Exam 24: Mergers and Acquisitions

Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?

Most acquirers pay an acquisition premium for a target.Upon announcement of the bid,the target's stock price increases,on average,so that the stock price is the same as the price bid by the acquirer.

This period is known as the conglomerate wave because firms typically acquired firms in unrelated businesses:

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $15.75 per share and has a premerger value of $950 million,while Mackinac is trading for $24 per share and has a premerger value of $225 million dollars.If the projected synergies from the merger are $95 million,what is the maximum cash offer per share that Greentree could make and still generate a positive NPV?

Explain the difference between a horizontal merger and a vertical merger.

For a hostile takeover to succeed,the acquirer must appeal to the target shareholders; this is usually done through

The synergies of a merger add so much value to the combined firm that,upon announcement of a merger,the stock prices of both the target and the acquirer increase substantially.

In Canada and most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive a ________ for their shares.

What is a conglomerate merger?

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $42 per share and has a premerger value of $4 billion,while Mackinac is trading for $28 per share and has a premerger value of $1.5 billion dollars.If Greentree's maximum offer is 0.75 shares for each Mackinac share,what are the projected synergies from the merger?

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's price-earnings ratio as a result of the acquisition?

Purchasing a corporation requires a more accurate estimate of value than can be achieved using the method of comparables.

What is a poison pill,and how does it prevent a hostile takeover?

A rights offering that gives existing target shareholders the right to buy shares in either the target or the acquirer at a deeply discounted price once certain conditions are met is called a

Which of the following is an example of a merger undertaken in order to achieve efficiency gains?

A merger in which the target and acquirer are in the same industry is called a(n)

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $31.50 per share and has a premerger value of $12 billion,while Hull is trading for $21.75 per share and has a premerger value of $4 billion dollars.If the projected synergies from the merger are $675 million,what is the maximum exchange ratio that Barlow could offer in a stock swap and still generate a positive NPV?

This period is known for known for "strategic" or "global" deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally:

Sol Company has announced plans to acquire Luna Corporation by swapping 1.2 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $41 per share,and Luna traded for $48 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

Consider two firms,Big Company and Little Enterprises,both with earnings of $6 per share and 2 million shares outstanding.Big is a mature company with few growth opportunities and a stock price of $56 per share.Little is a new firm with much higher growth opportunities and a stock price of $72 per share.Assume Little acquires Big using its own stock and the takeover adds no value.What is the change in Little's price-earnings ratio as a result of the acquisition?