W8: mergers and acquisitons

• acquirer (bidder) - buyer of the firm
• target - seller of the firm
• merger waves - peaks of heavy activity followed by quiet periods (troughs) of few transactions in the takeover market
• merger activity is greater during economic booms and correlates with bull markets
• merger waves:

  • 1960 - conglomerate wave
  • 1980 - hostile takeovers
  • 1990 - strategic/global deals
  • 2000 - consolidation in industries
• conglomerate wave (1960)

  • firms acquired firms in unrelated business
  • thought that managerial expertise was portable across businesses
• hostile takeovers (1980)

  • acquirer purchased poorly performing conglomerate and sold off its individual business units
• strategic/global deals (1990)

  • ' friendly ' deal and involved firms with related business
  • designed to create strong firms to compete globally
• in most states, the law requires acquirer firms to pay existing shareholders of a target firm the fair value of their shares
• acquisition premium - percentage difference between the acquisition price and the pre-merger price of target firm
• reaction to takeover: acquirer

  • acquirer shareholders see average gain of 1%
  • negative market reaction
  • stronger when firm is large and target is a public company
• reason for paying premium:

  • synergies
  • economies of scale
  • economies of scope
  • vertical integration
  • monopoly gains
  • efficiency gains
  • expertise
  • tax savings
  • diversification
  • earnings growth
• takeover defences:

  • poison pills
  • staggered board
• poison pills - rights offering that gives existing target shareholders the right to buy shares in the target at a deeply discounted price

  • dilutes the value of shares making takeover expensive
• staggered board - board of directors whose 3 -year terms are staggered so that only one third of directors are up for election each year
• takeover premium - difference between the price per share paid for the target company and the target's current stock price