Mergers and Acquisituion

15PFMC070: Corporate Finance

Autumn 2013

15PFMC070: Corporate Finance

Autumn 2013

Mergers and Acquisitions (I)

Motives

Dr Tolulola Lawal

Department of Financial & Management Studies SOAS, University of London

Module Overview

Investment appraisal

Capital budgeting

The Objective of the Firm

Sources of Finance (I) Debt Financing and Valuation

Efficient Market Risk & Return, and Capital Asset Pricing Model

Sources of Finance (II) Equity Financing and Valuation Dividend Policy

Capital Structure Theory Mergers & Acquisitions

Mergers and Acquisitions

• • • • Motives Target valuation Reasons for frequent failure of M&A Defences against takeovers

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15PFMC070: Corporate Finance

Autumn 2013

Economic Reasons for Mergers (1)

• Synergies

–

–

Most common justification that bidders give for the premium they pay for a target.

Suppose firm A is contemplating acquiring firm B. The synergy from the acquisition is Synergy = VAB – (VA + VB) The synergy of an acquisition can be determined from the standard discounted cash flow model:

–

Synergy =

S

T t=1

DCFt (1 + r)t

Sources of Synergy (A)

• Economies of Scale

– The savings a large company can enjoy from producing goods in high volume, that are not available to a small company

• Economies of Scope

– Savings large companies can realise that come from combining the marketing and distribution of different types of related products

• Resource Complementarities

Sources of Synergy (B)

Tax Motivations •Acquiring Loss-Makers •Book Value versus Fair Value Accounting •The Tax Gain from Leverage •Accounting for Merger Expenses

Financial Markets and Corporate Strategy, David Hillier

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15PFMC070: Corporate Finance

Autumn 2013

Reasons to Acquire (2)

• Vertical Integration

– A major benefit of vertical integration is coordination.

• For example, Apple Computers makes both the operating system and the hardware.

– However, not all not all successful...