BACKGROUND

Question 1

Types of Mergers and Rationale for each

Answer 1

Vertical - Combinations between firms at different stages
Goal is information and transaction efficiency

Horizontal - Economies of scale and scope
Synergies (ex. combining of best practices)

Conglomerate - list Dunning’s motives for FDI without mentioning FDI

Question 2

Change forces driving mergers

Answer 2

Technological change
Efficiency of operations
Globalization and freer trade
Changes in industry organization
New industries
Deregulation and regulation
Favorable economic and financial conditions
Negative trends in industries and economies
Widening inequalities in income and wealth
High valuation of equities (1990s)

Question 3

Reasons Against Mergers

Answer 3

No improvements subsequent to the acquisition
Redistribution of wealth from labor and other stakeholders to shareholders
Speculative activity

Question 4

Reasons For Mergers

Answer 4

Critical to healthy expansion of business firms
Increase value and efficiency
Move resources to optimal uses

Question 5

Value Enhancing Theory of Mergers

Answer 5

• Reduction in Transaction Costs
• Syngergies
• Remove poor management and streamline processes

Question 6

Value Reducing Theory of Mergers

Answer 6

• Agency cost of free cash flow
• Managerial entrenchment

Question 7

Value Neutral Theory of Mergers

Answer 7

• Overconfident managers
• Winners curse

Question 8

Empirical Evidence on combined returns

Answer 8

• Bulk of evidence suggests mergers have positive combined returns
• Bradley, Kaplan, Andrade all diff authors which show different levels of positive combined returns (from 1.8%-7.4%) throughout late 80s to ealy 00s
• Cash deals return most profits for both target and acquirer
• Berkovitch shows there is correlation between target and bidder return, due to synergies
• Multiple bidder attracts more positive returns