ADV Corporate coursework
..., and especially in the three main centers of world capitalism: North America, Europe and Asia. Before the merger, Chrysler and Daimler-Benz were essentially regional producers--Chrysler with the third-largest market share in North America, Daimler-Benz controlling the luxury market in Europe. This paper looks on the case in depth and is organized as follows. Section 2 gives a brief literature review on M&A including empirical finings related to the type of takeover that DaimlerChrysler deal represents. Section 3 provides an overview of the automobile industry outlining industry features at the time thus illustrating the necessity of the merger. Section 4 generally describes each company ¡V what products and/or services they offer, market position, and weakness ¡V from which we can see that the two are perfectly complementary. Section 5 then analyses the transaction focusing on how to derive the stock exchange ratio. Section 6 illustrates our findings on the market reaction to the merger, using event study method. Section 7 compares performance of the new company to its formers before the merger and to its American and European peers after the merger to see whether anticipated synergies have been achieved. Section 8 concludes. Section 2 Literature review What are M&A¡¦s and why do they occur? A firm acquiring another firm it is investing is something uncertain to succeed. The Acquiring Company is the bidder and the acquired company is the target. The bidder obtains control of the targets stocks in exchange for cash or securities. When acquiring a company the bidder should use a basic valuation principle to ensure that the acquisition generates a positive net present value for shareholders. When firm thinks about acquiring another firm, they have three legal ways of acquiring: „« Acquisition of stock. „« Acquisition of assets. „« Merger and consolidation. Acquisition of stock is achieved by a tender offer, where the bidder firm offers to buy the voting stock of existing shareholders in the target company via a public offering. Another way to acquire a firm is by Acquisition of assets, where the bidder firm buys all the assets of the target firm. This resolves the problem, which stock acquisition overlooks, of having shareholders from the target firm with interest in the new firm. A merger takes place when two firms form a union of their companies and think they will do better together (i.e. one firm is absorbed by another and the acquiring firm keeps its name and identity). These unions can either be Hostile , where the target company¡¦s board of directors disapproves of the mergers and shareholders overrule them. Or they can be friendly , where the board of directors approves of such an acquisition. Consolidations are very similar to mergers, but they differ in the fact that a completely new firm emerges, terminating the legal identity of each firm to form a new company. Acquisitions exist in three forms: 1. Horizontal Acquisition: represents the union of two firms in the same industry and at the same production stage. 2. Vertical Acquisition: represents the merger of two firms in the same industry but at different production stages. 3. Conglomerate Acquisition: is when the production activities of the two firms are unrelated. There are various reasons on why acquisitions occur; the most important one is synergy efficiency (Synergies = VAB ¡V (VA+ VB)), synergies can be divided into operational synergies and financial synergies. A very basic reason for acquisitions is cost reduction; the combined firm can operate more efficiently and effectively than the two separately therefore reducing costs. Their operating efficiency can be achieved through economies of scale where average price falls relative to the increasing production level. They can as well spread overheads by sharing central facilities (e.g. corporate headquarters, large mainframe computer). A partially important financial reason for acquisitions is revenue enhancement (i.e. the combined firms can create larger revenues than the two firms can separately). Revenue enhancement comes from marketing gain, strategic benefits, and market power. The possible Tax gains from an acquisition can be a very powerful incentive for firms to merge. Firms can gain by offsetting net present losses (i.e. when the target is bankrupt the bidder can get a tax cut), and increasing their debt capacity in order to increase their tax shields. The cost of capital can be reduced as well because the cost of issuing debt and equity for larger firms is much lower than smaller ones due to economies of scale. There are as well minor reasons on why Acquisition occurs for instance, elimination of inefficient management, where the managers of firms who not are operating in the best interest of shareholders and of firms that can be increased in size with a change of management will face an acquisition. Strategic realignment is a benefit for firms wanting to expand its activities in a certain market but lacks the expertise so it acquires a company with such expertise. Empirical evidence: The empirical evidence on mergers and acquisitions while large is not conclusive. Event-study evidence on large samples tends to show that, on average, around a merger announcement target shareholders benefit significantly from acquisitions while bidder shareholders are unaffected or lose slightly. The net announcement effects of takeovers (for both target and bidder) are positive, although the variance of these announcement returns is large. Various researchers have looked for the source of the gains from mergers and evidence exists that mergers can create value by reducing taxes, increasing productivity, improving incentives, or creating synergies. Another approach has been to examine the long-run performance of firms after the merger using stock or accounting data. The results from the long-run performance literature are mixed, in part because of the difficulty of ...