LOS o: Describe the empirical evidence related to the distribution of benefits in a merger.

Q1. Which of the following statements regarding the distribution of the benefits from a merger are least accurate?

A)   Long-term performance following a merger transaction suggests that the acquiring firm is unable to capture the synergies expected prior to the merger.

B)   The winners curse implies that in a contested takeover, on average, the winning bidder overpays for the target.

C)   Short-term performance around the date of a merger suggests that target management suffers from reference dependence in attempting to extract value for shareholders.

Q2. Empirical evidence suggests that the majority of the benefits from a merger accrue to the target firm’s shareholders. What does this suggest about the outcome of a competitive bidding process, and what does this imply with regard to the payment strategy and bidding strategy for prospective acquirers? It suggests that the:

A)   winner’s curse is real, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

B)   target’s management is infected with pride, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

C)   winner’s curse is real, that the preferred payment method in competitive bidding should be cash, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

Q3. Based upon short-term stock performance around the merger date, academic studies concerning the distribution of the benefits suggest that:

A)   both parties usually gain value.

B)   the target usually loses value, but the acquirer usually gains value.

C)   the acquirer usually loses value, but the target usually gains value.

Q4. Based upon long-term stock performance following a merger, academic studies suggest that acquirers:

A)   moderately outperform their peers, with slightly more than half exceeding their group

.B)  moderately underperform their peers, with slightly more than half lagging their group.

C)   significantly underperform their peers, with more than 60% lagging their group.

LOS o: Describe the empirical evidence related to the distribution of benefits in a merger. fficeffice" />

Q1. Which of the following statements regarding the distribution of the benefits from a merger are least accurate?

A)   Long-term performance following a merger transaction suggests that the acquiring firm is unable to capture the synergies expected prior to the merger.

B)   The winners curse implies that in a contested takeover, on average, the winning bidder overpays for the target.

C)   Short-term performance around the date of a merger suggests that target management suffers from reference dependence in attempting to extract value for shareholders.

Correct answer is C)

Short-term performance around the date of a merger suggests that, on average, target shareholders benefit handsomely from the completion of a merger transaction. In fact, they appear to extract all of the benefits of the merger. Reference dependence is a behavioral finance term that does not appear to be applicable to target firm management in the case of mergers.

Q2. Empirical evidence suggests that the majority of the benefits from a merger accrue to the target firm’s shareholders. What does this suggest about the outcome of a competitive bidding process, and what does this imply with regard to the payment strategy and bidding strategy for prospective acquirers? It suggests that the:

A)   winner’s curse is real, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

B)   target’s management is infected with pride, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

C)   winner’s curse is real, that the preferred payment method in competitive bidding should be cash, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.

Correct answer is A)

If the values of the bids are, on average, correct, then the winner has, by definition, overpaid. This is the winner’s curse. Since the empirical evidence suggests that the process is risky for the bidder, the form of payment should be stock so that the risk is shared with the target’s shareholders. The bidder should be prepared to withdraw if the cost exceeds maximum fair value.

Q3. Based upon short-term stock performance around the merger date, academic studies concerning the distribution of the benefits suggest that:

A)   both parties usually gain value.

B)   the target usually loses value, but the acquirer usually gains value.

C)   the acquirer usually loses value, but the target usually gains value.

Correct answer is C)

Studies based upon short-term stock performance around the merger date suggest that the acquirer loses a small amount of value, while the target makes significant gains.

Q4. Based upon long-term stock performance following a merger, academic studies suggest that acquirers:

A)   moderately outperform their peers, with slightly more than half exceeding their group

.B)  moderately underperform their peers, with slightly more than half lagging their group.

C)   significantly underperform their peers, with more than 60% lagging their group.

Correct answer is C)

Based upon long-term (3-year) performance following a merger, academic studies suggest that acquirers significantly underperform their peers, with more than 60% performing worse than their peer group averages.

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