My apologies for the extended holiday hiatus, however with the New Year, I am back big time!

For Level II, study session 9, I read the candidate reading, "Mergers," chapter 33 in Principles of Corporate Finance, 8^th edition, Richard A. Brealey, Stewart C. Myers, and Franklin Allen (McGraw-Jill Irwin, 2006).

Brief chapter outline:

• Genuine motives for mergers
  
  • Economies of scale - leveraging fixed costs, sharing resources
    
  • Economies of vertical integration - upstream / downstream
    
  • Complementary resources - e.g. distribution channels, manufacturing expertise
    
  • Inefficiency elimination - mgmt removal
    
  
  
• Dubious merger motives
  
  • Diversification - conglomerate discount
    
  • Bootstrapping - eps accretion in return for slower growth
    
  • Lower cost of capital
    
  
  
• Estimating merger gains and costs
  
  • Right and wrong ways to estimate benefits
    
  • When financed by stock / by cash
    
  • Asymmetric information - stock signals an overvalued currency
    
  
  
• Merger mechanics
  
  • Antitrust law - Clayton Act of 1914 & Hart-Scott-Rodino Antitrust Act of 1976
    
  • Purchase accounting - fair value allocation, goodwill impairment
    
  • Tax considerations - generally cash is taxed & stock is tax free
    
  
  
• Takeover defense / tactics
  
  • T Boone Pickens - Cities Services, Gulf Oil & Phillips Petro
    
  • Pacman
    
  • Greenmail
    
  • White knight
    
  • Two-tier offer
    
  • Poison pills
    
  • Shark-repellent
    
  • Golden parachutes
    
  
  
• Mergers and the econ

The very last section stood out in particular. The authors discussed the reality that "intense merger activity," occurs concurrent with periods of buoyant stock prices, although they couldn't provide an explanation for the concurrence.

It seems rather simple to me: If I take a page from Buffet and view the purchase of part of a company with the same logic and perspective as if I am buying the entire company, the merger mania occurrence makes perfect sense. Executives, as humans, are not immune to the same irrational exuberance being displayed in the stock market. Plus, in times of abundant merger activity, numerous companies are seen as possible takeover candidates, which translates into increased equity valuations. Journalists do it all the time.... "Google buys XYZ, thus these three similar companies in the same niche space may be acquired by MSFT, YHOO, etc..." To take it to the extreme, if every company where a likely takeover candidate, then the entire market would reflect a portion of the implied tender premium. I guess the question becomes, what comes first, lofty valuations or intense merger activity...my take is that they feed off each other.

HAPPY FREAKIN NEW YEAR

Mr. Risky Returns