CHAPTER 6
Treatment of Mergers and Acquisitions
Looking casually at any market index or composite, it is apparent over the course of years that the major reason that corporations disappear from indices or market listings is due to their merging with or being purchased by other corporations. Our analysis would be remiss if we did not address this topic specifically.
Not surprisingly, our valuation framework can be applied to the treatment of mergers and acquisitions. The consideration of such major transactions also can be fed back into the day-to-day valuation of companies not currently involved in a merger or acquisition. The natural outgrowth of these investigations will be some practical insight into dealing with frequent, but less imposing, financial events, such as leveraged recapitalizations or run-of-the-mill common stock repurchase programs.
In addition to the reasons set forth in Chapter 5 for the selection of companies to study, one additional factor influenced the choice, at least in regard to Procter & Gamble. Specifically, P&G and The Gillette Company had entered into a friendly merger agreement shortly before the end of the last fiscal year (2005) in our study, thereby enabling us to analyze an example of a merger transaction. The merger offer called for the exchange of .975 P&G shares of common stock for every share of Gillette common stock, which at the time represented over a 20% market premium compared to Gillette’s stock trading range shortly before. P&G’s purchase ...
