Mergers and Acquisitions
Activity, Rationale, and
Negotiation
RW Melicher
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Merger Waves or Activity
Five Major Merger Waves in U.S.:
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Late 1800s (consolidations in basic industries)
1920s (stock market boom fueled consolidations)
1960s (conglomerate mergers)
1980s (use of junk bonds in LBOs & MBOs)
Late 1990s to Today (strategic alliances)
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Explanations of M&A Activity
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Hubris (managerial psychology—urge to merger
is driven by pride & perceived power)
Market Manias (role of mass behavior--market
bubbles, merger fads, “deal frenzy,” etc.)
Overvaluation of Stocks (information asymmetry)
Agency Costs & Governance Problems (corrective
M&A activity to reduce managerial self-interests)
Competitive Positioning & Industry Shocks
(monopolistic powers & changes in demand)
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Rationale for Mergers
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Synergy
Tax Considerations
Purchase of Assets below Replacement
Costs
Diversification
Managers’ Personal Incentives
Breakup Value
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Types of Mergers
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Horizontal (combining of firms in same line of
business)
Vertical (merging with suppliers, producers, or
customers)
Congeneric (combining of related firms but not
direct competitors)
Conglomerate (combining unrelated firms)
Financial (focus on restructuring & breakup
values)
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Friendly Vs. Hostile Takeovers
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Mergers may be between equals, but more likely
there is an acquirer and a target
Friendly Merger (BODs and CEOs of both firms
desire to merge in order to share potential
synergies)
Hostile Takeover (occurs when a target resists a
takeover attempt often resulting in the acquirer
making a “tender offer” directly to the target’s
shareholders)
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Form of Payment & Financing
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Cash Offers (occur in majority of transactions & are
dominant in smaller acquisitions)
Stock Offers (occur more frequently in larger
transactions and stock offers occur more frequently
when stock prices are relatively high)
Stock tends to be used when a deal is friendly, the
buyer’s stock price is buoyant, ownership is not
concentrated, & deals are larger in size
Cash tends to be used in tender offers where deals
typically are hostile
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Negotiating the Deal
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Friendly Merger Negotiation (one where
potential synergy benefits are expected by
combining the two firms)
A successful friendly merger is often the
result of sharing synergy benefits
Understanding the other party’s point of
view is important in getting the deal done
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Negotiating the Deal (cont’d)
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Both parties should establish a range of
values for the target firm (using DCF and
relative valuation methods)
Establish an “opening” or “asking” price and
a “walk-away” or “reservation” price
Negotiations are more likely to be successful
if there is a “Zone of Potential Agreement”
(ZOPA) where the range of prices overlap
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Negotiating the Deal (cont’d)
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Hostile Merger Negotiation (occurs when the target
firm resists the merger)
Direct negotiations cease & acquirer turns directly
to target’s stockholders requesting they “tender”
their shares at a specific price
A “Tender Offer” involves the offering of a “Control
Premium” to the target’s stockholders
“Transactions” Multiples may reflect both friendly
mergers & hostile takeovers that use tender offers
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