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Lecture 3

FINE 434 Lecture 3: FINE 434 - Topics in Finance 1 - Winter 2017 Part 3
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3 Pages
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Department
Finance
Course Code
FINE 434
Professor
Jiro Kondo

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Companies involved:
- Blue chip.
- Healthcare, entertainment, and telecom.
Deal characteristics:
- Often hostile.
- Paid in cash.
- Financed through debt.
Turning point:
- Uncertainty created by Brexit and US elections.
- Government’s antitrust rulings.
General conclusions
Common key drivers of major merger movements:
- Government (de)regulations.
- Technical and/or financial innovations.
- Rising stock prices.
- Favorable economic setting with:
o Low interest rates.
o Favorable term structures of interest rates.
o Narrow risk premia.
Industry clustering
Mergers have been found to cluster in time and industries, for example:
1920s:
- 5 of 25 industries represented over two-thirds of merger activity.
1980s:
- Over 2 of 3 of firms in broadcasting, petroleum producing, and air transport acquired.
- 50% of mergers in given industry occurred within 2-year period.
- Reasons:
o Economic shocks (deregulation, oil prices).
o Financial factors (availability of debt financing).
International perspectives
M&A activity in other developed countries of the world has usually paralleled the US.
- Similar levels of merger activity.
- Similar industry clustering.

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Description
Companies involved: - Blue chip. - Healthcare, entertainment, and telecom. Deal characteristics: - Often hostile. - Paid in cash. - Financed through debt. Turning point: - Uncertainty created by Brexit and US elections. - Government’s antitrust rulings. General conclusions Common key drivers of major merger movements: - Government (de)regulations. - Technical and/or financial innovations. - Rising stock prices. - Favorable economic setting with: o Low interest rates. o Favorable term structures of interest rates. o Narrow risk premia. Industry clustering Mergers have been found to cluster in time and industries, for example: 1920s: - 5 of 25 industries represented over two-thirds of merger activity. 1980s: - Over 2 of 3 of firms in broadcasting, petroleum producing, and air transport acquired. - 50% of mergers in given industry occurred within 2-year period. - Reasons: o Economic shocks (deregulation, oil prices). o Financial factors (availability of debt financing). International perspectives M&A activity in other developed countries of the world has usually paralleled the US. - Similar levels of merger activity. - Similar industry clustering. Underlying factors: - Internationalisation of markets. - Globalisation of competition. - Privatisation achieves similar results to deregulation. - Anti-merger laws and regulations are generally loosening internationally. Topic 3: M&A Motives Why do mergers occur? Size and returns to scale: - Benefits of size are usual source of “synergies”. - Economies of scale: o Average costs decline with larger size. o Lower required investment in inventory. o Large firms more able to implement specialisation. - Improved capacity utilisation. - Economies of scope: Firms produce products due to experience with existing products. Transaction costs: - Firms must decide between internal or external production. - Transaction costs within and outside firm determine decision on firm size and merger. Link with valuation effects Value increasing theories: - Mergers create synergies: o Economies of scale. o More effective managem
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