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...22 Views
Finance allah shmoop what's the difference between mergers and acquisitions
all right people listen up Merger that's what's about to
happen here it's a merger acquisition that's what's about to
happen here Corporate america is kind of same thing when
two companies merge while they generally you know attracted to
each other hopefully respect each other they share stock or
combined the stocks of each side and you know combine
efforts and then and then cuddle afterwards if they're successful
at the merger than the combination of two roughly equals
yields more than the one plus one combo that made
them so two companies get together on generally equal ish
footing In that case acquisitions are a combining more like
that eating thing on much different footing The large company
eats or buys the target either using its more highly
valued stock currency or it's taft to do so Well
why would a company acquire another Well the target might
have one hundred employees ninety of whom can be fired
with massive expense savings after the acquisition For the acquirer
such that economically the acquisition won't just makes a whole
lot of financial sense acquisitions happen for market power reasons
As well like imagine the negotiating leverage that amazon would
have if it bought the next five biggest online retailers
Or maybe it'll just kill them Probably not legal for
them to buy him anyway given the monopoly like dominance
of amazon these days But wow that would be a
powerful set of acquisitions And that would be a good
reason for ems on to acquire a whole bunch Things
and bezos would grow even more powerful maybe too powerful
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