When analyzing investment decisions, we did not consider in any detail the largest investment decisions that most firms make, i.e., their acquisitions of other firms. Boeing’s largest investment of the last decade was not a new commercial aircraft but its acquisition of McDonnell Douglas in 1996. At the time of the acquisition, Boeing's managers were optimistic about the merger, claiming that it would create substantial value for the stockholders of both firms. What are the principles that govern acquisitions? Should they be judged differently from other investments?

By Prof. Aswath Damodaran

Summary:

•Acquisitions and takeovers

•Background on Acquisitions

•Empirical Evidence on the Value Effects Of Takeovers

•Create Operating or Financial Synergy

•Take over poorly managed firms and change management

•Choosing a Target firm and valuing control/synergy

•In Practice 26.1: A Status Quo Valuation of Digital

•In Practice 26.3: Value of Control

•Diversification

•Debt Capacity

•Structuring the Acquisition

•Accounting Considerations

•The Post-Deal Performance of Merged Companies

•Takeover Restrictions

•Analyzing Management and Leveraged Buyouts

•In Practice 26.7: Valuing A Leveraged Buyout: Congoleum Inc.

•Summary

•References