Exam 26: Mergers and Corporate Control

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980sσ

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated. The parent receives annual dividends from the subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are receivedσ

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.