1.What are the two primary mechanisms under which ownership and control of a public corporation can change?
2.Why do you think mergers cluster in time, causing merger waves?
3.What are some reasons why a horizontal merger might create value for shareholders?
4.Why do you think shareholders from target companies enjoy an average gain when acquired,while acquiring shareholders on average often do not gain anything?
5.If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital. What concerns would you have in structuring the deal and the post-merger integration that would be different from the concerns you would have when buying physical capital?
6.Do you agree that the European Union should be able to block mergers between two U.S.-based firms? Why or why not?
7.How do the carryforward and carryback provisions of the U.S. tax code affect the benefits of merging to capture operating losses?
8.Diversification is good for shareholders. So why shouldn’t managers acquire firms in different industries to diversify a company?
9.Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.
a. If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?
b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy TargetCo, what will your earnings per share be after the merger?
c. What explains the change in earnings per share in part (a)? Are your shareholders any better or worse off?
d. What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E ratio?