Corporate Finance M&a

Chapter 15

Acquisitions and Corporate Control

Overview and Learning Objectives

In this chapter, we will analyze potential benefits and costs that result when two previously separate companies are combined. Any form of corporate combination is generally classified under the heading of mergers and acquisitions (or M&A) activity. This chapter provides a synthesis of many of the financial principles we have seen before, because in evaluating a potential corporate combination, we need to apply the valuation techniques and other concepts developed in earlier chapters. We will also examine the motives and tactics commonly found among the different parties to a corporate control contest. After reading this chapter, you should be able to:

• Identify the different types of economic gains from an acquisition, ranging from economies of scale or scope to cost saving from eliminating duplicate facilities

• Avoid confusing unlikely sources of acquisition benefit, such as diversification, for true benefits

• Distinguish the cost of acquisitions financed with cash from those financed with stock

• Project the appropriate future cash flows resulting from the acquisition of another company

• Find an appropriate valuation technique and cost of capital for evaluating an acquisition, both of which incorporate the risk and financing characteristics of the acquisition

• Analyze the motives of bidders and targets in a corporate control contest and the tactics they use

15.1 Mergers versus Acquisitions: Is There Any Distinction?

The term “mergers and acquisitions” (or M&A) is applied to all types of combinations of two previously separate companies. In practice, the terms “merger” and “acquisition” tend to be used interchangeably, but technically, there is a distinction. An acquisition is a transaction in which one company (the acquiring company or acquirer) buys another company (the target) for cash, newly-issued securities, or a combination of the two. The target company’s shareholders relinquish their shares in exchange for the consideration paid by the acquirer, the target’s assets are joined with those of the acquirer, and the target ceases to exist as a separate company. In a merger, by contrast, two companies agree to combine their assets, and the shares of both companies are extinguished in exchange for new shares in a combined company. In actual fact, most corporate combinations are acquisitions, so we will use the term “acquisitions” throughout this chapter. In practice, though, “acquisition activity”, “merger activity” and “M&A activity” tend to be used synonymously.