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Mergers

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Mergers are referring to the consolidation of two companies. After the merger the two companies became one but acqusition is different than merger because in the acqusition the firm which acquiries the other firm stays solid and the other firm becomes a part of the acquirer. In the mergers the concept which is often used is discounted cash flow method(DCF). This method is for valuation of the companies. There are both some advantages and disadvantages for Discounted Cash Flows. The advantages are the model allows for changes in cash flows in the future, the cash flows and estimated value are based on forecasted fundamentals and the model can adapted for different situations. Just like its advtanges there are also some disadvantages. These…show more content…
Companies should keep in mind that after the merge there will be some synergy between companies and there will be growth for the after the merger because of the companies will continue to work. Also the market power will increase and the big company after the merger will have easy access to resources. There are also some cross-border advantages for mergers too.
The market imprefections will be exploited, government adverse policies will be adverted, there will be technology transfer and product differentiation. Finally, both of the companies clients will follow the merger and will start to work the company after the merger. There will also be some bad side of merger too. Diversification can be huge problem for the companies as in today’s world highly diversed companies become more successful. If there is conflict of interest between the managers of the two firms and this can even and the merger. Other than the problems there is also bootstrapping problems which can make a suspicion during the merger.
Exhibit 1.A

Assumptions:
Exchange ratio: One share of Company One for two shares of Company Two
Market applies pre-merger P/E of Company One to post-merger earnings.

Company One

Company Two

Company One Post-Acquisition
Earnings
$100 million

$50 million

$150 million
Number of shares
100 million

50 million

125 million
Earnings per share
$1

$1

$1.20
P/E
20

10

20
Price per share
$20

$10

$24
Market value of stock
$2,000 million

$500 million

$3,000
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