Process of Mergers and Takeovers: FedEx-Kinko's Case Study

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It is thought that when firms merge, the price paid by the acquiring firm should be fair value, because that firm is going to invest rationally. Yet, under rational investment, the shareholders of the acquired firm would never sell. For them, the uncertainty of new ownership would reduce the value of the holding. In order to accommodate for cashing out "early", the shareholders of the acquired company must be compensated. The acquiring firm therefore must pay an acquisition premium in order to entice the shareholders of the takeover target. The acquisition premium will depend on the specifics of the deal and the companies involved, where the industry is in the business cycle and whether or not the takeover is hostile (Milano, 2011). Naturally, in order to justify the acquisition premium, the acquiring firm needs to derive more than the acquired firm's intrinsic value. If it did, the acquiring firm would overpay. Thus, the acquiring firm needs to view the assets of the acquired firm as being more valuable to it than to other buyers. This value is called synergy, and it derives in a few different ways. The first such way is that the two firms have similar operations, and therefore the combined entity can merge those operations, allowing it to run more efficiently. If the acquiring firm has, for example, a service department that is not working to capacity, then an acquisition can give more work to that department, increasing productivity. This increase in productivity is

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