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CHAPTER 17 Mergers, LB0s, Divestitures, and Business Failure INSTRUCTOR’S RESOURCES Overview This chapter covers the fundamentals of mergers, leveraged buyouts (LBOs), and divestitures, as well as methods for reorganizing or liquidating a firm in the event of a business failure. The motives for and types of mergers, as well as procedures to analyze and negotiate mergers, are discussed. The techniques for estimating the value of a target firm and analyzing cash or stock swap transactions are presented. The chapter next explains leveraged buyouts (LBOs), another technique to finance acquisitions, and international merger practices. Finally, the student is introduced to the types of business failure and the private and legal means of resolution (reorganization and bankruptcy) for creditors and stockholders. PMF DISK This chapters topics are not covered in the PMF Tutor or the PMF Problem-Solver. PMF Templates Spreadsheet templates are provided for the following problems: Problem Topic 17-1 Tax effects of acquisition 17-4 Asset acquisition decision 17-7 EPS and merger terms Study Guide The following Study Guide examples are suggested for classroom presentation: Example Topic 1 Tax effects of acquisition 2 Asset acquisition decision ANSWERS TO REVIEW QUESTIONS 17-1 a. A merger is the combination of two or more firms such that the resulting firm maintains the identity of one of the merged firms, while a consolidation is the combination of two or more firms to form a completely new corporation. Consolidations are generally made between similarly sized firms; mergers normally result from a large firm acquiring the assets or stock of a smaller company. The larger firm pays for its acquisition in either cash or stock (common and/or preferred). A holding company is a corporation that has a voting control in one or more other corporations. The companies controlled by a holding company are normally referred to as subsidiaries. The ho