C14 M&A - Bidding strategies Flashcards

1
Q

Decide on payment mechanism: cash and stock

A

Cash: bidder simply pays for the target, including any premium, in cash
Stock: in a stock-swap transaction, bidder pays for the target by issuing new stock and giving it to the target shareholders
Exchange ratio: number of bidder shares received in exchange for each target share

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2
Q

Acquirer’s share price pre- and post-merger

A

Share price of acquirer should increase if:
A: pre-merger value of acquirer; T: pre-merger value of target; S: value of synergies; NA: acquirer’s outstanding shares pre-merger; x: number of new shares issued to pay for the target

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3
Q

formula Exchange ratio

A
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4
Q

formula Exchange ratio in terms of pre-merger share prices

A
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5
Q

Accretion / Dilution Analysis

A

(1) Does proposed deal increase or decrease post-transaction EPS of acquirer?
If EPSpost < EPSpre: dilution
If EPSpost > EPSpre: accretion
(2) What is the expected share price of A after the announcement of the deal?
PA,post — PA = accretion(dilution) per share

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6
Q

Definition Exchange ratio

A

Exchange ratio: relative number of new shares given to existing shareholders

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7
Q

Calculate EPSpre

A

EPSpre = EarningsA / NA
NA: #shares outstanding of Acquirer A

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8
Q

Calculate EPSpost

A

EPSpost = Earningspost / (NA + x)
with x = exchange ratio x NT , exchange ratio = A’s offer per share / PA

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9
Q

Calculate post-merger A’s share price PA,post

A

PA,post = P/E post x EPSpost
P/E post = PA,post / EPSpost
EPSpost = PA,post / P/E post

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10
Q

Summary Accretion/Dilution Analysis

A

(1) Calculate EPSpre of A
(2) Calculate EPSpost of A
(3) Calculate PA,post
(4) Calculate per share dilution/accretion

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11
Q

Decide on payment mechanism: cash vs stock

A
  • *A’s believing their stock is undervalued** will use cash to do acquisitions
  • *A’s believing their stock is over- or correctly valued** will use stock to do acquisitions
  • *premium paid is larger** when acquisitions is financed with stock
  • *accounting rationale** for using stock rather than cash as you are allowed to use pooling instead of purchase
  • *tax rationale** for using stock as cash acquisitions create tax liabilities to the target firm’s shareholders
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12
Q

Distribution of takeover gains

A

Evidence: payed premium by A = added value: Ultimately, T’s shareholders get the value added by A
Why?
Explanation 1: The Winner’s curse
Explanation 2: The Free Rider Problem

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13
Q

Winner’s curse

A

Information asymmetry about the true value of T:
Winner of the auction is the most optimistic bidder regarding T’s true value
Solution: bid adjustment
Winner’s curse is worse when uncertainty is high and number of bidders is large

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14
Q

Free Rider Problem

A

A makes a tender offer for T’s shareholders: b
If b ≤ E(PA,post): shareholders can gain more if they do not tender -> incentive to free-ride. If all shareholders free-ride, takeover is called off -> A has to make a bid:
b > E(PA,post): T’s shareholders tender their shares, but this removes any profit opportunity for A

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15
Q

Solution for Free Rider Problem

A

(1) Toehold bidding:
A has initial ownership of T’s stock (fraction

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