Rational for Mergers - external capital budgeting decision

Benefits associated with mergers

1. Synergy
2. Tax Consideration
3. Purchase of Assets below their Replacement Cost
4. Diversification
5. Manager’s Personal Incentives
6. Breakup Value

Types of Mergers

1. Horizontal
2. Vertical
3. Conglomerate

Level of Merger Activity - merger waves

Hostile vs. Friendly Takeovers

1. Kummer-Hoffmeister Takeover Study
2. Both the acquired firm’s shareholders and acquiring firm’s shareholders benefited.
3. Thwarted takeovers lost value subsequent to failured merger.
4. Incumbent management was often the reason behind the efforts - significant undervaluation of assets relative to the norm.

Merger Regulation

Role of Investment Bankers

1. Arranging Mergers
2. Developing Defensive Tactics
• White Knights
• Greenmail
• Poison Pills
• Golden Parachutes

Divestitures and Spinoffs and Rollups

• Earthgrains
• Spinoffs