Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Third Edition

CHAPTER 25

Aquisitions and Takeovers

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 Inc., Beatrice Foods, 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. The 1990s 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 or lower costs.

Acquisitions seem to offer firms a shortcut to their strategic objectives, but the process has its costs. This chapter examines 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 we talk about acquisitions or takeovers, we are talking about a number of different types of transactions. These transactions can range from one firm merging with another firm to create a new firm to managers of a firm acquiring the firm from their own ...