Computer Concepts/Computech Merger Analysis Essay
Question 1 Several factors have been proposed as providing a rationale for mergers. Among the more prominent ones are (1) tax considerations, (2) diversification, (3) control, (4) purchase of assets below replacement cost, and (5) synergy. From the standpoint of society, which of these reasons are justifiable? Which are not? Why is such a question relevant to a company like CompuTech, which is considering a specific acquisition? Explain your answers.
Answer: Synergy is by far the most socially justifiable reason for mergers. Synergy occurs when the value of the combined enterprise exceeds the sum of the values of the pre-merger firms. (If synergy exists, the whole is …show more content…
It is important for managers to understand these points for at least three reasons:
(1) The managers of a firm thinking about making an acquisition must know how others, in general, tend to think about mergers in order to anticipate reactions to a proposed merger.
(2) Managers ought to question their own motives; especially, a company's directors ought to question management's motives if a merger is proposed.
(3) If antitrust issues are raised, the potential merger partners may have to justify the merger in the courts, and knowledge of both law and economics is essential at that point.
Question 2 Briefly describe the differences between a hostile merger and a friendly merger. Is there any reason to think that acquiring companies would, on average, pay a greater premium over target companies’ pre-announcement prices in hostile mergers than in friendly mergers?
Answer: In a friendly merger, the management of one firm agrees to be bought out by another firm. In most cases, the acquiring firm initiates the action, but in some situations the target may initiate the merger. The managements of both firms get together and work out terms which they believe to be fair and beneficial to both sets of shareholders. Then, they issue