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The Pros And Cons Of Mergers

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2. Merger activity is greater during economic expansions than during contractions, and mergers are more likely in bull markets – markets in which share prices are rising and lots of buying is going on. However, unless we believe that companies purchase other companies just because they are in a position to do so, this alone cannot explain the phenomenon.

I believe that merger waves occur as the result of industry shocks (regulatory changes, technological developments, etc.). However, mergers can only happen if there is liquidity in markets and capital is easily available, so this is the reason we see mergers primarily during times of economic prosperity. Industry shocks and economic conditions that lead to bull markets can also be reason for companies to spin off or seek out different divisions in order to adjust to new market environments. These factors together are what drive mergers and cause them to occur in waves.

3. Horizontal mergers are likely to create value for shareholders because they combine firms in the same industry, thus the opportunity for synergies is very high. As competition decreases, market share and pricing power increase. Horizontal mergers often create economies of scale, allowing companies to offer the same product at a lower production cost.

4. The acquiring company is forced to compete against other firms, which drives down the gains that its shareholders can realize from the deal. At the same time the shareholders of target companies benefit from the competition, receiving higher bids for their firm.

5. It is difficult when acquiring intangibles, such as intellectual capital, to motivate employees of the target to stay on post-merger. Employees of the target may feel alienated or threatene...

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...ffer of $3,000,000/1 million shares = $3 per share. Compared to the current price per share of $2.50, this represents a 20% premium. The price per share of XYZ upon the announcement will therefore be $3, and the price per share of ABS upon the announcement will be $20 – 20% x $2.50 = $19.50.

b. The share price of ABC would equal the share price of the combined companies, which can be calculated by ($20 + $2.50)/1.15 = $19.57. The share price of XYZ would be 0.15 x $19.56 = $2.94. The premium is therefore $2.94/$2.50 = 17.38%.

c. No, this does not mean that my answers need to be identical. The actual premium in the stock offer is lower because market prices adjust to show that ABC shareholders are paying a premium to XYZ. The announcement in part B would cause the stock price of XYZ to increase and the stock price of ABC to decrease, so the premium goes down.
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