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Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 27 Mergers and Acquisitions
Solutions
1. This could result when the acquiring firm pays a premium higher than the value created from the
acquisition. The shareholders of the acquired firm would gain the premium, but the shareholders of
2. The pros include the fact that markets tend to be unbiased in their assessment of value. Research
shows that acquisitions do create value for the collective shareholders of the acquirer and acquired
3. The six archetypes are (1) improve the performance of the target company, (2) consolidate to
remove excess capacity from an industry, (3) create market access for the target’s (or buyer’s)
products, (4) acquire skills or technologies more quickly or at lower cost than they could be built in-
house, (5) exploit a business’s industry-specific scalability, and (6) pick winners early and help them
4. If Company A acquires Company B, currently valued at $200 million, and pays $240 million but then
5. Although EPS may increase, it insufficiently compensates for the additional risk from the debt or
6. There are two circumstances under which the acquirer is better off paying in stock than in cash: (1)
the acquirer’s shares are overvalued relative to the acquired company’s shares, and (2) the acquirer
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7. Opportunities to buy cheap are rare and, when they exist, usually offer little value. To gain control of
a “cheap” target, the acquirer must pay a premium over the current market value. Also, if the target
8. Generally the cost-savings side has more success. First, predicting cost savings is easier, as it can rely
on the existing performance of both firms. Second, the merger can disrupt existing customer
likely be eager to offer, for fear of losing more sales.
