TWENTY

CHAPTER

External Growth
Through Mergers

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Table 20-1
Ten largest mergers and acquisitions in 1998
Foundations of Financial PPT 20-1
Management

Value
Buyer Acquired Company ($ billions)

1. Exxon . . . . . . . . . . . Mobil $79

2. Travelers Inc. . . . . . . . Citicorp 73
3. SBC . . . . . . . . . . . . Ameritech 66
4. NationsBank . . . . . . . . BankAmerica 60
5. ATT . . . . . . . . . . . . Tele-Communications 54
6. Bell Atlantic . . . . . . . . GTR 53
7. British Petroleum . . . . . Amoco 49
8. Daimler-Benz . . . . . . . Chrysler 43
9. WorldCom . . . . . . . . . MCI 41
10. Zenca Group . . . . . . . . AB Astra 35
11. Sandoz AG. . . . . . . . . Ciba-Geigy AG 34
Block
Hirt 12. Mitsubishi Bank . . . . . . Bank of Tokyo 34
Short Note: Figures in U.S. dollars
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Table 20-2
Foundations of Financial PPT 20-2
Management

Largest (proposed) mergers and acquisitions in Canada in 1998

Value
Merger Partners (Cdn.
$ billions)

1. Royal Bank . . . . . . . . Bank of Montreal $23.1

2. CIBC . . . . . . . Toronto Dominion 22.0
3. Seagram . . . . . . . . . . Polygram 15.6
4. Trans Canada Pipelines . . . Nova 15.0
5. Northern Telecom . . . . . Bay Networks 13.4
6. Union Pacific Resources. . . Norcen Energy 3.7
7. Bowater . . . . . Avenor 2.5
8. Call-Net . . . . . . . Fonorola 1.8
9. Nova. . . . . . . . . Huntsman 1.3
Block 10. Merrill Lynch . . . . . . . Midland W 1.3
Hirt
Short
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Table 20-3
Financial data on potential merging firms
Foundations of Financial PPT 20-3
Management

Small Expand
Corporation Corporation

Total earnings. . . . . . . . . $200,000 $500,000

Shares of
stock outstanding . . . . . . 50,000 200,000
Earnings per share . . . . . . $4.00 $2.50
Price-earnings ratio (P/E) . . . 7.5x 12x
Market price per share . . . . $30.00 $30.00

Block
Hirt
Short
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Table 20-4
Post-merger earnings per share
Foundations of Financial PPT 20-3
Management

Total earnings: Small ($200,000) + Expand ($500,000) . . . $700,000

Shares outstanding in surviving corporation:
Old (200,000) + New (50,000) . . . . . . . . . . . . . 250,000

$700,000
New earnings per share for Expand Corporation = = $2.80
250,000

Block
Hirt
Short
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Figure 20-1
Impact of alternate plans on Expand Corporation
Foundations of Financial
Management
PPT 20-4

Earnings per share for Expand Corporation ($)

7 With Growth Corporation
Without merger
6
With Small Corporation
5

0
1 2 3 4 5 6 7 8 9 10
Year
Immediate 10-year
Effect Effect
Block No merger . . . . . . . . . . . . . . . . . . . . $2.50 $6.49
Hirt Merger with Small Corporation . . 2.62 6.07
Merger with Growth Corporation 2.12 6.79
Short
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Figure 20-2
Risk-reduction portfolio benefits
Foundations of Financial PPT 20-5
Management

Probability of occurrence
1.00
Without merger With merger

.50

0
Earnings per share Earnings per share

= $2.50 (expected value) = $2.50 (expected value)

Block
Hirt = $1.00 (standard deviation) = $ .50 (standard deviation)
Short
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Chapter 20 - Outline
Foundations of Financial
Management

LT 20-1

Mergers vs. Consolidations

3 Types of Mergers
Negotiated vs. Tender Offers
Takeover Terminology
Why Merge?
Motives of Selling Shareholders

Block
Hirt
Short
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Mergers vs. Consolidations

Foundations of Financial
Management

LT 20-2

A business combination can be either a merger or a

consolidation
Merger:
a combination of 2 or more companies where the acquirer buys the
voting shares of the target company, but both remain as separate
legal entities
a holding company controls one or more other companies with a
minimal equity investment
Consolidation:
when 2 or more companies are combined to form an entirely new
entity
more common in U.S.
Block
Hirt Acquirer may pay in cash, in its own shares, or in both
Short
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3 Types of Mergers
Foundations of Financial
Management

LT 20-3

Horizontal Merger:
unites direct competitors
ex., 2 shoe companies combine
Vertical Merger:
unites buyers and sellers
ex., a shoe manufacturer buys a leather producer
Conglomerate Merger:
merging of firms in totally unrelated industries
ex., a shoe company joins with a beverage company
Block
Hirt
Short
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Negotiated vs. Tender Offers

Foundations of Financial
Management

LT 20-4

Negotiated Offer:
a friendly merger that is negotiated between officers
and directors of the participating corporations
it is agreed upon by all sides

Takeover (or Unsolicited) Tender Offer:

when a company attempts to acquire a target firm
against its will (an unfriendly takeover)
unsolicited tender offers for a target company have
Block gained in popularity
Hirt
Short
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Takeover Terminology
Foundations of Financial
Management

LT 20-5

White Knight:
a friendly company that agrees to bid a higher price for
a targeted company
Crown Jewels:
targeted company sells prize division or asset of
company to make it less attractive to buyer
Poison Pill:
present shareholders entitled to buy more shares at
reduced prices
Golden Parachute:
Block contract that pays existing management if they lose
Hirt their jobs in a takeover
Short
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Why Merge?
Foundations of Financial
Management

LT 20-6

Financial motives:
to reduce risk through diversification
to increase operating efficiency
to improve access to financial markets
to obtain a tax carry-forward benefit
Non-financial motives:
to protect / increase market share
to expand through acquisition rather than internal
growth
to expand marketing and management capabilities
Block
Hirt
to allow for new product development
Short to provide synergistic benefits (2+2=5)
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Motives of Selling Stockholders

Foundations of Financial
Management

LT 20-7

Price offered for their stock is attractive

Desire to receive acquiring firms stock which may have

greater acceptability in the market

Provides shareholders an opportunity to diversify their

holdings

Officers of selling company may receive attractive post-

merger management contracts
Block
Hirt
Short Avoids the bias against smaller businesses
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