Corporate Finance Theory and Practice, Third Edition

Chapter 44

MERGERS AND DEMERGERS

When the financial manager celebrates a wedding (or a divorce!)

At first glance, this chapter might seem to repeat the previous ones in that selling a company almost always leads to linking it up with another. In everyday language we often talk of the merger of two companies, when in reality one company typically takes control of the other, using the methods described in Chapter 43. In fact, all that we have previously said about synergies and company valuations will be used in this chapter. The only fundamental difference we introduce here is that 100% of the seller's consideration will be in shares of the acquiring company and not in cash.

In addition, because markets nowadays prefer “pure-play” companies, demergers have come back into fashion. We will take a look at them in Section 44.3.

Section 44.1

ALL-SHARE DEALS

In this section, we will examine the general case of two separate companies that decide to pool their operations and redistribute roles. Before the business combination can be consummated, questions of valuation and power-sharing among the shareholders of the new entity must be resolved. Financially, the essential distinguishing feature among mergers and acquisitions is the nature of the consideration paid: 100% cash, a combination of cash and shares or 100% shares. Our discussion will focus on the last of these forms. Finally, we will not address the case of a company that merges with an already wholly-owned subsidiary, which raises ...