Sld20 External Growth Through Merger

C H

A P

T E

R

T W E N T Y

External GrowthThrough Mergers

McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000

th5

©McGraw-Hill Ryerson Limited 2000

Foundations of FinancialManagement CANADIAN

E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Table 20-1Ten largest mergers and acquisitions in 1998

ValueBuyer Acquired Company ($ billions)

1. Exxon . . . . . . . . . . . Mobil $792. Travelers Inc. . . . . . . . Citicorp 733. SBC . . . . . . . . . . . . Ameritech 664. NationsBank . . . . . . . . BankAmerica 605. ATT . . . . . . . . . . . . Tele-Communications 546. Bell Atlantic . . . . . . . . GTR 537. British Petroleum . . . . . Amoco 498. Daimler-Benz . . . . . . . Chrysler 439. WorldCom. . . . . . . . . MCI 4110. Zenca Group . . . . . . . . AB Astra 3511. Sandoz AG. . . . . . . . . Ciba-Geigy AG 3412. Mitsubishi Bank . . . . . . Bank of Tokyo 34Note: Figures in U.S. dollars

PPT 20-1

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Table 20-2Largest (proposed) mergers and acquisitions in Canada in 1998

Value Merger Partners (Cdn.

$ billions)

1. Royal Bank . . . . . . . . Bank of Montreal $23.12. CIBC . . . . . . . Toronto Dominion 22.03. Seagram . . . . . . . . . . Polygram 15.64. Trans Canada Pipelines . . . Nova 15.05. Northern Telecom . . . . . Bay Networks 13.46. Union Pacific Resources. . . Norcen Energy 3.77. Bowater . . . . . Avenor 2.58. Call-Net . . . . . . . Fonorola 1.89. Nova. . . . . . . . . Huntsman 1.310. Merrill Lynch . . . . . . . Midland W 1.3

PPT 20-2

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Small ExpandCorporation 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

PPT 20-3

Table 20-3Financial data on potential merging firms

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Table 20-4Post-merger earnings per share

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

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

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

250,000

PPT 20-3

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Figure 20-1Impact of alternate plans on Expand Corporation

0

1

2

3

4

5

6

7

1 2 3 4 5 6 7 8 9 10

Year

Earnings per share for Expand Corporation ($)With Growth Corporation

Without merger

With Small Corporation

Immediate 10-yearEffect Effect

No merger . . . . . . . . . . . . . . . . . . . . $2.50 $6.49Merger with Small Corporation . . 2.62 6.07Merger with Growth Corporation 2.12 6.79

PPT 20-4

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Figure 20-2Risk-reduction portfolio benefits

Probability of occurrence

Without merger With merger

Earnings per share

= $2.50 (expected value)= $1.00 (standard deviation)

1.00

.50

0Earnings per share

= $2.50 (expected value)= $ .50 (standard deviation)

PPT 20-5

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Chapter 20 - Outline LT 20-1

• Mergers vs. Consolidations

• 3 Types of Mergers

• Negotiated vs. Tender Offers

• Takeover Terminology

• Why Merge?

• Motives of Selling Shareholders

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Mergers vs. Consolidations LT 20-2

• A business combination can be either a merger or aconsolidation

Merger:– a combination of 2 or more companies where the acquirer buys the

voting shares of the target company, but both remain as separatelegal entities

– a holding company controls one or more other companies with aminimal equity investment

Consolidation:– when 2 or more companies are combined to form an entirely new

entity

– more common in U.S.

• Acquirer may pay in cash, in its own shares, or in both

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

3 Types of Mergers 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

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Negotiated vs. Tender Offers LT 20-4

Negotiated Offer:

– a “friendly” merger that is negotiated between officersand 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 firmagainst its will (an “unfriendly takeover”)

– unsolicited tender offers for a target company havegained in popularity

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Takeover Terminology LT 20-5

White Knight:

– a friendly company that agrees to bid a higher price fora targeted company

Crown Jewels:

– targeted company sells prize division or asset ofcompany to make it less attractive to buyer

Poison Pill:

– present shareholders entitled to buy more shares atreduced prices

Golden Parachute:

– contract that pays existing management if they losetheir jobs in a takeover

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Why Merge? 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 internalgrowth

– to expand marketing and management capabilities

– to allow for new product development

– to provide synergistic benefits (“2+2=5”)

th5



E D I T I O N

FIF

T H

McGraw-Hill Ryerson

BlockHirt

Short

Motives of Selling Stockholders LT 20-7

• Price offered for their stock is attractive

• Desire to receive acquiring firm’s stock which may havegreater acceptability in the market

• Provides shareholders an opportunity to diversify theirholdings

• Officers of selling company may receive attractive post-merger management contracts

• Avoids the bias against smaller businesses

Sld20 External Growth Through Merger

Documents

Transcript of Sld20 External Growth Through Merger