Module6MergersandAcquisitions.pdf

Mergers: Reshaping the Corporate Landscape

Over the past several years, a series of large mer-
gers have reshaped the corporate landscape.
These mergers include the $85 billion merger
between Exxon and Mobil in 1998, Procter &
Gamble’s $55 billion bid for Gillette in 2005, InBev’s
$52 billion acquisition of Anheuser-Busch in 2008,
and the infamous $160 billion deal between
America Online and Time Warner in 2000.

More recently, in 2013 Verizon paid $130
billion for Vodafone’s 45% stake in Verizon Wire-
less. And in early 2014, AT&T made a proposal to
acquire DirecTV for $48.5 billion, and Comcast
made an offer to acquire Time Warner Cable for
$45 billion. These proposed deals have attracted
criticism from policymakers, consumer groups,
and companies such as Netflix who worry about
the increased market power created by these
mergers.

In recent years, there have also been a num-
ber of somewhat smaller, but still noteworthy,
deals taking place. These deals include Microsoft’s

acquisition of Skype Global, Google’s purchase of
Nest and Motorola’s phone business, Facebook’s
buyout of WhatsApp, and Apple’s purchase of
Beats Music and Beats Entertainment. In each
case, these transactions bring together interesting
companies with diverse technologies, but they
also have some risk.

Although it will be interesting to see how
these deals turn out, it’s worth noting that while
target shareholders generally benefit when their
firm is acquired, the track record for acquiring
firms in large deals has not been very successful.
In an article written for The Wall Street Journal
shortly after the P&G–Gillette announced deal,
David Harding and Sam Rovit discussed the
potential pitfalls of large acquisitions. They
estimated that only 3 out of 10 large deals in
recent years created meaningful benefits for
the acquiring firm’s shareholders. Harding and
Rovit (who are Bain & Company partners and
coauthors of the book titled Mastering the

C H A P T E R

21
Mergers and Acquisitions

Courtesy of Comcast logo

Merger: Four Critical Decisions That Make or Break the Deal)
argue that five major criteria will determine whether a merger
is successful:

1. Is management successful in deal making? Experienced
acquirers tend to do better than firms that make
infrequent acquisitions.

2. Will the acquisition strengthen the buyer’s core? Firms tend
to do better when they acquire companies that operate
in businesses they understand.

3. Did management do its homework? Successful acquirers
take time to do the necessary due diligence.

4. Is the company addressing merger integration issues up
front? Deals can often unravel because there is no clear
plan for how the two management teams are going to
be integrated after the acquisition.

5. Is the executive team prepared for the unexpected? History
shows that nothing turns out the way it was planned.
Successful acquirers anticipate the unexpected and are able
to adapt well to changing circumstances.

Sources: Tom Gara, “Comcast: Netflix Is Worried About Its Model, Not Its Customers,” The Wall Street Journal (online.wsj.com), April
21, 2014; Shalini Ramachandran, Dana Cimilluca, and Dana Mattioli, “Cable Company Got Its Price, With Tradeoffs,” The Wall Street Journal
(online.wsj.com), February 13, 2014; Cecilia Kang Jia Lynn Yang, “Microsoft-Skype Deal to Boost the Online Free-Calling Service,” The
Washington Post, May 11, 2011, p. A10; Shayndi Raice, “When Google Met Moto,” The Wall Street Journal, August 17, 2011, pp. B1-B2; David
Harding and Sam Rovit, “Five Ways to Spot a Good Deal,” The Wall Street Journal, March 29, 2005, p. B2; and David Harding and Sam Rovit,
Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Boston, MA: Bain and Company, Inc., 2004).

Most corporate growth occurs by internal expansion, which takes place when a
firm’s existing divisions grow through normal capital budgeting activities. How-
ever, the most dramatic examples of growth, and often the largest increases in
firms’ stock prices, result from mergers. In this chapter, we will describe various
aspects related to corporate mergers.

When you finish this chapter, you should be able to:

• Identify the different types of mergers and the various rationales for mergers.
• Conduct a simple analysis to evaluate the potential value of a target firm, and

discuss the various considerations that influence the bid price.
• Explain whether the typical merger creates value for the participating

shareholders.
• Discuss the value of other transactions such as leveraged buyouts (LBOs),

corporate alliances, and divestitures.

