Valuation for Mergers, Buyouts, and Restructuring, Second Edition

Chapter 9

Mergers and Acquisitions

9.1 VALUE CREATION AND MERGERS

A merger should be attractive to the shareholders of the companies involved if it increases the value of their shares. Value creation may result from a number of factors such as economies of scale in production, distribution and management, a technology that can be best deployed by the surviving company, the acquisition of new channels of distribution, and cross-selling of each other's products. However, experience shows that merger synergies are difficult to attain and their size can be disappointing.¹ Acquisitions are sometimes made to redeploy excess corporate cash and avoid double taxation of dividends to shareholders, but the tax argument may lead the acquirer to overreach into areas beyond its competency.² Changes in technology and the globalization of markets have led to many recent mergers. These factors have created opportunities and, in many cases, the need to consolidate, and pushed the global volume of transactions to $3.6 trillion in the year 2000. In the less favorable stock market and economic environment of 2002, the global volume of transactions fell to $1.4 trillion but deal activity regained momentum by mid-2003 and reached $4 trillion in 2006.

The chapter begins with an introduction to the legal, tax, and accounting aspects of mergers and acquisitions with emphasis in the choices available for structuring a transaction and their implications. The rest of the chapter shows how to apply the valuation ...