Mergers and Acquisitions Paper: Financial Analysis for Managers II. FIN/325

Introduction

In his 1997 Chairmans Letter to the Sh atomic number 18holders of Berkshire Hathaway Inc., Warren Buffett wrote,

In some mergers, there truly are major synergies--though often clips the acquirer pays too much to adjudge them--but at other times the cost and revenue benefits that are projected prove illusory. Of one thing, however, be certain: If a CEO is enthused about a particularly foolish acquisition, both(prenominal) his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked. (February 27, 1998, p.17)

Buffetts admonition, given in the middle of an unprecedented merger wave (Pitofsky, 1999, para.3) and at a time when the investment community was panning him for rejecting technology ventures (Dominio, March 2000), was an auger of things to come. The family 1998 saw the US$37 jillion merger of WorldCom and MCI Communications, which and so merged with Sprint in a US$129 billion deal, (Wikipedia, 2006) and the CDN$9.9 billion purchase of Bay Networks by Nortel. Both proven to be ill fated. MCI WorldCom declared bankruptcy a a few(prenominal) years later and was purchased by Verizon for a mere US$7.6 billion.



Nortel continued to purchase other companies at a frenzied pace but by 2005 had to make major write up write-downs to disclose that the companies they bought were now worth only a atom of their purchase price (CBC News Online, December 2005). Not tout ensemble the mergers and acquisitions during that time were unsuccessful - Toronto Dominions purchase of Canada Trust, for example - but Buffetts approximation that many mergers were not approached with any critical thought certainly proved to be true.

This paper will look at some of the sound and questionable reasons for mergers and acquisitions. In addition, it will image the impact of mergers...

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