Cash and Cash Management

In June 2018, Amazon held $16.7 billion in cash and $8.3 billion in short-term securities. Short-term securities pay interest; cash doesn’t. So why do firms such as Amazon hold such large amounts of cash? Why don’t they arrange for the bank to “sweep” the cash at the end of the day into an interest-bearing

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Marketable Securities

In December 2017, Apple was sitting on a $285 billion mountain of cash and fixed-income investments, amounting to about 70% of the company’s total assets. Of this sum, $9.5 billion was kept as cash and the remainder was invested as follows: Apple’s massive investments in securities came from the torrent of free cash flow

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Sensible Motives for Mergers

Mergers can be horizontal, vertical, or conglomerate. A horizontal merger is one that takes place between two firms in the same line of business. Most of the mergers listed in Table 31.1 are horizontal. A vertical merger involves companies at different stages of production. The buyer expands back toward the source of raw materials

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Some Dubious Reasons for Mergers

The benefits that we have described so far all make economic sense. Other arguments some­times given for mergers are dubious. Here are a few of the dubious ones. 1. Diversification We have suggested that the managers of a cash-rich company may prefer to see it use that cash for acquisitions rather than distribute it

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Estimating Merger Gains and Costs

Suppose that you are the financial manager of firm A and you want to analyze the possible purchase of firm B. The first thing to think about is whether there is an economic gain from the merger. There is an economic gain only if the two firms are worth more together than apart. For

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The Mechanics of a Merger

Buying a company is a much more complicated affair than buying a piece of machinery. Thus we should look at some of the problems encountered in arranging mergers. In practice, these arrangements are often extremely complex, and specialists must be consulted. We are not trying to replace those specialists; we simply want to alert

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Proxy Fights, Takeovers, and the Market for Corporate Control

The shareholders are the owners of the firm. But most shareholders do not feel like the boss, and with good reason. Try buying one share of IBM stock and marching into the boardroom for a chat with your employee, the CEO. (However, if you own 50 million IBM shares, the CEO will travel to

Merger Waves and Merger Profitability

1. Merger Waves Look back at Figure 31.1, which shows the number of mergers in the United States for each year since 1985. Notice that mergers come in waves. There was an upsurge in merger activ­ity from 1967 to 1969 and then again in the late 1980s and 1990s. Another merger boom got under

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Leveraged Buyouts

Leveraged buyouts (LBOs) differ from ordinary acquisitions in two immediately obvious ways. First, the target company goes private, and its shares no longer trade on the open mar­ket. Second, the acquirer finances a large fraction of the purchase price by bank loans and bonds, which are secured by the assets and cash flows of

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The Private-Equity Market

1. Private-Equity Partnerships Figure 32.1 shows how a private-equity investment fund is organized. The fund is a partner­ship, not a corporation. The general partner sets up and manages the partnership. The limited partners put up almost all of the money. Limited partners are generally institutional investors, such as pension funds, endowments, and insurance companies.

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Fusion and Fission in Corporate Finance

Figure 32.2 shows some of AT&T’s acquisitions and divestitures. Before 1984, AT&T con­trolled most of the local and virtually all of the long-distance telephone service in the United States. (Customers used to speak of the ubiquitous “Ma Bell.”) Then in 1984, the company accepted an antitrust settlement requiring local telephone services to be spun

Bankruptcy

Some firms are forced to reorganize by the onset of financial distress. At this point they need to agree to a reorganization plan with their creditors or file for bankruptcy. We list the largest nonfinancial U.S. bankruptcies in Table 32.6. The credit crunch also ensured a good dollop of large financial bankruptcies. Lehman Brothers

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Financial Markets and Institutions

In most of this book, we have assumed that a large part of debt financing comes from public bond markets. Nothing in principle changes when a firm borrows from a bank instead. But in some countries, bond markets are stunted and bank financing is more important. Figure 33.1 shows the total values of bank

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Ownership, Control, and Governance

Who owns the corporation? In the United States and United Kingdom, we just say “the stock­holders.” There is usually just one class of common stock, and each share has one vote. Some stockholders may have more influence than others, but only because they own more shares. In other countries, ownership is not so simple,

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Do These Differences Matter?

A good financial system appears to accelerate economic growth.[1] In fact, at least rudimen­tary finance may be necessary for any growth at all. Raghu Rajan and Luigi Zingales give the example of a bamboo-stool maker in Bangladesh, who needed 22 cents to buy the raw materials for each stool. Unfortunately, she did not have

What We Do Know: The Seven Most Important Ideas in Finance

What would you say if you were asked to name the seven most important ideas in finance? Here is our list. 1. Net Present Value When you wish to know the value of a used car, you look at prices in the secondhand car market. Similarly, when you wish to know the value of

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What We Do Not Know: 10 Unsolved Problems in Finance

Since the unknown is never exhausted, the list of what we do not know about finance could go on forever. But, following Brealey, Myers, and Allen’s Third Law (see Section 29-5), we list and briefly discuss 10 unsolved problems that seem ripe for productive research. 1. What Determines Project Risk and Present Value? A

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Nature of Business and Accounting

A business1 is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. Businesses come in all sizes, from a local coffee house to Starbucks, which sells over $10 billion of coffee and related products each year. The objective of

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Generally Accepted Accounting Principles

If a company’s management could record and report financial data as it saw fit, compari­sons among companies would be difficult, if not impossible. Thus, financial accountants follow generally accepted accounting principles (GAAP) in preparing reports. These reports allow investors and other users to compare one company to another. Accounting principles and concepts develop from

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The Accounting Equation

The resources owned by a business are its assets. Examples of assets include cash, land, buildings, and equipment. The rights or claims to the assets are divided into two types: (1) the rights of creditors and (2) the rights of owners. The rights of creditors are the debts of the business and are called

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