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Merger Or Acquisition And On Term Paper

An increasing leverage shows that equity is slowly substituted with debt, which reduces the fraction of voting right controlled by management and therefore affects the bidder's gain. Stultz finds that the probability of success of a takeover bid is decreasing as the debt-to-equity ratio increases. Harris and Raviv (1988) have studied the same phenomenon from a different point-of-view. They have examined the effects of capital structure change, when it is used and an anti-takeover defense. Substituting debt for equity increases the bargaining power of the target companies. These conclusions were also obtained by way of empirical research (Raad and Ryan (1995), Assem and Titman (1999), and Schwert (2000)): the negative relation between the probability of takeover success and the target's leverage is sometimes modified, in a sense that ratios such as debt-to-asset (Raad and Ryan, 1995) or debt-to-equity (Schwert, 2000) have been used.

The importance of a bid premium is noticed by Walkling (1985), who states that the size of the bid premium influences in a positive way the rate of success of the tender offer. Walking also believes that previous researches, which have minimized the importance of the bid premium, are wrong due to the fact that the premium specification was incorrect (Pelligrino, 1972; Hoffmeister and Dyl, 1981).

Another important factor in establishing the success of a merger or acquisition is the degree of resistance of the target. The mangers' cash flow modifications are obviously negatively related to the resistance of the target company (Walkling and Long (1984), Mikkelson and Partch (1989) and Cotter and Zenner (1994)). It would seem that the lowest success rate is attributed to unnegotiated hostile offers (Schwert, 2000).

One helpful element in predicting the success or failure of merger attempts is the analysis of target stock price movements, for both stock swap mergers and cash tender offers. The higher the target stock price movement, the more probable the success. It would seem that there is a cyclical improvement of the market's accuracy, which acts monotonically (i.e. merger period). There is also a direct relation between the target stock price during the offer period and the estimated price at the consummation date.

There are also other factors that are explored by the literature. For instance, there is a positive relation between success of takeover efforts and the book-to-market ratios (Schwert, 2000). The sooner the target is contacted by the bidder, the higher the rate of success. Other studies indicate a relation between the purchase by the informed arbitrageurs and the success rate of takeovers.

The conclusion that may be drawn from this literature review is that managers should prepare with great care all stages of a merger or acquisition, before and after the actual operation has taken place, in order to avoid failure, or if success is achieved, to avoid ulterior complications that risk to damage in a severe way the entire process.

Reference:

Angwin, D. (2001), "Mergers and acquisitions across European borders: national perspectives on pre-acquisition due diligence and the use of professional advisers," Journal of World Business, Vol. 36 No. 1, pp. 2-57.

Assem, S., and S. Titman, "Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers," Journal of Finance, 54 (1999), pp. 547-580.

Branch, B., Yang, T."Predicting Successful Takeovers and Risk Arbitrage" Quarterly Journal of Business and Economics. Lincoln: Winter 2003.Vol.42, Iss. 1/2; pg. 3, ProQuest

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Chatterjee, S., Lubatkin, M.H., Schweiger, D.M. And Weber, Y. (1992), "Cultural differences and shareholder value in related mergers: linking equity and human capital," Strategic Management Journal, Vol. 13, pp. 319-34.

Child, J. (2000), "Learning through strategic alliance," in Dierkes, M., Antal, a.B. And Child, J. (Eds), Handbook of Organisational Learning and Knowledge, Oxford University Press, Oxford.

Datta, D.K. (1991), 'Organisational fit and acquisition performance: effects of postacquisition integration," Strategic Management Journal, Vol. 12, pp. 281-97.

Datta, D.K. And Grant, J.H. (1990), "Relationships between type of acquisition, the autonomy given to the acquired firm, and acquisition process: an empirical analysis," Journal of Management, Vol. 16, pp. 29-44.

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Harrison, J. (2002), "Probing a target in tough M&a market," Mergers and Acquisitions, Vol. 37, No.1, pp. 7-12.

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Harris, M., and a. Raviv, "Corporate Control Contests and Capital Structure," Journal of Financial Economies, 20 (1988), pp. 55-86.

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Mikkelson, W.U., and M. Partch, "Managers' Voting Right and Corporate Control," Journal of Financial Economics, 25 (1989), pp. 263-290.

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Pclligrino, J., "Causes of Inter-Firm Tender Offers: An Empirical Study, 1962-1968," Ph.D. dissertation. Northwestern University (1972).

Raad, E., R. Ryan, and J.F. Sinkey, "Leverage, Ownership Structure and Returns to Shareholders of Target and Bidding Firms," Quarterly Journal of Business and Economics, 38 (1999), pp. 37-53.

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Schwert, W., "Hostility in Takeovers: In the Byes of the Beholder?" Journal of Finance, 55 (2000), pp. 2599-2640.

Stulz, R., "Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control," Journal of Financial Economics, 20 (1988), pp. 461-478.

Sudarsanam, P.S. (1995), the Essence of Mergers and Acquisitions, Prentice-Hall, London.

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Vinten, G. (1992), "Ethical aspects of mergers and acquisitions in Europe," in Mahoney, J. And Vallance, E., Business Ethics in New Europe, Kluwer Academic Publishers, Dordrecht, pp. 114-37.

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Wullaerts, L. (2002), Successful Mergers…

Sources used in this document:
Reference:

Angwin, D. (2001), "Mergers and acquisitions across European borders: national perspectives on pre-acquisition due diligence and the use of professional advisers," Journal of World Business, Vol. 36 No. 1, pp. 2-57.

Assem, S., and S. Titman, "Leverage and Corporate Performance: Evidence from Unsuccessful Takeovers," Journal of Finance, 54 (1999), pp. 547-580.

Branch, B., Yang, T."Predicting Successful Takeovers and Risk Arbitrage" Quarterly Journal of Business and Economics. Lincoln: Winter 2003.Vol.42, Iss. 1/2; pg. 3, ProQuest

Buono, a.F. And Bowditch, J.L. (1989), the Human Side of Mergers and Acquisitions, Jossey-Bass, San Francisco, CA.
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