Question

The empirical evidence strongly indicates that the stockholders of the target firm realize large wealth gains...

The empirical evidence strongly indicates that the stockholders of the target firm realize large wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain little, if anything. Although there exists no definitive answer as to why this is the case, several possible explanations have been proposed. List and explain three of these possible explanations for the minimal returns to the acquiring firm's stockholders.

Homework Answers

Answer #1

High Premium

The acquiring company often pays too high a premium which results in the acquiring company's shareholders gaining only a little from an acquisition. The reason for the high premium is to motivate the shareholders of the target company to sell.

Lack of Synergies

Most takeovers happen at fair value plus a premium paid to shareholders of the target company. If there aren't enough synergies to make up for the premium paid. It will result in Acquiring company's shareholders gaining only a little or even losing some.

High Costs of Acquisition

Acquisitions or takeovers involve a high deal of cost for the Acquiring company. This is over and above the consideration paid to the shareholders of target company. Transaction costs, Financial Analysis costs e.t.c can add up to be a huge amount and hinder the gain potential for Acquiring Company's Shareholders

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