Acquisition Premium

  

Lumber company A has had a devil of a time negotiating with the Lumberjack Union, but it buys company B so that they can go from five million acres to eight million acres of forest to kill, digest, and turn into scratchpads.

With a highly unionized labor force, both lumberjack companies had only 10% margins, and few resources to invest in technology. Combined, however, with their enormous new scale, it makes financial sense to replace two-thirds of their lumberjacks with robots, a.k.a., the Tree Slayers.

The would-be acquired lumberjack company B knows the math, because they've taken a couple of awesome finance courses on Shmoop, and while as a stand-alone company they might be worth 14x earnings, as they key to unlock the Tree Slayer and a new era of high-margin tree cutting, lumberjack company B will be smart enough to demand a big acquisition premium.

That is, instead of their steady state 14x earnings valuation, they'll ask for and probably get something closer to 20x earnings or more, as the acquisition premium here is warranted in the creation of this new behemoth tree cutting company, which everyone is happy about.

Except the trees. And the squirrels who lived in them. And the birds. And the atmosphere...

Related or Semi-related Video

Finance: What's the difference between m...23 Views

00:00

Finance allah shmoop what's the difference between mergers and acquisitions

00:08

all right people listen up Merger that's what's about to

00:11

happen here it's a merger acquisition that's what's about to

00:16

happen here Corporate america is kind of same thing when

00:20

two companies merge while they generally you know attracted to

00:24

each other hopefully respect each other they share stock or

00:28

combined the stocks of each side and you know combine

00:32

efforts and then and then cuddle afterwards if they're successful

00:36

at the merger than the combination of two roughly equals

00:39

yields more than the one plus one combo that made

00:43

them so two companies get together on generally equal ish

00:46

footing In that case acquisitions are a combining more like

00:51

that eating thing on much different footing The large company

00:55

eats or buys the target either using its more highly

00:59

valued stock currency or it's taft to do so Well

01:02

why would a company acquire another Well the target might

01:05

have one hundred employees ninety of whom can be fired

01:08

with massive expense savings after the acquisition For the acquirer

01:12

such that economically the acquisition won't just makes a whole

01:15

lot of financial sense acquisitions happen for market power reasons

01:19

As well like imagine the negotiating leverage that amazon would

01:23

have if it bought the next five biggest online retailers

01:27

Or maybe it'll just kill them Probably not legal for

01:29

them to buy him anyway given the monopoly like dominance

01:32

of amazon these days But wow that would be a

01:34

powerful set of acquisitions And that would be a good

01:37

reason for ems on to acquire a whole bunch Things

01:39

and bezos would grow even more powerful maybe too powerful

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