Subject Corporate Finance

Segment Mergers and Acquisitions

Topic Overview

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Table of Contents
1. Introduction
2. Segment Overview
3. Objectives
4. Required Reading

1. Introduction

Mergers and acquisitions (M&As) are investment decisions made by companies for
various reasons, including the creation of more value for their shareholders. One of
the main sources of value creation for takeovers are synergies. Operating synergies
result if the uniting of two firms improves productivity or reduces costs. In these
cases, the operating cash flows of the merged firm exceed the combined operating
cash flows of the individual firms. Later, we will also discuss financial synergies,
taxes and agency costs as sources of gains in takeovers. Besides the benefits or
synergies, there are also costs associated with M&As.
The NPV of a merger therefore consists of the synergies minus the costs, which
includes the premium to be paid for acquiring the target company.

The growing increase in M&As have been mainly due to dramatic changes in the
world economy such as technological development, globalisation and an increase in
free trade. The deregulation in some industries and the changes in regulation in
others, the emergence of new industries and strong economic growth in some
countries have also contributed to the increase. In terms of the number of merger
announcements, merger activity in the US peaked in 2000 (see Figure 1).

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Subject Corporate Finance
Segment Mergers and Acquisitions
Topic Overview

Source: Copeland, T., J. F. Weston and K. Shastri. Financial Theory and Corporate
Policy. 4th ed. Pearson Addison Wesley (2005): 753-807.
In terms of dollar value, the peak year was 1999 with US$1.3 trillion of activity.
Worldwide M&A activities follow the pattern of the US activity as seen in Table 1.
M&As declined sharply in 2001 and 2002 due to the economic downturn and the
decline in stock prices.

1998 1999 2000 2001 2002

US 1,373.3 1,433.7 1,792.2 1,148.4 612.6
Rest of world 659.3 917.3 1,652.2 821.8 623.7
World 2,032.6 2,351.0 3,444.4 1,970.2 1,236.3
US % of world 67.6% 61.0% 52.0% 58.3% 49.6%

Source: Worldwide M&A Activities, 1998-2002.

Copeland, T., J.F. Weston and K. Shastri. Financial Theory and Corporate Policy. 4th
ed. Pearson Addison Wesley (2005): 753-807.
Let's look at the top 10 announced acquisition deals for 2001, 2002 and 2003.

Top 10 Acquisition Deals in 2001, 2002 & 2003

2003
First, let us discuss the top 10 deals for the year 2003.
1. Ranked at number 1 was Bank of America's acquisition of Fleetboston valued
at US$48 billion.
2. This was followed by St. Paul's acquisition of Travellers at US$16 billion.
3. Third was Anthem's acquisition of Wellpoint at US$15 billion.
4. Fourth is Manulife's acquisition of John Hancock at US$11 billion.
5. Ranked fifth was General Electric's acquisition of Amersham at US$9 billion.

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Subject Corporate Finance
Segment Mergers and Acquisitions
Topic Overview

6. Ranked sixth was Liberty Media's acquisition of Comcast QVC valued at US$8
billion.
7. Ranked seven was Oracle's acquisition of Peoplesoft at US$7 billion.
8. Ranked eight was First Data's acquisition of Concord EFS valued at US$7
billion.
9. Ranked nine was Newscorp's acquisition of Hughes (GM) at US$7 billion.
10. Ranked ten was IDEC Pharma's acquisition of Biogen Inc at US$ 6 billion.
2002
Let us now discuss the top 10 deals for the year 2002.
1. Ranked first was Pfizer's acquisition of Pharmacia valued at US$58 billion.
2. At second place was HSBC's acquisition of Household int. at US$14 billion.
3. At third place was Grumman's acquisition of TRW Northrop at US$8 billion.
4. Ranked fourth was Welsh et all/ Carlyle's acquisition of Qwestdex publishing
at US$7 billion.
5. Ranked fifth was AOL Time Warner's acquisition of AOL Europe at US$7
billion.
6. Ranked six was Simon Property's acquisiton of Rodamco North America at
US$5 billion.
7. Ranked seventh was Citigroup's acquisition of Golden State Bancorp at US$5
billion.
8. Ranked eighth was Blackstone Group's acquisition of TRW Automotive at
US$5 billion.
9. Ranked nine was Cadbury Schweppes acquisition of Adams candy at US$4
billion.
10. Ranked tenth was BCE's acquisition of Bell Canada at US$4 billion.
2001
Finally, let us discuss the top ten deals for the year 2001.
1. Ranked first was Comcast's acquisition of AT&T Broadband valued at US$44
billion.
2. Ranked number 2 was Echostar's acquisiton of GM-Hughes valued at US$30
billion.
3. Ranked 3 was HP's acquisition of Compaq at US$26 billion.
4. Ranked 4 was AIG's acquisition of Amer. Gen. At US$23 billion.
5. Ranked fifth was Amgen's acquisition of Immunex at US$16 billion.
6. Ranked 6 was Philip's acquisition of Conoco at US$15 billion.
7. Ranked seventh was First Union's acquisition of Wachovia at US$14 billion.
8. Ranked 8 was J&J's acquisition of Alza at US$12 billion.
9. Ranked 9 was Citigroup's acquisition of Banamex at US$ 13 billion.
10. Ranked 10 was Tyco's acquisition of CIT at US$ 10 billion.

Source: Top 10 deals (announced), 2003, 2002 & 2001.

Copeland, T., J.F. Weston and K. Shastri. Financial Theory and Corporate Policy. 4th
ed. Pearson Addison Wesley (2005): 753-807.

