Answers to End-of-Chapter Discussion Questions
CHAPTER 2 MERGER WAVES
1. Motives for individual mergers include agency-related and hubris-driven motives as well as efficiency and market power/collusion–based motives. Agency and hubris–driven mergers should result in wealth losses for bidding shareholders and, due to the lack of synergies, would not create value overall. If the wealth loss from bidder shareholders is purely transferred to target shareholders, the combined net value creation would be zero. If the merger involves additional costs, the net value creation could be negative. More efficiency-based reasons include economies of scale and/or scope and the possibility of creating market (pricing) power through horizontal merger in a concentrated industry. In these cases, the combined net value creation is positive, but the premium paid determines how much of it bidder shareholders capture (resulting in positive bidder announcement return).
2. Some behavioral hypotheses are market driven, such as Shleifer and Vishny (2003), where overvalued equity directly leads managers to use equity as currency to acquire the real assets of targets. In others, the high valuation creates uncertainty for target managers as to whether the premium represents true synergies or misvaluation. In the neoclassical view, the rising stock market reflects aggregate economic activity as well as capital liquidity, both of which contribute to increasing merger activity. Thus, rising stock prices do not ...