21-1 RATIONALE FOR MERGERS
Financial managers and theorists have proposed many reasons for the high level
of U.S. merger activity. The primary motives behind corporate mergers are pre-
sented in this section.1

1As we use the term, merger means any combination that forms one economic unit from two or more
previous ones. For legal purposes, there are distinctions among the various ways these combinations
can occur, but our focus is on the fundamental economic and financial aspects of mergers.

Merger
The combination of two or
more firms to form a
single firm.

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21-1A SYNERGY
The primary motivation for most mergers is to increase the value of the combined
enterprise. If Companies A and B merge to form Company C, and if C’s value
exceeds that of A and B taken separately, then synergy is said to exist. Such a
merger should be beneficial to both A’s and B’s stockholders.2 Synergistic effects
can arise from four sources: (1) operating economies, which result from economies of
scale in management, marketing, production, or distribution; (2) financial econo-
mies, including lower transactions costs and better coverage by security analysts;
(3) differential efficiency, which implies that the management of one firm is more
efficient and that the weaker firm’s assets will be more productive after the
merger; and (4) increased market power due to reduced competition. Operating
and financial economies are socially desirable, as are mergers that increase man-
agerial efficiency, but mergers that reduce competition are socially undesirable
and often illegal.3

21-1B TAX CONSIDERATIONS
Tax considerations have stimulated a number of mergers. For example, a profit-
able firm in the highest tax bracket could acquire a firm with large accumulated
tax losses. These losses could then be turned into immediate tax savings rather
than carried forward and used in the future.4 In other cases, cross-border mergers
have arisen to take advantage of varying tax rates across countries.5 Also, mergers
can serve as a way of minimizing taxes when disposing of excess cash. For
example, if a firm has a shortage of internal investment opportunities compared
with its free cash flow, it could (1) pay an extra dividend, (2) invest in marketable
securities, (3) repurchase its own stock, or (4) purchase another firm. If it pays an
extra dividend, its stockholders would have to pay immediate taxes on the
distribution. Marketable securities often provide a good place to keep money
temporarily, but they generally earn rates of return less than those required by
stockholders. A stock repurchase might result in a capital gain for the remaining
stockholders. However, using surplus cash to acquire another firm would avoid
all these problems, and this has motivated a number of mergers.

21-1C PURCHASE OF ASSETS BELOW THEIR REPLACEMENT COST
Sometimes a firm will be touted as an acquisition candidate because the cost of
replacing its assets is considerably higher than its market value. For example, in
the early 1980s, oil companies could acquire reserves more cheaply by buying
other oil companies than by conducting exploratory drilling. Thus, Chevron
acquired Gulf Oil to augment its reserves. Similarly, in the 1980s, several steel

2When synergy exists, the whole is greater than the sum of the parts. Synergy is also called the “2 plus
2 equals 5 effect.” The distribution of the synergistic gain between A’s and B’s stockholders
is determined by negotiation. This point is discussed later in the chapter.
3In the 1880s and 1890s, many mergers occurred in the United States, and some of them were obviously
directed toward gaining market power rather than increasing efficiency. As a result, Congress passed a
series of acts designed to ensure that mergers are not used as a method of reducing competition. The
principal acts include the Sherman Act (1890), the Clayton Act (1914), and the Celler Act (1950). These
acts make it illegal for firms to merge if the merger tends to lessen competition. The acts are enforced
by the antitrust division of the Justice Department and by the Federal Trade Commission. For example,
AT&T’s planned purchase of T-Mobile was met with opposition from the Department of Justice
because the proposed merger would reduce competition in U.S. wireless communication services,
and AT&T subsequently dropped its merger bid.
4Mergers undertaken only to use accumulated tax losses would probably be challenged by the IRS. In
recent years, Congress has made it increasingly difficult for firms to pass along tax savings after
mergers.
5Refer to “The Rush of Firms Fleeing America for Tax Reasons Is Set to Continue,” The Economist
(www.economist.com), June 21, 2014.

Synergy
The condition wherein the
whole is greater than the
sum of its parts; in a
synergistic merger, the
post-merger value exceeds
the sum of the separate
companies’ pre-merger
values.

Chapter 21 Mergers and Acquisitions 719

company executives stated that it was cheaper to buy an existing steel company
than to construct a new mill. For example, LTV (the fourth largest steel company
at the time) acquired Republic Steel (the sixth largest steel company at the time), to
create the second largest firm in the industry.