2. Segment Overview
In this segment, you will explore the various aspects of M&As – the different types of
M&As, the reasons behind them, their limitations, the defensive strategies to prevent
them and the various alternatives. In this segment, you will also learn how to value
a merger and the acquisition and deal structuring process. Finally, the segment will

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Subject Corporate Finance
Segment Mergers and Acquisitions
Topic Overview

analyse the performance of M&As and potential reasons for the failure of some
M&As.

Mergers and Acquisitions – Overview

The topic "Types of Mergers and Acquisitions" introduces the different
classifications of M&As.
The topic "The Motivation for Mergers and Acquisitions" discusses the strategic
motivations for a merger as well as the resulting synergies.
The topic "Limitations of Mergers and Acquisitions" discusses the problems and
costs that are associated with mergers, as well as the regulatory issues.
The topic "Defending against a Merger" analyses different types of defences that
companies can use in the case of an unfriendly merger.
The topic "Alternatives to Mergers and Acquisitions" discusses joint ventures
and strategic alliances, as well as shrinkage strategies such as equity carveouts,
spin-offs and divestitures as alternatives to M&As.
The topic "Valuing a Merger" presents the different methods for valuing a merger.
The topic "Acquisition Process and Deal Structuring" outlines the acquisition
process and deal structuring.
The topic "Returns on Mergers and Acquisitions" examines the performance of
M&As and some potential reasons for the failure of a merger.
The topic "Notations and Formulas" provides the important excerpts from the
entire segment.

3. Objectives
Objectives: Mergers and Acquisitions
Upon completion of the segment, you should be able to
 identify the different types of M&As as an attractive strategy for some
companies
 analyse the limitations of M&As
 discuss the possible merger defences that an acquiring company can face
 identify the different shrinkage strategies used to refine the company's
operations
 value a merger and estimate synergies using different methods
 describe the implications of tax, accounting and financing implications for deal
structuring

4. Required Reading
Reading: Textbook and Other Readings
Required Textbook Readings:
Refer to the List of Textbook Readings for relevant readings.

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Subject Corporate Finance
Segment Mergers and Acquisitions
Topic Overview

Reference Readings:
 Ramstad, E. and J. G. Auerbach. "Tech Takeover: Compaq Buys Digital, An
Unthinkable Event Just a Few Years Ago --- The PC Maker Grew Rapidly While
Big Competitors Shunned Risks and Lost --- Gambling on the 386 Chip", Wall
Street Journal (Eastern edition) (27 Jan 1998): A.1
 Ball, D. "Adams to Bring Cadbury Debt as Well as Revenue", Wall Street
Journal (Eastern edition) (18 Dec 2002): B.8
 Coggan, P. "Winner takes all the risk", The Financial Times (19 February
2001): 27
 Krauskopf, L. "Merger of Merck, Schering-Plough would create third-largest
pharmaceutical", Knight Ridder Tribune Business News (25 Jul 2004): 1
 Parkes, C. "DuPont to dispose of oil and gas business", The Financial Times
(12 May 1998): 32
 "Citicorp and Travelers Group to Merge, Creating Citigroup", Citigroup Press
Release, New York (6 April 1998)
 Authers, J. "Travelers, Citicorp merger completes today", The Financial Times
(8 October 1998): 30
 Liesman, S. "Exxon Mobil to Cut 14,000 Jobs, Sees Big Savings", Wall Street
Journal (Eastern edition) (16 Dec 1999): A.3
 "BCE OFFERS TO BUY CTV FOR $2.3 BILLION IN CASH", PR Newswire (25 Feb
2000): 1
 Tait, N. "Germans at Chrysler's gate", The Financial Times (16 June 2000): 21
 Roberts, D. "GE Europe in hunt for acquisitions", The Financial Times (11 June
2002): 20
 Hara, S. "Cisco Systems to acquire LightSpeed International, Inc.", Business
Wire (22 Dec 1997): 1
 Foremski, T. "Cisco agrees Dollars 6bn deal for ArrowPoint", The Financial
Times (6 May 2000): 20
 Habeck, M.M., F. Kröger and M.R. Träm. After the Merger, Financial
Times/Prentice Hall: London, 2000
 "Deals on wheels", The Economist 372 no.8391 (4 September 2004)
 Fackler, M. "Maverick Jolts Japanese Banks; Sumitomo Mitsui's Chief Breaks
With Pack Again in Pursuing UFJ", Wall Street Journal (Eastern edition) (27
Aug 2004): C.14
 Mazurkiewlcz, G. "European Regulators Block GE-Honeywell Merger", Air
Conditioning Heating & Refrigeration News Vol. 213 Issue 10 (9 July 2001)
 "Blackstone's James: It's All Good", Corporate Financing Week (24 Sept
2007): 1
 Thornton, E. (New York), R. Grover (Los Angeles) and T. Lowry (New York).
"Those Bulging Buyouts; LBO firms are getting bolder, thanks to the strong
economy and cheap money", Business Week issue 3869 (9 Feb 2004): 74
 Dranikoff, L., T. Koller and A. Schneider. "Divestiture: Strategy's Missing Link"
Harvard Business Review Vol. 80 Issue 5 (May 2002): 75

Credits and Disclaimer

Copeland, T., J. F. Weston and K. Shastri. Financial Theory and Corporate Policy. 4th ed. Pearson Addison Wesley (2005):
753-807.
Worldwide M&A Activities, 1998-2002.
Copeland, T., J.F. Weston and K. Shastri. Financial Theory and Corporate Policy. 4th ed. Pearson Addison Wesley (2005):
753-807.
Top 10 deals (announced), 2003, 2002 & 2001.
Copeland, T., J.F. Weston and K. Shastri. Financial Theory and Corporate Policy. 4th ed. Pearson Addison Wesley (2005):
753-807

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