Reasons for Takeovers Like any other investment- maximise the value of the acquiring company' s shares Must be financial benefits Motivated by a desire for greater returns or reduction in risk profile, or both
Reasons for Takeovers • Like any other investment – maximise the value of the acquiring company’s shares. • Must be financial benefits. • Motivated by a desire for greater returns or reduction in risk profile, or both
Reasons for Takeovers Target company is managed inefficiently Complimentary assets Target company is undervalued
Reasons for Takeovers • Target company is managed inefficiently • Complimentary assets • Target company is undervalued
Reasons for Takeovers Cost reductions Increased market power Excess liquidity free cash flow
Reasons for Takeovers • Cost reductions • Increased market power • Excess liquidity & free cash flow
Reasons for Takeovers Tax benefits continuity-of-ownership test continuity-of-business test Text(pp. 702-6)and Study Book(pp 5.2-5.4)
Reasons for Takeovers • Tax benefits – continuity-of-ownership test – continuity-of-business test • Text (pp. 702-6) and Study Book (pp. 5.2-5.4)
Invalid/ dubious reasons Diversification Risk reduction Increased debt capacity the co-insurance effect ° Higher EPS bootstrapping
Invalid/Dubious Reasons • Diversification – Risk reduction • Increased debt capacity – the co-insurance effect • Higher EPS – bootstrapping