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Merger accounting Look again at Table 31.3. Suppose that B Corporations fixed assets are reexamined and found to be worth $12 million instead of $9 million. How would this affect the AB Corporations balance sheet under purchase accounting? How would the value of AB Corporation change? Would your answer depend on whether the merger is taxable? APPENDIX _ _ _ Conglomerate Mergers and Value Additivity A pure conglomerate merger is one that has no effect on the operations or profitability of either firm. If corporate diversification is in stockholders interests, a conglomerate

Merger accounting Look again at Table 31.3. Suppose that B Corporations fixed assets are reexamined and found to be worth $12 million instead of $9 million. How would this affect the AB Corporations balance sheet under purchase accounting? How would the value of AB Corporation change? Would your answer depend on whether the merger is taxable? APPENDIX _ _ _ Conglomerate Mergers and Value Additivity A pure conglomerate merger is one that has no effect on the operations or profitability of either firm. If corporate diversification is in stockholders interests, a conglomerate merger would give a clear demonstration of its benefits. But if present values add up, the conglomerate merger would not make stockholders better or worse off. In this appendix we examine more carefully our assertion that present values add. It turns out that values do add as long as capital markets are perfect and investors diversification opportunities are unrestricted. Call the merging firms A and B. Value additivity implies PVAB = PVA + PVB where PVAB = market value of combined firms just after merger PVA, PVB = separate market values of A and B just before merger For example, we might have PVA = $100 million ($200 per share _500,000 shares outstanding) and PVB = $200 million ($200 per share _1,000,000 shares outstanding) Suppose A and B are merged into a new firm, AB, with one share in AB exchanged for each share of A or B. Thus there are 1,500,000 AB shares issued. If value additivity holds, then PVAB must equal the sum of the separate values of A and B just before the merger, that is, $300 million. That would imply a price of $200 per share of AB stock. But note that the AB shares represent a portfolio of the assets of A and B. Before the merger investors could have bought one share of A and two of B for $600. Afterward they can obtain a claim on exactly the same real assets by buying three shares of AB. Suppose that the opening price of AB shares just after the merger is $200, so that PVAB = PVA + PVB. Our problem is to determine if this is an equilibrium price, that is, whether we can rule out excess demand or supply at this price.