21-1D DIVERSIFICATION
Managers often cite diversification as a reason for mergers. They contend that
diversification helps stabilize a firm’s earnings and thus benefits its owners.
Stabilization of earnings is certainly beneficial to employees, suppliers, and cus-
tomers, but its value is less certain from the standpoint of stockholders. Why
should Firm A acquire Firm B to stabilize earnings when stockholders can simply
buy the stock of both firms? Indeed, research of U.S. firms suggests that in most
cases, diversification does not increase the firm’s value. To the contrary, many
studies find that diversified firms are worth significantly less than the sum of their
individual parts.6

21-1E MANAGERS’ PERSONAL INCENTIVES
Financial economists like to think that business decisions are based only on
economic considerations, especially maximization of firms’ values. However,
many business decisions are based more on managers’ personal motivations than
on economic analyses. leaders like power, and more power is attached to
running a larger corporation than a smaller one. Obviously, no executive would
admit that his or her ego was the primary reason behind a merger, but egos do
play a prominent role in many mergers.

It has also been observed that executive salaries are highly correlated with
company size—the larger the company, the higher the salaries of its top officers.
This too could play a role in corporate acquisition programs.

Personal considerations deter as well as motivate mergers. After most take-
overs, some managers of the acquired companies lose their jobs—or at least their
autonomy. Therefore, managers who own less than 51% of their firms’ stock look
to devices that will lessen the chances of a takeover. Mergers can serve as such a
device. For example, several years ago Paramount made a bid to acquire Time Inc.
Time’s managers received a great deal of criticism when they rejected Paramount’s
bid and chose instead to enter into a heavily debt-financed merger with Warner
Brothers that enabled them to retain power. Such defensive mergers are hard to
defend on economic grounds. The managers involved invariably argue that
synergy, not a desire to protect their own jobs, motivated the acquisition, but
observers suspect that many mergers were designed more to benefit managers
than stockholders.

21-1F BREAKUP VALUE
Firms can be valued by book value, economic value, or replacement value.
Recently, takeover specialists have begun to recognize breakup value as another
basis for valuation. Analysts estimate a company’s breakup value, which is the
value of the individual parts of the firm if they are sold off separately. If this value
is higher than the firm’s current market value, a takeover specialist could acquire
the firm at or even above its current market value, sell it off in pieces, and earn a
substantial profit.

6See, for example, Philip Berger and Eli Ofek, “Diversification’s Effect on Firm Value,” Journal of
Financial Economics, vol. 37 (1995), pp. 37–65; and Larry Lang and Rene Stulz, ‘Tobin’s Q, Corporate
Diversification, and Firm Performance,” Journal of Political Economy, vol. 102 (1994), pp. 1248–1280.

Defensive Mergers
Mergers designed to make
a company less vulnerable
to a takeover.

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21-2 TYPES OF MERGERS
Economists classify mergers into four types: (1) horizontal, (2) vertical, (3) con-
generic, and (4) conglomerate. A horizontal merger occurs when one firm
combines with another in its same line of business—the merger between Sirius
Satellite Radio and XM Satellite Radio is an example. An example of a vertical
merger is a steel producer’s acquisition of one of its own suppliers, such as an
iron or coal mining firm, or an oil producer’s acquisition of a petrochemical firm
that uses oil as a raw material. Congeneric means “allied in nature or action”;
hence, a congeneric merger involves related enterprises, but not producers of
the same product (horizontal) or firms in a producer-supplier relationship (ver-
tical). The Bank of America and Countrywide Financial merger is such an
example. A conglomerate merger occurs when unrelated enterprises combine.
Conglomerate mergers tend to produce few, if any synergies, and have become
less popular in recent years.

Operating economies (and anticompetitive effects) are at least partially depen-
dent on the type of merger involved. Vertical and horizontal mergers generally
provide the greatest synergistic operating benefits, but they are also the mergers
most likely to be attacked by the Department of Justice as anticompetitive. In any
event, it is useful to think of these economic classifications when analyzing pro-
spective mergers.

21-3 LEVEL OF MERGER ACTIVITY
Five major “merger waves” have occurred in the United States. The first was in the late
1800s, when consolidations occurred in the oil, steel, tobacco, and other basic indus-
tries. The second was in the 1920s, when the stock market boom helped financial
promoters consolidate firms in a number of industries, including utilities, communica-
tions, and autos. The third was in the 1960s, when conglomerate mergers were the
rage. The fourth occurred in the 1980s, when LBO and other firms began using junk
bonds to finance acquisitions. The fifth, which involves strategic alliances designed to
enable firms to compete better in the global economy, is in progress today.

