Mergers & Acquisitions: valuation techniques, synergistic effect, options for financing

Mergers & Acquisitions

1. Describe the different types of valuation techniques discussed in the text or in class. Compare and contrast the different techniques and discuss why a company would use one or another.

2. Describe what is meant by the "synergistic effect" of mergers. What do you think are good reasons to merge and what would you consider to be bad reasons to merge?

3. Describe the different options that a company can utilize to finance a merger or acquisition. Discuss the pros, cons, and rationale for each?

Please include an introduction and conclusion. The body of the essay should include at least three paragraphs - one for each question. Answers should be concise and clear. Use at least two references and cite them properly.

© SolutionLibrary Inc. 9836dcf9d7

Solution Preview

... market price of the stocks of public traded companies engaged in the same or a similar line of business, whose shares are traded in the stock exchange, can be an accurate indicator of the value when the transactions in which stocks are traded are sufficiently similar.

A company would use one method or the other depending on its objectives. For instance, a controlling shareholder who is interested in selling off some of the prime assets of the company will be interested in an asset based approach. On the other hand if the person that is acquiring the company is interested in obtaining a steady stream of income from the acquired company typically uses an income approach. Market approaches are adopted by companies that are interested in the value of the shares of the company in the stock exchange. A company should also used one approach over another depending on the reliability and validity of the information available with him. For instance, if the acquirer is not able to get the fair market value of the assets, he should avoid using that method.

3. Describe what is meant by the "synergistic effect" of mergers. What do you think are good reasons to merge and what would you consider to be bad reasons to merge?

4. The synergistic effect of mergers refers to the extra advantage the merged company enjoys because of the merger rather than the sum of the two companies. Synergy means that the sum is greater than the total value of the parts.

Synergistic effects may take place in several functions of the merged company. For instance, the combination of the products of the two companies increases the total sales of the company far beyond the sum of sales before merger. This might be because the products are complementary in nature, avoiding duplication of sales efforts and making it convenient for the customer to deal with one seller. The synergistic effect in sales may also take place because of reputation, distribution channels or market power of the acquired company. The synergistic effect may take place also because of improvement in technology because of merger. The advanced technology of one company is duplicated in the other and results are very positive. Further, if there is vertical integration, there might be cost savings because of lack of travel, taxation and technology sharing. Further, the acquisition may help protect the company from the vagaries of ...