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FI3004 > M&A > Flashcards

M&A Flashcards

1
Q

Horizontal merger

A

Two companies in the same industry e.g. tesco and asda

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2
Q

Reasons for Horizontal Merger

A
  • stronger market power
  • economies of scale
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3
Q

What is a merger?

A

A merger is a transaction in which two or more businesses combine into a single entity

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4
Q

Vertical merger

A

Two companies at different stages of production e.g. oil companies

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5
Q

Upstream vertical merger

A

Manufacturer acquires raw materials producer

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6
Q

Downstream vertical merger

A

Manufacturer acquires distributor

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7
Q

Reasons for vertical merger

A
  • secure provider for raw materials or a secure sales outlet
  • streamlined operations and reduced costs
  • increase in market power
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8
Q

Conglomerate

A

Two unrelated companies e.g. virgin group

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9
Q

Reason for conglomerate merger

A
  • diversify risk
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10
Q

Financing with cash

A
  • bidding shareholders control is not diluted
  • price is clear to see
  • target shareholders have more options
  • target shareholders subject to capital gains tax
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11
Q

Regulatory bodies related to mergers in the UK

A
  • UK listing authority
  • takeoverpanel (city code/blue book)
  • competition and markets authority
  • European commission
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12
Q

What drives merger waves?

A
  • may be linked to booms/recessions
  • more efficient to grow artificially than organically
  • economic disturbance theory
  • surplus cash
  • industry deregulation and consolidation
  • e.g. covid may lead to increased merger due to the volatility and number of companies in financial distress
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13
Q

Economic disturbance theory

A

Shareholders are more likely to overvalue the company due to overconfidence in synergies

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14
Q

Reasons for cross border mergers

A
  • UK companies are attractive due to less regulation and red tape
  • UK trade unions are pragmatic
  • UK underproductivity compared to European counterparts, foreign companies see they could potentially increase profitability
  • UK culture is less supportive of national sovereignty
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15
Q

Problems with cross border mergers

A
  • cultural differences and language barriers
  • time barriers?
  • UK R&D suffers when a foreign company acquires them
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16
Q

Reasons for mergers

A
  • synergies
  • Increased market power
  • new market entry
  • complementary resources
  • valuable assets
  • using surplus cash
  • boost growth rates
  • managerial motives
  • hubris hypothesis
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17
Q

Synergies (reason for merger)

A

The PVxy is equal to PVx + PVy + synergistic gain

where synergistic gain could come from economies of scale for example

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18
Q

Increased market power (reason for mergers)

A
  • impacts competition
  • can increase prices if they have enough market power
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19
Q

New market entry (reason for mergers)

A
  • can help break into a new industry, sector or location
  • artificial growth > organic growth
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20
Q

Complementary resources (reason for mergers)

A
  • large companies acquire smaller firms who have e.g. better R&D prospects or a unique product.
  • small company gains due to increased access to capital, experience and expertise
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21
Q

Valuable assets (reason for mergers)

A
  • Desire to get hold of tangible e.g. M&S locations example and intangible assets e.g. patents, licenses, brand names
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22
Q

Boost growth rates (reason for mergers)

A
  • mature company acquires a company in the takeoff stage, used as a quick fix to boost EPS
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23
Q

Managerial motives (reason for mergers)

A
  • Management tend to benefit from merger activity as they end up controlling a larger empire and as such receive higher pay and therefore pension. Also, higher status and prestige
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24
Q

Hubris Hypotheseis (reason for mergers)

A
  • Richard Roll (1986)
  • managers become overconfident and overquantify the benefits of the merger
  • Roll argues that even if there are no synergistic benefits, overconfidence of the manager will result in them overpaying for the company
  • assumes market efficiency
  • does not imply managers deliberately act against shareholder interest
  • suggests, due to the rarity of mergers, managers will get excited and overquantiy the accrued benefits
  • empirical evidence supports this
25
Q

Mechanics of a merger

A
  • Identify target
  • appraise target
  • negotiation
  • the offer
26
Q

Appraise target (4 types of due diligence)

A
  • financial: examination of e.g. outstanding debt, tax, profit forecasts, management accounts, accounting systems and policies
  • legal: any litigation outstanding? examine contracts, share capital, memorandum and articles of association
  • employee: pension commitments, bonus or share ownership schemes, termination clauses
  • commercial: market information, competitor research, R&D, marketing, customer research, product research
27
Q

Negotiation

A
  • How much?
  • When?
  • Who will be on the new board?
  • Depends on friendly or hostile
28
Q

Friendly negotiation

A
  • target board advises shareholders to accept the bid
29
Q

Hostile takeover

A
  • target board does not recommend that shareholders accept the bid
  • bidding company will continue with a hostile bid
30
Q

Hostile bid

A
  • the predatory company embarks on a dawn raid
31
Q

Dawn raid

A
  • bidding company targets key shareholders and attempts to buy all of the shares on the open market
32
Q

Rules relating to takeover bids

A
  • 3% rule
  • 30% rule
  • 90% rule
33
Q

3% rule

A
  • once the bidding company has 3% of the company’s shares they must inform the target, regardless of a takeover bid
34
Q