S E L F T E S T

What are the four economic types of mergers?

S E L F T E S T

Define synergy. Is synergy a valid rationale for mergers? Describe several situations
that might produce synergistic gains.

Give two examples of how tax considerations can motivate mergers.

Suppose your firm could purchase another firm for only half its replacement
value. Would that be a sufficient justification for the acquisition? Explain.

Discuss the pros and cons of diversification as a rationale for mergers.

What is breakup value?

Horizontal Merger
A combination of two
firms that produce the
same type of good or
service.

Vertical Merger
A merger between a firm
and one of its suppliers or
customers.

Conglomerate Merger
A merger of companies in
totally different industries.

Congeneric Merger
A merger of firms in the
same general industry, but
for which no customer or
supplier relationship
exists.

Chapter 21 Mergers and Acquisitions 721

Table 21.1 lists some of the large high-profile mergers that have been
announced since the late 1990s. In general, those mergers have been significantly
different from mergers of the 1980s.7 Most mergers in the 1980s were financial
transactions in which buyers sought companies that were selling at less than their
true value as a result of incompetent or sluggish management. If a target company
could be managed better, if redundant assets could be sold, and if operating and
administrative costs could be cut, profits and stock prices would rise. On the other
hand, most of the more recent mergers have been strategic in nature—companies are
merging to gain economies of scale or scope and thus to be better able to compete in
the world economy. Indeed, many recent mergers have involved companies in the
financial, airline, defense, media, computer, telecommunications, and health care
industries, all of which are experiencing structural changes and intense competition.

TABLE 2 1.1 A Sample of Large Mergers Announced Since the Late 1990s

Buyer Target Announcement Date
Value

(Billions, U.S. $)

America Online Time Warner January 10, 2000 $160.0

Vodafone AirTouch Mannesmann November 14, 1999 148.6

BHP Billiton Rio Tinto May 11, 2007 145.3

Verizon Communications Verizon Wireless September 1, 2013 130.0

RBS, Fortis, & Banco Santander ABN-AMRO Holding July 16, 2007 99.4

Pfizer Warner-Lambert November 4, 1999 90.0

Exxon Mobil December 1, 1998 85.2

Bell Atlantic GTE July 28, 1998 85.0

SBC Communications Ameritech May 11, 1998 80.6

Glaxo Wellcome SmithKline Beecham January 18, 2000 76.0

Vodafone AirTouch January 18, 1999 74.4

Royal Dutch Petroleum Shell Trans. & Trading October 28, 2004 74.3

AT&T BellSouth Corp. March 6, 2006 72.7

Travelers Group Citicorp April 6, 1998 70.0

Pfizer Wyeth January 26, 2009 68.4

NationsBank Corp. Bank America Corp. April 13, 1998 62.0

British Petroleum Amoco August 11, 1998 61.7

AT&T MediaOne Group May 6, 1999 61.0

Sanofi-Synthelabo Aventis January 26, 2004 60.2

Pfizer Pharmacia Corporation July 15, 2002 60.0

JPMorgan Chase Bank One January 14, 2004 58.8

Procter & Gamble Gillette January 28, 2005 55.0

InBev Anheuser-Busch June 11, 2008 50.5

*AT&T DirecTV May 18, 2014 48.5

Comcast AT&T Broadband July 8, 2001 47.0

Roche Holding Genentech July 21, 2008 46.8

*Comcast Time Warner Cable February 13, 2014 45.2

*These mergers have only been proposed. As of June 25, 2014, they have not been approved.

Source: Adapted from recent ‘Year-End Review” articles from The Wall Street Journal.

7For detailed reviews of the 1980s merger wave, see Andrei Shleifer and Robert W. Vishny, “The
Takeover Wave of the 1980s,” Journal of Applied Corporate , Fall 1991, pp. 49–56; Edmund
Faltermayer, “The Deal Decade: Verdict on the ‘80s,” Fortune, August 26, 1991, pp. 58–70; and “The
Best and Worst Deals of the ’80s: What We Learned from All Those Mergers, Acquisitions, and
Takeovers,” Week, January 15, 1990, pp. 52–57.

