Chapter 31 Mergers 839
bre44380_ch31_813-842.indd 839 10/06/15 09:58 AM
c. Walmart acquires Tyson Foods.
d. Tyson Foods acquires IBM.
- Merger motives Which of the following motives for mergers make economic sense?
a. Merging to achieve economies of scale.
b. Merging to reduce risk by diversification.
c. Merging to redeploy cash generated by a firm with ample profits but limited growth
opportunities.
d. Merging to combine complementary resources.
e. Merging just to increase earnings per share.
- Merger gains and costs Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc.
The values of the two companies as separate entities are $20 million and $10 million, respectively.
Velcro Saddles estimates that by combining the two companies, it will reduce marketing and
administrative costs by $500,000 per year in perpetuity. Velcro Saddles can either pay $14 million
cash for Pogo or offer Pogo a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the cost of the stock alternative?
d. What is the NPV of the acquisition under the cash offer?
e. What is its NPV under the stock offer?
- Taxation Which of the following transactions are not likely to be classed as tax-free?
a. A cash acquisition of assets.
b. A merger in which payment is entirely in the form of voting stock.
- Mergers True or false?
a. Sellers almost always gain in mergers.
b. Buyers usually gain more than sellers in acquisitions.
c. Firms that do unusually well tend to be acquisition targets.
d. Merger activity in the United States varies dramatically from year to year.
e. On the average, mergers produce large economic gains.
f. Tender offers require the approval of the selling firm’s management.
g. The cost of a merger to the buyer equals the gain realized by the seller.
- Vo c abu l a r y Briefly define the following terms:
a. Purchase accounting
b. Tender offer
c. Poison pill
d. Golden parachute
e. Synergy
INTERMEDIATE
- Merger motives Examine several recent mergers and suggest the principal motives for merg-
ing in each case. - Merger gains and costs Examine a recent merger in which at least part of the payment
made to the seller was in the form of stock. Use stock market prices to obtain an estimate of
the gain from the merger and the cost of the merger. - Merger motives Respond to the following comments.
a. “Our cost of debt is too darn high, but our banks won’t reduce interest rates as long as
we’re stuck in this volatile widget-trading business. We’ve got to acquire other companies
with safer income streams.”