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Takeovers, mergers and acquisitions: market perception

Indicate whether you think the following claims regarding takeovers are true or false. In each case provide a brief explanation for your answer.

1. By merging competitors, takeovers have created monopolies that will raise product prices, reduce production, and harm consumers.

2. Managers act in their own interests at times and, in reality, may not be answerable to shareholders. Takeovers may reflect runaway management.

3. In an efficient market, takeovers would not occur because market price would reflect the true value of corporations. Thus, bidding firms would not be justified in paying premiums above market prices for target firms.

4. Traders and institutional investors, having extremely short time horizons, are influenced by their perceptions of what other market traders will be thinking of stock prospects and do not value takeovers based on fundamental factors. Thus, they will sell shares in target firms despite the true value of the firms.

5. Mergers are a way of avoiding taxes because they allow the acquiring firm to write up the value of the assets of the acquired firm.

6. Acquisitions analysis frequently focuses on the total value of the firms involved. An acquisition, however, will usually affect relative values of stocks and bonds, as well as their total value.

Solution Preview

1. By merging competitors, takeovers have created monopolies that will raise product prices, reduce production, and harm consumers.

That can be true which is why there is anti-trust legislation in place. The government may not always be right or timely, but laws are there to preclude what is described. On the other hand, there are clearly cost savings for combining certain types of activities, and we like efficiency in our marketplace. The government had been involved (before deregulation) by restricting one company to airline routes, electric distribution, etc.

2. Managers act in their own interests at times and, in reality, may not be answerable to shareholders. Takeovers may reflect runaway management.

Absolutely true at times but I'd like to think they are the exception to the rule rather than the norm. Bernie Ebbers, Ken Lay, Jeff ...

Solution Summary

The 380 word solution includes facts, opinions and current world examples about anti-trust, tax-free mergers. accretive earnings, the workings of the stock market and notable abusive corporate executives.

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