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Recently, there has also been an increase in cross-border mergers. Many of
these mergers have been motivated by large shifts in the value of the world’s
leading currencies. For example, many suggest that the recent decline in the U.S.
dollar helped spur InBev’s bid for Anheuser-Busch.

21-4 HOSTILE VERSUS FRIENDLY TAKEOVERS
In the vast majority of merger situations, one firm (generally the larger of the two)
decides to buy another company, negotiates a price with the management of the
target firm, and then acquires the target company. Occasionally, the acquired firm
will initiate the action, but it is more common for a firm to seek acquisitions than
to seek to be acquired.8 Following convention, we call a company that seeks to
acquire another firm the acquiring company and the firm that it seeks to acquire
the target company.

Once an acquiring company has identified a possible target, it must (1) establish
a suitable price or range of prices and (2) tentatively set the terms of payment—will
it offer cash, its own common stock, bonds, or some combination of cash and
securities? Next, the acquiring firm’s managers must decide how to approach the
target company’s managers. If the acquiring firm has reason to believe that the
target’s management will approve the merger, it will propose a merger and try to
work out suitable terms. If an agreement is reached, the two management groups
will issue statements to their stockholders indicating that they approve the merger,
and the target firm’s management will recommend to its stockholders that they
agree to the merger. Generally, the stockholders are asked to tender (or send in) their
shares to a designated financial institution, along with a signed power of attorney
that transfers ownership of the shares to the acquiring firm. The target firm’s
stockholders then receive the specified payment—common stock of the acquiring
company (in which case the target company’s stockholders become stockholders of
the acquiring company), cash, bonds, or some mix of cash and securities. This is a
friendly merger.

Often, however, the target company’s management resists the merger. Per-
haps they think that the price offered is too low, or perhaps they want to keep
their jobs. In either case, the acquiring firm’s offer is said to be hostile rather than
friendly, and the acquiring firm must make a direct appeal to the target firm’s
stockholders. In a hostile merger, the acquiring company will again make a
tender offer and again ask the stockholders of the target firm to tender their shares
in exchange for the offered price. This time, though, the target firm’s managers will

S E L F T E S T

What five major “merger waves” have occurred in the United States?

What are some reasons for the current merger wave?

Tender Offer
The offer of one firm to
buy the stock of another
by going directly to the
stockholders, frequently
(but not always) over the
opposition of the target
company’s management.

Hostile Merger
A merger in which the
target firm’s management
resists acquisition.

Friendly Merger
A merger whose terms are
approved by the
managements of both
companies.

Target Company
A firm that another
company seeks to acquire.

Acquiring Company
A company that seeks to
acquire another firm.

8However, if a firm is in financial difficulty; if its managers are elderly and do not think that suitable
replacements are on hand; or if it needs the support (often the capital) of a larger company, it may seek
to be acquired. Thus, when a number of Texas, Ohio, and Maryland financial institutions were in
trouble in the 1980s, they lobbied to get their state legislatures to pass laws that would make it easier
for them to be acquired. Out-of-state banks then moved in to help salvage the situation and minimize
depositor losses.

Chapter 21 Mergers and Acquisitions 723

urge stockholders not to tender their shares, generally stating that the price offered
(cash, bonds, or stocks in the acquiring firm) is too low.

Although most mergers are friendly, a number of interesting cases have involved
high-profile firms that have attempted hostile takeovers. For example, Warner-
Lambert tried to fight off a hostile bid by Pfizer; however, the merger was completed
in 2000. Overseas, Olivetti successfully conducted a hostile takeover of Telecom
Italia; and in another telecommunications merger, Britain’s Vodafone AirTouch
made a hostile bid for its German rival, Mannesmann AG, which was successful.

21-5 MERGER ANALYSIS
In theory, merger analysis is quite simple. The acquiring firm performs an analysis
to value the target company and then determines whether the target can be
bought at that value or, preferably, for less than the estimated value. The target
company, on the other hand, should accept the offer if the price exceeds either its
value if it continued to operate independently or the price it could receive from
some other bidder. Theory aside, however, some difficult issues are involved. In
this section, we discuss valuing the target firm, which is the initial step in a merger
analysis. Then we discuss setting the bid price and post-merger control.

