Introduction to Mergers

and Acquisitions

PREPARED BY: MARY ANNE JAMISOLA, CPA, JD

Why do mergers and
acquisitions happen?
 Operating Synergy

Economies of Scale
the reduction in average total costs
for a firm producing a single
product for a given scale of plant due
to the decline in average fixed costs
as production volume increases
 Operating Synergy

Economies of Scale
the reduction in average total costs
for a firm producing a single
product for a given scale of plant due
to the decline in average fixed costs
as production volume increases
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 Operating Synergy

Economies of Scope
the reduction in average total costs
for a firm producing two or more
products, because it is cheaper to
produce these products in a single
firm than in separate firms
 Operating Synergy

Complementary
Technical Assets & Skills

those possessed by one firm that

could be used by another to fill gaps
in its technical capabilities
 Operating Synergy

Complementary
Technical Assets & Skills

those possessed by one firm that

could be used by another to fill gaps
in its technical capabilities
Financial Synergy

the reduction in the acquirer’s cost of

capital due to a merger or acquisition
 M&AS RESULTING IN FIRMS WHOSE
INDIVIDUAL BUSINESS UNIT CASH
FLOWS ARE UNCORRELATED CAN
INDEED LEAD TO A REDUCTION IN
SYSTEMATIC RISK. SUCH FIRMS MAY BE
BETTER ABLE TO WITHSTAND THE
LOSS OF CUSTOMERS, SUPPLIERS,
EMPLOYEES, OR THE IMPACT OF
FINANCIAL DISTRESS THAN SINGLE
PRODUCT FIRMS.
 Diversification

buying firms beyond a company’s

current lines of business

The new product lines or target

markets may be related or unrelated
to the firm’s current products or
markets.
Strategic Realignment

Firms use M&As to adjust to changes

in their external environment such
as:
regulatory changes, and
technological innovation
Hubris and the "Winner's Curse"

Overpricing due to overconfidence

Buying Undervalued Assets:
The Q-Ratio

the ratio of the market value of the

acquirer’s stock to the replacement
cost of its assets
 Managerialism
(Agency Problems)

Agency problems arise when the

interests of managers & shareholders
differ
 Tax Considerations

Acquirers of firms with accumulated

losses and tax credits may use them
to offset future profits generated by
the combined firms. Taxes also are an
important factor motivating firms to
move their corporate headquarters to
low cost countries.
 Market Power

firms merge to improve their ability

to set product prices by reducing
output or by colluding
 Misvaluation

Absent full information, investors

may periodically incorrectly value a
firm. Opportunistic acquirers may
profit by buying undervalued targets
for cash at a price below their actual
value or by using overvalued equity
(even if the target is overvalued), as
long as the target is less overvalued
than the bidding firm’s stock.
 Recall a recent life
decision that applied a
concept of M&A.
What is it and what
motivated you to do it?