Exam 21: Mergers

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.

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

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.

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market risk premium is 5% and the risk-free rate is 5%. Assume the market is in equilibrium. If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%), what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.

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

One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

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

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.

Which of the following actions does NOT help managers defend against a hostile takeover?

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

Since the primary rationale for any operating merger is synergy, in planning such mergers the development of accurate pro forma cash flows is the single most important task.

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

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

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

In early 2011 Giant Inc.'s management was considering making an offer to buy Micro Corporation. Micro's projected operating income (EBIT) for 2011 was $30 million, but Giant believes that if the two firms were merged, it could consolidate some operations, reduce Micro's expenses, and raise its EBIT to $35 million. Neither company uses any debt, and they both pay income taxes at a 35% rate. Giant has a better reputation among investors, who regard it as very well managed and not very risky, so its stock has a P/E ratio of 12 versus a P/E of 9 for Micro. Since Giant's management would be running the entire enterprise after a merger, investors would value the resulting corporation based on Giant's P/E. If Micro has 10 million shares outstanding, by how much should the merger increase its share price, assuming all of the synergy will go to its stockholders?

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Anacott Steel is acquiring Terafly Incorporated. Terafly is expected to provide Anacott with operating cash flows of $12, $21, $16, and $9 million over the next four years, respectively. In addition, the horizon value of all remaining cash flows at the end of Year 4 is estimated at $18 million. The merger will cost Anacott $45.0 million today. If the value of the merger is estimated at $9.00 per share and Anacott has 1,000,000 shares outstanding, what equity discount rate must the firm be using to value this acquisition?