How to Create Value
New Perspectives on the Modern Corporation series
Chapter 8: Financing M & As and effects on merger value
In M & A operations the form of payment of the target firm is crucial for the success of the merger. This chapter examines the main alternatives of payment: by cash and by new stocks issued by the acquiring firm. The payment by new shares requires the exchange ratio between the shares of the acquiring firm and those of the target firm to be determined. The analysis indicates how to calculate the maximum exchange ratio the shareholders of the acquiring firm can pay without destroying value, and the minimum exchange ratio that makes the merger neutral for the shareholders of the target firm.
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