30% rule

A
  • the takeover panel usually oblige the bidding company to make a cash bid for all of the target company shares
  • In the case of a hostile takeover, the target has 14 days to convince shareholders not to sell
  • There will be counter deals and offers
  • Max period of bid is 60 days and if unsuccessful, another bid cannot be submitted for 12 months
35
Q

90% rule

A
  • to avoid the frustrations of having a small group of shareholders unwilling to sell
  • once the bidder has convinced over 90% of the remaining shareholders to sell, they can force the final 10% to sell
36
Q

Financing the merger

A
  • cash
  • equity
  • debt
  • earnouts

In practice, usually a combination of debt, equity and cash. It is also very common to use a rights issue

37
Q

Equity financing

A
  • share for share exchange
  • shareholders in both companies are combined into one group
  • CGT is postponed for target shareholders and can participate in merger gains. However, no immediate cash flow gain
  • Bidder shareholders benefit from no immediate cash outflow
  • disadvantages for bidder: equity financing is expensive, bidding shareholders control is diluted as they are now sharing control
38
Q

Debt Financing

A
  • using debentures, loan stocks, convertibles or preference shares for example
39
Q

Earn-outs

A
  • Part paid at time of merger
  • rest paid at end of earnout period
  • earnout period is pre-defined, usually 2 to 5 years
  • amount paid based on profits earned since the acquisition
  • key advantage is former owners and managers can be locked into the deal
  • many problems can arise:
    • how is performance defined?
    • the speed of integration: may be no synergistic gains in the period
40
Q

Regulatory bodies related to M&A

A
  • UK Listing Authority
  • Takeover panel (City Code (Blue Book))
  • Competition and Markets Authority
  • European Commission
41
Q

UKLA

A
  • their rules apply when the bidding company is on the LSE
42
Q

City Code

A
  • Applies to bidding and target companies
  • Code of best practice with no legal backing
  • Enforced by the takeover panel
  • Aims to ensure all shareholders are treated fairly and that managers act in shareholder interests
43
Q

Takeover panel

A
  • they will name and shame any company who doesn’t adhere to the city code
  • companies who are named and shamed face the risk of being shunned by the financial sector
44
Q

CMA

A
  • ensure there is no lessening of competition
  • will block a merger if they believe it will harm competition
45
Q

European Commission

A
  • will block any mergers that they don’t think are in the interest of the European Common Market
46
Q

Defence Strategies

A
  • Press coverage
  • Revise profit forecasts/revaluation of assets
  • ‘White Knight’
  • Poison pill
  • Share buyback
  • Employee share ownership plan
  • Golden parachutes
47
Q

Press coverage

A
  • Directors try to build up shareholder loyalty by highlighting company strengths in the media
  • e.g. hint at increased dividend, appointment of new director
48
Q

Revise profit forecasts/revaluation of assets

A
  • try to boost the value of balance sheet to increase the share price, making the target more expensive
  • Revised figures must be credible
49
Q

‘White Knight’

A
  • Defensive merger
  • target finds a company they would rather be taken over by
  • target shareholders should be wary of managers acting in their own interests e.g. safer jobs
50
Q

Poison pill

A
  • issue rights to acquire new shares in the target to increase the cost of acquisition
  • target could issue convertible bonds which are exercisable only in the case of a takeover, making the cost of a takeover prohibitive
51
Q

Share buyback

A
  • target company buys back shares, removing shares from the open market and driving the share price up
  • making it more expensive to acquire
52
Q

Employee share ownership plan

A
  • Shares placed into the hands of employees rather than predators, with the hope being that employees wont sell to any bidding companies
53
Q

Golden parachutes

A
  • target companies give directors huge termination packages which would make it too expensive for the bidding company to get rid of them
54
Q

Financial institutions gain/loss from merger

A
  • biggest winners due to fees charged and lots of paperwork
  • must consider risks such as litigation for a failed bid
55
Q

Consumers gain/loss from merger

A
  • Synergistic cost savings could lower prices for consumers
  • Alternatively, abuse of monopoly power can raise prices
56
Q

Shareholders gain/loss from merger

A
  • target: seem to gain due to premium paid by predator
  • predator: at best, effect is neutral (conflicting evidence whether there is a gain or loss)
57
Q

Employees gain/loss from merger

A
  • may suffer from redundancies
  • alternatively, combined group could mean a stronger group and more employees are needed
58
Q

Directors gain/loss from merger

A
  • target: tend to lose due to loss of power, may be made redundant. However, may enjoy golden parachutes or big payoffs
  • predator: bigger empire therefore higher remuneration
59
Q

Reasons for merger failure

A
  • acquiring them for the wrong reasons e.g. a conglomerate losing focus by diversifying into several different fields
  • Over/underestimating merger gains/costs, linked to hubris hypothesis
  • Poorly planned integration: might look good on paper but doesn’t work in practice. e.g. cultural differences, integration plan, are employees/senior management supportive?

FI3004 (4 decks)

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