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1. Mergers and Business Consolidations
1. Recent merger climate. During the 1990s and early in 2000, mergers were happening with increasing frequency. See Slide 3 (43.0K) for a historical perspective of the ten largest mergers.
2. Types of Business Combinations. There are two types of business combinations. A _____ Key Term business consolidation two or more companies are combined to form a new company.
3. Financial reasons for business combinations. There are several financial reasons for firms to merge. They are the following. Critical Concept
4. Non-financial reasons for business combinations. Firms merge because they want to expand their management or marketing capabilities and because they want to acquire new products. The most justified reason for merger Critical Concept See Slide Why Merge? (56.0K)
5. Types of mergers. Mergers can be divided into horizontal mergers, vertical mergers and conglomerate mergers. See Slide 3 Types of Mergers (54.0K) . See Finance Video ma28k.rm (20007).
2. Terms of Exchange
1. Cash Purchases. If one company buys another for cash, that is a simple capital budgeting decision and a capital budgeting/net present value analysis should be done. If the net present value were positive, then it would be a value-maximizing move on the part of the acquiring firm.
2. Stock-for-Stock Exchange. In a stock-for-stock exchange, the acquiring company increases its immediate earnings per share but its future growth rate may be impacted. The results of stock-for-stock exchanges include many possibilities but it should be a value-maximizing decision. See Slide Terms of Exchange (43.0K)
3. Portfolio Effect. Firms that are merging must keep their portfolio effect in mind. What will happen to earnings per share as a result of the merger? Can they reduce risk while maintaining or increasing return?
3. Accounting Considerations for Mergers
1. Purchase of Assets. As of December 2000, purchase of assets accounting is required for mergers by the Financial Accounting Standards Board.
4. Negotiated versus Tender Offers
1. Negotiated mergers. Negotiated mergers are friendly mergers, negotiated between the two companies in question.
2. Tendered Offers. A takeover tender offer is when a firm tries to acquire another firm against its will. See Slide Negotiated vs Tender offers (62.0K) See this portion of the SEC website on tender offers .
5. Merger Terminology
1. Saturday night special. This is a tender offer made after the market closes on Friday that attempts to take the target company by surprise.
2. White knight. A white knight is a third firm that management calls on to help it avoid the initial unwanted tender offer.
6. Premium Offers and Stock Price Movements

A. Premium Offers. Most offers for merger are at a price above the current market price of the firm being acquired. The acquired firm's stock price may go up dramatically. If the merger falls through, the stock price will fall.