- stock prices were high,
- interest rates were low and
- one or more large deals had already taken place.
Of the mergers and acquisitions:
- 1/3rd of the deals created value for the acquirer,
- 1/3rd destroyed value, and
- 1/3rd had unclear results.
Cost savings can create value, but estimating those savings requires a framework.
As an example for a generic drug firm, the analyst might allocate the savings into six categories:
- sales and marketing,
- distribution, and
Assumed cost savings should be estimated and categorized in detail to avoid double counting.
It is recommended that those directly involved in the cost-savings process be involved in the estimations of cost savings.
Revenue analysis has both explicit and implicit considerations.
Revenue improvements generally have four sources:
- increasing sales to a higher peak level,
- reaching a peak level faster,
- extending the life of products, and
- adding new products.
Revenue could increase from higher prices, but antitrust regulation can prevent higher prices unless the quality of the products increases.
Stock offer or cash offer
Generally, an acquiring firm's stockholders benefit more if the firm uses stock instead of cash for the acquisition.
Although the stock offering can lead to dilution, it lowers the risk to the acquirer and allocates more risk to the target firm's shareholders.
Research has shown that stock prices react to creation of intrinsic value in an acquisition and that dilution and other accounting issues do not matter.