Handbook of Finance: Investment Management and Financial Management

Chapter 86. Acquisitions and Takeovers

ASWATH DAMODARAN, PhD

Professor of Finance and David Margolis Teaching Fellow, Stern School of Business, New York University

Abstract: Firms are acquired for a number of reasons. In the 1960s and 1970s, firms such as Gulf & Western and ITT built themselves into conglomerates by acquiring firms in other lines of business. In the 1980s, corporate giants like Time, Beatrice, and RJR Nabisco were acquired by other firms, their own management or wealthy raiders, who saw potential value in restructuring or breaking up these firms. In the 1990s, we saw a wave of consolidation in the media business as telecommunications firms acquired entertainment firms and entertainment firms acquired cable businesses. Through time, firms have also acquired or merged with other firms to gain the benefits of synergy, in the form of either higher growth, as in the Disney acquisition of Capital Cities, or lower costs.

Keywords:, acquisitions, control, synergy, premiums, diversification, merger

Acquisitions seem to offer firms a shortcut to their strategic objectives, but the process has its costs. In this chapter, we examine the four basic steps in an acquisition, starting with establishing an acquisition motive, continuing with the identification and valuation of a target firm, and following up with structuring and paying for the deal. The final and often the most difficult step is making the acquisition work after the deal is consummated.

BACKGROUND ON ACQUISITIONS

When ...