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AN EXCHANGE RATIO DETERMINATION MODEL FOR MERGERS: A NOTE
Author(s) -
Yagil Joseph
Publication year - 1987
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1987.tb00326.x
Subject(s) - negotiation , earnings , dividend , function (biology) , economics , exchange rate , monetary economics , econometrics , business , accounting , finance , political science , law , evolutionary biology , biology
One of the most important financial and economic issues involved in corporate mergers is the determination of the exchange ratio between the shares of the acquiring firm and the acquired firm. The model presented in theis paper is based on the dividend growth model. Since growth expectations are crucial in an exchange ratio negotiation, the model derived here, which explicitly incorporates these growth expectations, is relevant. In contrast, Larson and Gonedes' exchange ratio expressions are in terms of price‐earnings multiples. The model presented here provides an exchange ratio expression for the buying firm and one for the selling firm. Both expressions are a function of one variable—the post‐merger growth rate as perceived by each party. There are two important features of the model: (1) it provides boundary values for negotiation; and (2) it can be used to study the effect of firm characteristics on the bid‐and‐asked exchange ratios.