FI 561 MERGERS & ACQUISITIONS

WEEK 3 HOMEWORK ANSWER KEY

Questions 6.4 & 6.5 (Chapter 6 p. 142)

6.4

A merger can be value increasing if it lowers transactions costs, improves synergies or removes ineffective management.

6.5

A merger can be value reducing if it does not lower transaction costs or if it merely protects the job of incumbent management.

Question 7.4 (Chapter 7 p. 186)

7.4

Mergers often occur because of technological change or changes in input costs. Mergers can cluster in particular industries because the effects of change forces such as technological change or input costs are borne relatively more by certain industries. An example is the concentration of mergers in energy-related sectors in the 1980s following the energy shocks of the 1970s.

Questions 8.8 & 8.9 (Chapter 8 p. 214)

8.8

a. AT&Ts price fell 8.22 percent and the stock market rose 1.20 percent. Hence, the abnormal return was 9.42 percent.

b. AT&Ts price increased 11.8 percent and the stock market increased by 0.7 percent. Hence, the abnormal return was 11.1 percent.

c. The negative return at the acquisition of TCI as well as the positive return upon the sale of the cable assets suggest that the stock market did not view the combination of telephone and cable assets as having positive synergies.

8.9

The Williams Act appears to have improved the bargaining power of target firms and thereby shifted some of the gains from bidders to targets.