Question

1. Discuss the effect of the following variables on merger activity:

The growth rate of GDP

Interest rate levels

Interest rate risk premiums

Monetary stringency

2. What percentage of gross domestic product is represented by M&A activity?

3. How do bidder returns vary with (1) the mode of payment and (2) the presence of single versus multiple bidders?

4. How does the presence of single versus multiple bidders affect the returns to the target (1) on the announcement date versus (2) subsequent to the announcement date?

5. Define target run-up? What are some possible reasons for run-up?

6. How might a premium paid for target firms be expected to vary with single versus multiple bidders?

7.How do bidder returns vary with (1) the mode of payment and (2) the presence of single versus multiple bidders?

8. What is the evidence on postmerger operating performance? How does this evidence relate to the event study results for combined returns at merger announcement?

9. What does the evidence of merger returns around banking deregulation say about the source of gains from takeover activity?

10. What are the theoretical predictions on combined merger returns for the (1) efficiency and (2) entrenchment theories? Which theory is supported by the empirical evidence on combined returns?

11. What are some possible reasons for the decline in takeover activity at the end of the 1980s and beginning of the 1990s

12. What is the evidence on postmerger operating performance? How does this evidence relate to the event study results for combined returns at merger announcement?

13. How do the estimation issues differ between event studies of merger announcement and the analysis of the long-term performance following mergers?

14. What is the evidence on the market power explanation for merger announcement gains?

15. What are some reasons why deregulation is associated with heightened merger activity?

7.

Answer 1

1. Discuss the effect of the following variables on merger activity:

a) The growth rate of GDP -

The study of merger activities of United States shows that in general trend with growth of economy in which a major variable is GDP. The study showed in 1970 -80 the percentage of M&A to GDP is 1.3% which increased to 3.6% in 1981-89 and then decreased to 1.6% in 1990-92 and then increased to 9% in 1993-2000 and marginally decreased to 6.9% in 2000 .Normally if the GDP in increasing than mergers will increases because it provides increased market for the products and services and merger generally provides access to length and breadth of the market

b) Interest rate levels

Normally if the interest rates falls the merger activity increases as the study shows that in 1980 to 2000. The impact of interest rate on merger can be described as under

·         Lower interest rate means the debt becomes cheap and lot of hostile takeovers by raiders was on the strength of easy debt availability with low interest rates

c) Interest rate risk premiums

Interest rate risk premium means. The investor expects higher return in long term than risk free return. This excess return is termed premium on his investment

With low interest rates the investors were willingly to financing on mergers by way of taking up stocks which in long term will provide higher returns in terms capital appreciation and dividend payments far exceeding the risk free returns

The mega mergers were on basis of stock to stock transfers

d)Monetary stringency

In monetary stringency the fed increases rate of interest to banks to borrow on overnight basis. this makes in general the debt costly to the companies , which in return will discourage raiders for hostile takeovers

The increase in fed interest rate is normally if the inflation is high because of more demand and less supply and more liquidity in market . The economy is growing this provides good opportunities for mergers for strong companies to take advantage

2. What percentage of gross domestic product is represented by M&A activity?

Ans

The study showed in 1970 -80 the percentage of M&A to GDP is 1.3% which increased to 3.6% in 1981-89 and then decreased to 1.6% in 1990-92 and then increased to 9% in 1993-2000 and marginally decreased to 6.9% in 2000