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Chapter 10. Mergers and Returns: The Acq... > Theoretical Roots: Acquisitions and ...

Theoretical Roots: Acquisitions and Value

If an acquisition creates value, it is possible that both the acquiring and acquired firm stockholders can walk away with more money in their pockets after the transaction. Even if an acquisition can create value, though, the division of value between stockholders of the acquiring and acquired firms will critically depend on the acquisition price. If an acquiring company pays too much for a target firm, relative to value created in the acquisition, its stock price will go down, but target company stockholders will gain proportionately.

Acquisitions and Value Creation

Can a firm create value by acquiring other firms? While taking a skeptical view of this proposition, you can, at least in theory, see ways in which acquisitions and mergers can increase value. A company can acquire companies that are undervalued by the market and take advantage of market mistakes, thus playing the role of a canny portfolio manager. A merger can work by creating synergy, a rationale much used and misused in acquisitions. Finally, a firm can also create value by buying poorly managed, poorly run firms and turning them around. In this section, each of these value-creating motivations is described.


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