FINC6017_Merger and Acquisition_2009 Semester 1_Model_SOLUTION_WSQ1

SOLUTIONS

(base case provided, students need to elaborate to do better) keywords in bold

Q4.1

A merger affects virtually all the stakeholders in the merging firms (i.e. shareholders, debtholders, employees, suppliers, customers, managers, general public). Therefore the assessment of the success of a merger can yield different results, depending on the perspective of the particular stakeholder.

Q4.4

The different benchmarks that can be used to assess the impact of mergers on shareholder wealth include:-

• Stock market based return measures

• Operating performance / accounting based measures

To add meat to this report may for example talk about the problems with intuitive benchmarks:

Q4.3

The post acquisition firm is different from the pre-acquisition merging entities, hence to compare the post acquisition performance of the merged firm with the pre-acquisition performance of the separate merging firms, requires a measure of the shareholder value had the merger not occurred. One possible benchmark is a weighted average of the shareholder returns of the pre-merger firms. There are two problems with this measure: • The separate performance of the merging firms in the pre-merger period may not have continued in the post merger period (eg if the two firms were facing a price war and have merged as a means of gaining market power, then the returns generated in the pre-merger period may have continued to deteriorate in the absence of a merger.) Extrapolation of past performance would overstate future performance benchmark

• The merged firm may perform better than the separate combining entities, even if individually they would have maintained their pre-merger performance, since the whole objective of the merger is to create new sources of competitive advantage. Extrapolation of past performance in this case would understate future performance. An alternative approach to extrapolating past performance is the use of external benchmarks like a control sample of non-merging firms. The presumption is that firms sharing common characteristics are likely to have similar performance. However the choice of characteristics on which to pick a control sample is imprecise. Additionally firms may share some common characteristics and still be widely different in their strategic posture, resources, capabilities and ability to create and maintain competitive advantage.