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Learning Objectives

Learn about defensive measures against takeovers, motives for mergers/divestitures, and NPV analysis for proposals. Understand amalgamation, merger transactions, financial/non-financial motivations, and benefits for shareholders.

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Learning Objectives

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  1. Learning Objectives • Explain some defensive measures taken to avoid an unfriendly takeover. (LO1) • Analyze the motives for mergers and divestitures, including financial considerations and the desire to increase operating efficiency. Also, perform an NPV analysis for a merger proposal. (LO2)

  2. LO2 Business Combinations • Legal definition of amalgamation: • a statutory combination under one of the provincial corporations or companies acts, the Canada Corporations Act, or the Canada Business Corporations Act • Merger (and acquisition) refers to a transaction by which two or more companies are combined either under a statutory amalgamation or by ownership, that is: - one firm buys a majority or all of the voting shares of another firm

  3. LO2 Financial Motives for Business Combinations • To reduce risk through diversification • Portfolio effect • To improve financing posture • Larger firms enjoy greater access to capital • Greater financing capability may be achieved if the acquired firm has a strong cash position or low debt-equity ratio • To obtain tax loss carry-forward benefit • To gain synergistic effect • Synergy: the whole is greater than the sum of the parts • Overlapping functions in production and marketing are eliminated • Engineering and administrative capabilities are meshed

  4. LO2 Non-financial Motives for Business Combinations • Management desires • Expand in more dynamic industries to upgrade their image • Marketing Expansion • Merge with companies in allied but not directly related fields • Acquiring Technology • Obtain technology and related patents

  5. LO2 Motives of Selling Shareholders • To receive the acquiring company’s shares • To diversify their holdings into many new investments • To escape the bias against smaller businesses

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