Lecture 15

Question 1

What are the three basic forms of Mergers/Acquisition?

Answer 1

• Merger or consolidation: one firm being absorbed by another. The acquiring firm retains its name and identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business entity. In a consolidation, an entirely new firm is created, sot the two original firms terminate their previous legal existence
• Acquisition of shares: one firm purchases the another firm’s voting shares in exchange for cash, or shares of equity and other securities
• Acquisition of assets: one firm buys all the assets of another firm

Question 2

What are the three classifications of Acquisitions?

Answer 2

• Horizontal acquisition: between firms in the same industry
• Vertical acquisition: involves firms at different steps of the production process, i.e., between a company and its supplier or customer
• Conglomerate acquisition: the acquirer and the target are in unrelated businesses

Question 3

What are the motives for takeovers: Economic Synergy?

Answer 3

• Economies of horizontal integration:
  Reducing average unit cost of production by spreading fixed costs (central administration, marketing) over a larger volume of production
• Economies of vertical integration:
  Facilitating coordination of closely related operations (reducing bargaining/contracting problems between suppliers/customers)
• Complementary resources:
  Combining the different strength of two companies
  Cheaper than acquiring resources in the market

Question 4

What are the implication of Payment Methods?

Answer 4

• Payment with stock sends a negative signal:
  A cash offer may signal the ability of acquiring firms to raise funds; a stock offer signal an inability to issue more debt
  …hence target shareholders should place less value on share offers
• Personal tax effects:
  Cash acquisitions force realisation of capital gains
  Capital gains tax reduces value of cash offer to target shareholders
  So cash offers need to be higher than stock offers to offset extra tax