Mergers and Acquisitions

1
Mergers and Acquisitions

• BP-Amoco-Arco
• Exxon-Mobil
• Time Warner-EMI
• National Westminster-Royal Bank of Scotland
• GEC-Honeywell

2
Mergers and Acquisitions

• What is a merger? ABC
• What is an acquisition (takeover)? ABA
• In economics the terms merger, acquisition and
  takeover are used interchangeably.

3
Classifying Merger Activity

• Hostile or Friendly?
• Contested not Contested?
• Horizontal, Vertical or Diversifying
  (Conglomerate)?
• Paid for by Cash, Stock or Mixture?

4
Motives for Merger

• Profit
• Cost savings
• Growth
• Diversification
• Ease of entry to new market (geographic or
  product, home or abroad)
• Market share

5
Who Gains?

• Gains to victim accrue from any appreciation in
  share price assuming that bid and/or final price
  gt market price.
• Gains to acquirer accrue from expected
  performance improvements.
• These are difficult to quantify - you will never
  know what would have happened to BP had it not
  acquired Amoco.

6
Economic Measurement of the Gains

• Cost based - rare
• Market share studies - rare
• Profitability studies - reliability of accounting
  data.
• Share price studies - time frame crucial.

7
Outcomes and Evaluation

• The majority of studies show that the major
  beneficiaries of merger activity are the
  shareholders of the acquired firms.
• This could be because managers are
  opportunistically pursuing growth.
• It could also be explained by Rolls hubris
  hypothesis.

8
Mergers

• Prospective mergers must satisfy the relevant
  regulatory bodies (UK and EU in the case of the
  UK).
• Referral often causes bidder to pull out.
• Looser forms of inter-firm collaboration exist -
  joint ventures and strategic alliances. Are these
  optimal or transitional?