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The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions by H. Kent Baker, Halil Kiymaz

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CHAPTER 6

Theoretical Issues on Mergers, Acquisitions, and Divestitures

ABDUL H. RAHMAN

Professor in Finance and Economics, Telfer School of Management, University of Ottawa

INTRODUCTION

This chapter considers mergers, acquisitions, and divestures (e.g., spin-offs, sell-offs, and equity carve-outs) as potential actions aimed at corporate restructuring and control. Mergers and acquisitions (M&As) represent management's choice to expand the boundaries of the firm, and this choice may be part of a broader strategic plan to achieve a long-term goal. Clearly, if the management of the acquiring firm can add economic value as a result of the acquisition, then the firm may pay a premium for the target firm and still benefit from the acquisition.

Various factors may motivate managers to optimize the value of the firm via corporate takeovers. One such motive involves synergy. For example, operational synergies may arise from achieving economies of scale and scope, improving resource allocation, reducing costs, and acquiring key technologies or competencies. Chatterjee (1986) distinguishes between operational synergies (i.e., efficiency gains) and allocative synergies, which are derived from increased market power and provide management with the ability to extract a consumer surplus. Recent evidence shows that efficiency gains are relatively more significant than gains arising from allocative synergies. Devos, Kadapakkam, and Krishnamurthy (2009) compare operational synergies, market power, ...

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