Merger waves
10 important questions on Merger waves
What is the key LIMITATION of Q Theory?
- The behavioural model (Shleifer & Vishny) provides a better answer to the timing question.
What are the 3 assumptions of Shleifer & Vishny (2003)?
- Capital markets are INEFFICIENT — some firms are overvalued, some undervalued during booms.
- Firms are either OVERVALUED or UNDERVALUED at any given time during a boom.
- Managers are RATIONAL — they recognise and deliberately exploit the mispricing.
What is the core mechanism of Shleifer & Vishny (2003)?
- During market booms, the most overvalued firm uses its inflated stock as cheap currency to acquire real assets of less overvalued targets.
- Managers exploit temporary mispricing.
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What are the 4 key implications of Shleifer & Vishny (2003)?
- Stock acquisitions dominate during waves — overvalued bidders prefer stock payment.
- Merger waves cluster during stock market booms when overvaluation is greatest.
- Long-run bidder underperformance — as overvaluation corrects post-deal, stock falls.
- Market-driven acquisitions may not maximise long-term value.
What is the FUNDAMENTAL difference between Q Theory and Shleifer & Vishny?
- Q theory = markets price firms fairly, mergers create genuine value.
- S&V = markets misprice firms, mergers exploit temporary mispricing.
What did Ang & Cheng (2006) find and why does it support S&V?
- Post-merger stock acquirers subsequently underperform the market.
- Direct empirical support for Shleifer & Vishny (2003).
What is the key conclusion of Rhodes-Kropf et al. (2005)?
- Merging firms are typically more overvalued; deals cluster in sectors with high industry-wide overvaluation.
What are the 6 merger motives beyond synergies?
- Market power — eliminate competition, raise prices.
- Agency/FCF (Jensen 1986) — empire building with excess cash.
- Hubris (Roll 1986) — overconfidence, overpayment.
- Diversification — reduce firm risk, protect management jobs.
- Access to technology/resources — patents, talent, IP.
- Tax benefits — offset losses, increase debt capacity.
What is the exam structure for discussing merger motives?
(1) Define revenue and cost synergies — acknowledge they ARE a major motive.
(2) Disagree — "sole" is wrong.
(3) Cover all 6 other motives with citations: Jensen (1986), Roll (1986).
(4) Conclude with empirical evidence — if synergies were the sole reason, why do bidders consistently destroy value long-run (Moeller et al. 2005)?
What is the cross-unit connection for Shleifer & Vishny (2003)?
- Unit 2 (why bidders destroy wealth — overvaluation)
- Unit 7 (why stock deals produce worse announcement returns — Travlos 1987)
- Unit 10 (why long-run BHAR is negative — overvaluation corrects post-deal).
- It is the single most cross-cutting theory in the entire course.
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