why target firm is worth a premium

• synergies:

  • cost reduction
  • revenue enhancements
• revenue enhancement synergies - possibilities to expand into new markets and gain customers
• cost-reduction synergies - layoff of overlapping employees and elimination of redundant resources
• economies of scale - savings from producing in high volumes that aren't available to a small company
• economies of scope - savings realised by combining the marketing and distribution of different related products
• vertical integration - merger of two companies in same industry that make products required at different stages of the production cycle
• expertise - expertise to compete more efficiently and may be more efficient to purchase talent as a functioning unit through acquisition
• monopoly gains - acquisition of major rival enables firm to reduce competition within industry and increase profits
• efficiency gains - acquirers may argue that they can run the target firm more efficiently than existing management
• tax savings from operating losses - conglomerate may have tax advantage over single-product firm because losses in one division can offset profits in another
• diversification:

  • risk reduction
  • debt capacity and borrowing costs
  • asset allocation
  • more liquidity
• earnings growth: combine companies with the result that earnings per share of merged company exceed pre-merger EPS, even when merger doesn't create economic value

  • benefits CEO remuneration