Sales Enhancement and Operating Economic Economies of scale the benefits of size n which the average unit cost falls as volume increases o Horizontal merger: best chance for economies n Vertical merger: may lead to economies n Conglomerate merger: few operating economies o Divestiture: reverse synergy may occur 23-6
23-6 Sales Enhancement and Operating Economies Horizontal merger: best chance for economies Vertical merger: may lead to economies Conglomerate merger: few operating economies Divestiture: reverse synergy may occur Economies of scale -- The benefits of size in which the average unit cost falls as volume increases
Strategic Acquisitions Involving Common Stock Strategic Acquisition -Occurs when one company acquires another as part of its overall business strateg y When the acquisition is done for common stock, a fatio of exchange ? which denotes the relative weighting of the two companies with regard to certain key variables, results A financial acquisition occurs when a buyout firm is motivated to purchase the company(usually to sell assets, cut costs, and manage the remainder more efficiently), but keeps it as a stand-alone entity 23-7
23-7 Strategic Acquisitions Involving Common Stock When the acquisition is done for common stock, a 搑atio of exchange,?which denotes the relative weighting of the two companies with regard to certain key variables, results. A financial acquisition occurs when a buyout firm is motivated to purchase the company (usually to sell assets, cut costs, and manage the remainder more efficiently), but keeps it as a stand-alone entity. Strategic Acquisition -- Occurs when one company acquires another as part of its overall business strategy
Strategic Acquisitions Involving Common Stock Example-Company A will acquire Company B with shares of common stock Company a Company B Present earnings $20,000000 $5,000,000 Shares outstanding 5,000.000 2,000,000 Earnings per share $400 $250 Price per share $6400 $3000 Price /earnings ratio 16 12 23-8
23-8 Strategic Acquisitions Involving Common Stock Example -- Company A will acquire Company B with shares of common stock. Present earnings $20,000,000 $5,000,000 Shares outstanding 5,000,000 2,000,000 Earnings per share $4.00 $2.50 Price per share $64.00 $30.00 Price / earnings ratio 16 12 Company A Company B
Strategic Acquisitions Involving Common Stock Example - Company B has agreed on an offer of $35 in common stock of company A. Surviving Company A Total earnings $25,000,000 Shares outstanding 6,093750 Earnings per share $410 Exchange ratio=$35/$64=. 546875 New shares from exchange =. 546875X 2,000,000 =1.093750 23-9
23-9 Strategic Acquisitions Involving Common Stock Example -- Company B has agreed on an offer of $35 in common stock of Company A. Total earnings $25,000,000 Shares outstanding* 6,093,750 Earnings per share $4.10 Surviving Company A Exchange ratio = $35 / $64 = .546875 * New shares from exchange = .546875 x 2,000,000 = 1,093,750
Strategic Acquisitions Involving Common Stock The shareholders of company a will experlence an Increase In earnings per share because of the acquisition [$4.10 post-merger EPS versus $4.00 pre-merger EPS] The shareholders of Company B will experience a decrease in earnings per share because of the acquisition. [546875X $4.10 $2.24 post-merger EPS versus $2. 50 pre merger EPs 23-10
23-10 Strategic Acquisitions Involving Common Stock The shareholders of Company A will experience an increase in earnings per share because of the acquisition [$4.10 post-merger EPS versus $4.00 pre-merger EPS]. The shareholders of Company B will experience a decrease in earnings per share because of the acquisition. [.546875 x $4.10 = $2.24 post-merger EPS versus $2.50 premerger EPS]