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Chapter 26 - Mergers and Acquisitions
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CHAPTER 26
MERGERS AND ACQUISITIONS
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
26.1 The Legal Forms of Acquisitions
26.2 Taxes and Acquisitions
26.3 Accounting for Acquisitions
26.4 Gains from Acquisition
26.5 Some Financial Side Effects of Acquisitions
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26.6 The Cost of an Acquisition
26.7 Defensive Tactics
ANNOTATED CHAPTER OUTLINE
Video Note: See “Mergers and Acquisition”
26.1 The Legal Forms of Acquisitions
Bidder firm – the company making an offer to buy the stock or assets of another
Lecture Tip: Overall, the massive wave of mergers and restructurings of the
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CEOs aren’t callous Scrooges shouting ‘Bah, humbug!’ as they
A. Merger or Consolidation
Lecture Tip: Appearing relatively infrequently in previous
decades, the use of the hostile takeover bid to acquire control of a
target firm exploded in the 1980s. The term “corporate raider”
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B. Acquisition of Stock
Taking control by buying the voting stock of another firm with
cash, securities, or both.
Tender offer – offer by one firm or individual to buy shares in
C. Acquisition of Assets
D. Acquisition Classifications
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E.
1. Horizontal acquisition – firms in the same industry
Real-World Tip: It is useful to give names to the various types of
F. A Note about Takeovers
Lecture Tip: The popularity of proxy contests as a means of
gaining control has waxed and waned over the last several
Real-World Tip: An interesting example of a long, drawn-out
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Four means to gain control of a firm:
G. Alternatives to Merger
Firms could simply agree to work together via a joint venture or
26.2 Taxes and Acquisitions
A. Determinants of Tax Status
B. Taxable versus Tax-Free Acquisition
26.3 Accounting for Acquisitions
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A. The Purchase Method
Balance Sheets (in millions) prior to the acquisition:
Balance Sheet after the acquisition
C. More about Goodwill
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26.4 Gains from Acquisition
A. Synergy
B. Revenue Enhancement
Lecture Tip: The text notes several reasons for M&A activity. The
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C. Cost Reductions
D. Lower Taxes
1. Net operating losses (NOL) – a firm with losses and not paying
Lecture Tip: The IRS requires that the merger must have
E. Reductions in Capital Needs
1. A firm needing capacity acquires a firm with excess capacity
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F. Avoiding Mistakes
G. A Note about Inefficient Management
If management isn’t doing its job well, or others may be able to do
26.5 Some Financial Side Effects of Acquisitions
A. EPS Growth
An acquisition may give the appearance of growth in EPS without
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Before and after merger financial positions
Lecture Tip: Who have been some of the top dealmakers? The
2006 Leaders
(200+ Deals)
Company
No. of M&A
Deals
$ Volume of M&A
Deals (millions)
B. Diversification
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Lecture Tip: In earlier chapters, we pointed out that conflicts of
interest may exist between stockholders and managers in publicly
26.6 The Cost of an Acquisition
A. Case I: Cash Acquisition
B. Case II: Stock Acquisition
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C. Cash versus Common Stock
Lecture Tip: Emphasize that the logic used in determining the
NPV of an acquisition is the same as that used to find the NPV of
26.7 Defensive Tactics
A. The Corporate Charter
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B. Repurchase and Standstill Agreements
C. Poison Pills and Share Rights Plans
D. Going Private and Leveraged Buyouts
E. Other Devices and Jargon of Corporate Takeovers
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Ethics Note, page 834: In The Law and Finance of Corporate
Insider Trading: Theory and Evidence (Kluwer Publishing, 1993)
Arshadi and Eyssell argue that an active market for corporate
Lecture Tip: Less common, but not rare, are “reverse mergers,”
26.8 Some Evidence on Acquisitions: Do M&A Pay?
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Lecture Tip: It is probably not overstating the matter to say that
the accepted wisdom in modern finance is that, in the aggregate,
“The corporate ringmasters left out the part with the
trapeze artists and the clowns. Instead of a band they
brought accountants, introducing Jumbo or Babar to
the cameras in the hotel ballroom with a blare of press
releases – how much cash for what class of stock, the
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In at least one sense, Lapham is correct. The 1998 merger pace
was torrid. In the first five months of the year, $630 billion worth
26.9 Divestitures and Restructurings
Divestiture – a firm sells assets, operations, divisions, or segments
Reasons for a divestiture
26.10 Summary and Conclusions
