Banking Chapter 28 Mergers And Acquisitions Outline The Following Outline Correlated The

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Chapter 28

Mergers and Acquisitions

I. Chapter Outline

The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides

are referenced in bold. Alternative Examples to selected textbook examples are also available in the

PowerPoint Lecture Slides and are also referenced in bold.

28.1 Background and Historical Trends (Slides 7–10)

• Table 28.1 Twenty Largest Merger Transactions, 1998–2015 (Slide 8)

28.2 Market Reaction to a Takeover (Slides 14–17)

28.3 Reasons to Acquire (Slide 18)

• Economies of Scale and Scope (Slides 19–20)

• Vertical Integration (Slides 21–22)

• Expertise (Slide 23)

• Monopoly Gains (Slides 24–25)

• Efficiency Gains (Slide 26)

• Tax Savings from Operating Losses (Slide 27)

• Example 28.1 Taxes for a Merged Corporation (Slides 28–29)

• PowerPoint Alternative Example 28.1 (Slides 30–33)

• Diversification (Slides 34–36)

– Risk Reduction (Slide 34)

• PowerPoint Alternative Example 28.2 (Slides 40–41)

• Example 28.3 Mergers and the Price-Earnings Ratio (Slides 43–44)

• Managerial Motives to Merge (Slide 45–46)

– Conflicts of Interest (Slide 45)

– Overconfidence (Slide 45)

28.4 Valuation and the Takeover Process (Slide 47)

• Valuation (Slides 47–48)

• The Offer (Slides 49–54)

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 117

• Example 28.4 Maximum Exchange Ratio in a Stock Takeover (Slides 55–56)

• PowerPoint Alternative Example 28.4 (Slides 57–59)

• Merger “Arbitrage” (Slides 60–64)

• Figure 28.2 Merger-Arbitrage Spread for the Merger of HP and Compaq (Slide 65)

• Tax and Accounting Issues (Slides 66–71)

• Board and Shareholder Approval (Slides 72–73)

28.5 Takeover Defenses (Slide 74)

• Poison Pills (Slide 75)

• Staggered Boards (Slide 76)

28.6 Who Gets the Value Added from a Takeover? (Slide 83)

• The Free Rider Problem (Slides 84–88)

• Toeholds (Slide 89)

• The Leveraged Buyout (Slides 90–91)

• Example 28.5 Leveraged Buyout (Slides 92–94)

II. Learning Objectives

28-1 Describe trends in the global takeover market since the 1960s.

28-3 Define the term “tender offer,” and discuss the premium typically paid over current share

price.

28-5 Calculate the maximum premium that should be paid in a stock acquisition, as well as the

28-6 Identify two methods commonly used to pay for a target, and the tax and accounting

consequences of each.

28-8 Distinguish between a friendly and a hostile takeover.

118 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition

28-9 List and define several defense strategies against takeovers.

28-10 Define the free rider problem, and describe how it can be alleviated by a toehold, a leveraged

buyout, or a freezeout merger.

III. Chapter Overview

The topic is motivated with a description of the merger between Anheuser-Busch and InBev. It

describes the important events in that transaction. This chapter first provides historical background

and trends in mergers and acquisitions. Next, the authors discuss both why a manager may pursue an

acquisition and the takeover process. Finally, the question of who gets the value when a takeover

occurs is addressed.

28.1 Background and Historical Trends

The global takeover market is active and large. Table 28.1 shows the 10 largest mergers from 1995 to

2015. Mergers appear to occur in distinct waves, as illustrated in Figure 28.1. Those waves seem to be

28.2 Market Reaction to a Takeover

Most U.S. states have laws requiring that shareholders who are forced to sell must receive a fair

value. In most cases, fair value is interpreted to be the share price before the merger announcement.

price of the target rise less than the premium offered? (3) Why does the acquirer not experience a

large price increase?

28.3 Reasons to Acquire

This section attempts to answer the first part of question 1 above. Namely, what benefits ensue from a

merger that would lead a company to pay more than the market price for the acquisition? The reasons

most often cited by acquirers are economies of scale and scope, vertical integration, expertise,

monopoly gains, efficiency gains, operating losses, diversification, and earnings growth.

One example of economies of scale and scope is Stride Rite’s acquisition of sports shoemaker

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 119

Efficiency gains are often achieved through elimination of duplication, like in the SBC/AT&T

merger. If a company is not being run efficiently, the CEO can be ousted by the shareholders.

28.4 The Takeover Process

Chapter 19 demonstrated how a bidder values a target company. That discussion is reviewed in this

section.

Once the acquirer is in the position to make a tender offer, there is a public announcement of the

intention to buy the company. There is no guarantee that the takeover will take place at this price.