The co-insurance Effect Combining two companies whose earnings streams are less than perfectly positively correlated will lower the risk of default on debt, so that the debt capacity of the combination is greater than the sum of the debt capacities of the two companies operating separately
The Co-insurance Effect Combining two companies whose earnings streams are less than perfectly positively correlated will lower the risk of default on debt, so that the debt capacity of the combination is greater than the sum of the debt capacities of the two companies operating separately
Bootstrapping Occurs in share-exchange takeovers whenever the acquiring company's P/E ratio is greater than the target companys P/E ratio Need to distinguish between the effects of true growth and the bootstrap effect Study Book Example 5.1
Bootstrapping • Occurs in share-exchange takeovers whenever the acquiring company’s P/E ratio is greater than the target company’s P/E ratio. • Need to distinguish between the effects of true growth and the bootstrap effect. • Study Book Example 5.1
Reasons for Takeovers Valid reason PVAB(PVA+PVB) LE SYNERGISTIC EFFECT
Reasons for Takeovers Valid Reason: I.E. SYNERGISTIC EFFECT ( ) PVA B PVA + PVB +
Synergism The combined company must be of greater value than the sum of the parts 2+2=5 Benefit 2+2=4 No Benefit
Synergism The combined company must be of greater value than the sum of the parts: 2 + 2 = 5 Benefit 2 + 2 = 4 No Benefit
Terms of offer Cash(when shares are purchased on the stock market Exchange of shares and/or cash(in the case of a formal offer
Terms of Offer • Cash (when shares are purchased on the stock market). • Exchange of shares and/or cash (in the case of a formal offer)