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Business Mergers and Control

1.) What is meant by a change in corporate control? List and describe the various ways in which a change of corporate control may occur.

2.) What is the signaling theory of mergers? What is the relationship between signaling and the mode of payment used in acquisitions?

3.) Why do creditors usually accept a plan for financial rehabilitation rather than demand liquidation of a business?

4.) Who would use Altman's Z-score to predict bankruptcy? Why would the ability to predict bankruptcy be useful to them?

5.) Describe the relationship between conglomerate mergers and portfolio theory. What is the desired result of merging two unrelated businesses? Has the empirical evidence proven corporate diversification to be successful?

6.) What are the advantages and disadvantages of a voluntary workout to resolve financial distress? What are the advantages and disadvantages of declaring bankruptcy to resolve financial distress?

7.) Explain why the option to delay entering bankruptcy has value for corporate managers.

8.) Elaborate on the significance of the mode of payment for the stockholders of the target firm and their continued interest in the surviving firm. Specifically, which form of payment retains the stockholders of the target firm as stockholders in the surviving firm? Which payment form received preferential tax treatment?

9.) A business can be liquidated for $700,000, or it can be reorganized. Reorganization would require an investment of $400,000. If the company is reorganized, earnings are projects to be $150,000 per year, and the company would trade at a price/earnings ratio 8.0 times. Should the company be liquidated or reorganized?

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Answer 1: The corporate control is concerned with one authority to make the decision for their organization for strategic planning, top personnel decision, marketing, production and financial decision. In this concern, the change in corporate control indicates transfer of ownership to other person or firm in which a new person or entity gets fifty percent or greater ownership interest in the organization and also make the decision for the organization (Gaughan, 2010).

Further, there are various ways in which a change of corporate control may occur:
Merger: Merger is a situation when two or more businesses come and form one company (Gaughan, 2010). This merger forces to changes at all levels of the organization such as monitoring, supervision and direction level of the corporation.

Consolidation of Voting Power: This change of corporate control may occur in small groups such as leverage buyouts (LBO) and management buyouts (MBO). The LBO occurs due to an investor and large financial sponsor, who acquire controlling interest in an organization's equity. Further, in MBO, management is the main element and factor that buys-out all the prominent shareholders and take the company towards the private organization and grow the business through controlling the ownership of that organization (Graham, Smart & Megginson, 2009).

Transferring Ownership: The ownership transferring to the business unit may also change the corporate control (Longenecker, Petty & Palich, 2009). This ownership transferring concerned with transferring ownership control from corporation to small group that changes management structure in their suitable way to monitor and supervise the organization.

Answer 2
Signaling theory suggests that the tender offer circulates the information that target shares are undervalued, which motivates the market to revalue the share. But, any particular action by the target firm or any other is not necessary to induce revaluation (Eckbo, 2008). The signaling theory of merger also states that the mode of payment that offered by acquiring firms' signals inside information to the capital markets would require a response to the offer and the means of payment with signaling value. Further, this theory also states that managers would finance acquisitions with the cheapest source of capital availability. Financing an acquisition with equity signals to the market that equity is a cheap source of capital because the acquirer's stock price is overvalued (Bruner, 2004).

Moreover, the relationship between signaling and mode of payment that is used in acquisition exhibits superior performance related to industry operation. Addition to this, the experience of the industry also shows significantly higher levels of operating performance than control firms with similar operating performance (Siegel & Albers, 2006). The mode of payment to acquire a firm, it also signals inside information to the capital markets with the cheapest source of capital availability. It also exhibits through receiving the market signal to adjust the stock price by lowering it at a suitable level to control overvalues. Similarly, the relationship between signaling and mode of payment connects with managers' capability to choose a heavily leveraged capital structure to finance an acquisition after knowing that investment would require huge cash flows in the future (Bruner, 2004).

Answer 3
Every business is based on the mutual profits of creditors and owner of business because both get profits from the business. Creditors invest their money in the business to gain more profits from a business that is not possible by other financial investments. So, creditors more often accept a plan for financial rehabilitations rather than the liquidation of business demands because of the effective significance of financial rehabilitation in further business concerns (Hopkins, 2011). Financial rehabilitation actions are planned to make possible some opportunity for a debtor organization that helps to make a ...

Solution Summary

The following posting helps answer a variety of questions about business mergers and control. Concepts discussed include corporate control, financial rehabilitation and bankruptcy.