Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VIII. Topics in Corporate

Finance

25. Mergers and
    Acquisitions

© The McGraw−Hill^865

Companies, 2002

CHAPTER

25

Mergers and Acquisitions

Suppose you decide to sell your car.Two buyers come to look at it; one offers

you $5,000 and the other offers you $5,200. Which offer do you take? If you

have been paying attention throughout this book, you take the $5,200. That’s

exactly what the board and shareholders of the giant bank Wachovia didn’tdo

in the summer of 2001. In a bitter battle for Wachovia, First Union offered $14.6

billion, while rival SunTrust offered $15.3 billion. Nonetheless, Wachovia’s

shareholders voted to accept the First Union bid, thereby following the

recommendation of Wachovia’s board. Why did they take a lower offer? This

chapter explores reasons for mergers to take place, and just as important,

reasons why they should not.

here is no more dramatic or controversial activity in corporate finance than the ac-

quisition of one firm by another or the merger of two firms. It is the stuff of head-

lines in the financial press, and it is occasionally an embarrassing source of

scandal.

The acquisition of one firm by another is, of course, an investment made under un-

certainty, and the basic principles of valuation apply. One firm should acquire another

only if doing so generates a positive net present value for the shareholders of the ac-

quiring firm. However, because the NPV of an acquisition candidate can be difficult to

determine, mergers and acquisitions are interesting topics in their own right.

Some of the special problems that come up in this area of finance include the

following:

1. The benefits from acquisitions can depend on such things as strategic fits. Strategic
   fits are difficult to define precisely, and it is not easy to estimate the value of
   strategic fits using discounted cash flow techniques.


2. There can be complex accounting, tax, and legal effects that must be taken into
   account when one firm is acquired by another.


3. Acquisitions are an important control device for shareholders. Some acquisitions
   are a consequence of an underlying conflict between the interests of existing
   managers and those of shareholders. Agreeing to be acquired by another firm is one
   way that shareholders can remove existing managers.

T

For up-to-date information

on happenings in the

world of M&A, go to

cbs.marketwatch.com,

then type “merger” into its

search option.

An excellent source of

merger data online is

found at

http://www.mergers.com.

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