Establishing a Fair Value

 it is important to document that the agreed-upon price is a fair one.

 Fairness opinions in mergers suggests that advisor working for the acquiring firms tend to
produce overly optimistic valuations of the target firm, whereas the advisors working for
the target firms tend to produce more accurate estimates of the target’s value.
Financing Mergers
 Mergers financed by cash
 Mergers financed by junk bonds
Arbitrage Operations
 Generally, means simultaneously buying and selling the same commodity or security in
two different markets at different price. Some wealthy private investors are engaged in a
different type of arbitrage called “risk arbitrage”. Arbs speculate in the stocks of
companies that are likely takeover targets.
 Vast amounts of capital are required to speculate in many securities and thus reduce risk
and to make money on narrow spreads
For example
Two companies, A and B, are worth $10 billion each. If A buys B, A will be able to cut $2
billion of costs out of the combined company. A goes ahead and buys B, agreeing to pay $15
billion. When the deal is announced, B’s value will increase by $5 billion, from $10 billion to
$15 billion, while A’s value will decline by $3 billion from $10 billion to $7 billion.
When we look at the overall picture in the data, accounting for the combined returns to both
bidders and sellers, a quite different story emerges from the popular merger myth. At the times
when merger deals are announced, the combined returns are usually positive both statistically
and economically. On average, the overall value of both acquirer and acquired increases, which
indicates that the market believes the announced deals will create value. This has been the case
for the average acquisition going back 30 years, and it remains the case today. If combined
returns are positive, mergers certainly create value for the overall market, and, therefore, for
investors in index funds
The evidence strongly suggests:
 acquisitions do create value but
 that shareholder of target firms reaps virtually all the benefits

Corporate Alliances
  mergers are one way for two companies to join forces, but many companies are striking
cooperative deals, which stop far short of merging.
 Joint venture- parts of companies are joined to achieve specific, limited objectives.
Private Equity Investments
 NOT ALL target firms are acquired by publicly traded corporations. There are many
target firms that also have been acquired by private equity firms.
 Leverage buyout- a small group of investors, normally including management, buys all
of the publicly held stock, and hence takes the firm private

Divestitures
It is the disposal of company’s operating assets or business unit through sale, exchange, and
closure.
Some Reasons behind a divestiture
 To sell off redundant business units
 To generate funds-
 To increase resale value
Types of Divestitures
 Selling an operating unit to another firm (sell-off)
 Setting up the business to be divested as a separate corporation and the “spinning it off”
to the divesting firm’s stockholders
 Following the steps of a spin-off but selling only some of the shares (carve out)
 Liquidating asset outright

Divestitures Illustration
Over the past several decades, there have been a number of a high-profile divestitures. The table
below from The Wall Street Journal provides a summary of the largest spinoffs since 2005.
 The Wall Street Journal table was put together in September 2014, the day after eBay’s
announced plans to spinoff its Paypal unit in 2015.
Apart from blockbuster deals, some other very interesting deals were announced in 2014. These
include:
1. Healthcare firm Baxter International announced plans to spin off its biotech to focus on
medical products and equipment.
2. Chesapeake Energy announced plans to spin-off its oilfield services business.
3. FMC Corporation, a diversified chemical company, announced plans to spin off its
industrial mineral division to focus on its agriculture, health and nutrition division.
4. Hertz Global Holdings announced plans to spin off its construction equipment rental
business.
5. Pepsi spun off its fast food business
6. United Airlines sold its Hilton International Hotels