21-5A VALUING THE TARGET FIRM
Several methodologies are used to value target firms, but we will confine our
discussion to the two most common: (1) the discounted cash flow approach and
(2) the market multiple method. However, regardless of the valuation methodol-
ogy, it is crucial to recognize two facts. First, the target company typically does not
continue to operate as a separate entity, but becomes part of the acquiring firm’s
portfolio of assets. Therefore, changes in operations affect the value of the business
and must be considered in the analysis. Second, the goal of merger valuation is to
value the target firm’s equity because a firm is acquired from its owners, not from
its creditors. Thus, although we use the expression valuing the firm, our focus is on
the value of the equity rather than on total value.

Discounted Cash Flow Analysis
The discounted cash flow (DCF) approach to valuing a business involves the
application of capital budgeting procedures to an entire firm rather than to a
single project. To apply this method, two key items are needed: (1) pro forma
statements that forecast the incremental cash flows expected to result from the
merger and (2) a discount rate, or cost of capital, to apply to the projected cash
flows.

Pro Forma Cash Flow Statements Obtaining accurate post-merger cash flow
forecasts is by far the most important task in the DCF approach. In a
pure financial merger, in which no synergies are expected, the incremental post-
merger cash flows are simply the expected cash flows of the target firm. In an

S E L F T E S T

What’s the difference between a hostile and a friendly merger?

Financial Merger
A merger in which the
firms involved will not be
operated as a single unit
and from which no
operating economies are
expected.

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operating merger, where the two firms’ operations are to be integrated, forecast-
ing future cash flows is more difficult.

Table 21.2 shows the projected cash flow statements for Apex Corporation,
which is being considered as a target by Hightech, a large conglomerate. The
projected data are for the post-merger period, and all synergistic effects have been
included. Apex currently uses 50% debt; and if it is acquired, Hightech will keep
the debt ratio at 50%. Both Hightech and Apex have a 40% marginal federal-plus-
state tax rate.

Lines 1 through 4 of the table show the operating information that Hightech
expects for the Apex subsidiary if the merger takes place, and line 5 contains the
earnings before interest and taxes (EBIT) for each year. Unlike a typical capital
budgeting analysis, a merger analysis usually incorporates interest expense into
the cash flow forecast, as shown on line 6. This is done for three reasons:
(1) Acquiring firms often assume the debt of the target firm, so old debt at
different coupon rates is often part of the deal; (2) the acquisition is often financed
partially by debt; and (3) if the subsidiary is to grow in the future, new debt must
be issued over time to support the expansion. Thus, debt associated with a merger
is typically more complex than the single issue of new debt associated with a

Projected Post-Merger Cash Flow Statements for the Apex Subsidiary as of December 31
(Millions of Dollars)

TABL E 21.2

2015 2016 2017 2018 2019

1. Net sales $105.0 $126.0 $151.0 $174.0 $191.0

2. Cost of goods sold 75.0 89.0 106.0 122.0 132.0

3. Selling and administrative expenses 10.0 12.0 13.0 15.0 16.0

4. Depreciation 8.0 8.0 9.0 9.0 10.0

5. EBIT $ 12.0 $ 17.0 $ 23.0 $ 28.0 $ 33.0

6. Interesta 8.0 9.0 10.0 11.0 11.0

7. EBT $ 4.0 $ 8.0 $ 13.0 $ 17.0 $ 22.0

8. Taxes (40%)b 1.6 3.2 5.2 6.8 8.8

9. Net income $ 2.4 $ 4.8 $ 7.8 $ 10.2 $ 13.2

10. Plus depreciation 8.0 8.0 9.0 9.0 10.0

11. Cash flows $ 10.4 $ 12.8 $ 16.8 $ 19.2 $ 23.2

12. Less retentions needed for growthc 4.0 4.0 7.0 9.0 12.0

13. Plus continuing valued 127.8

14. Cash flows to Highteche $ 6.4 $ 8.8 $ 9.8 $ 10.2 $ 139.0

Notes:
aInterest payments are estimates based on Apex’s existing debt plus additional debt required to finance growth.
bHightech will file a consolidated tax return after the merger. Thus, the taxes shown here are the full corporate taxes attributable to Apex’s operations.
No additional taxes on any cash flows will be passed from Apex to Hightech.
cSome of the cash flows generated by the Apex subsidiary after the merger must be retained to finance asset replacements and growth, while some
will be transferred to Hightech to pay dividends on its stock or for redeployment within the corporation. These retentions are net of any additional debt
used to help finance growth.
dApex’s …