Mergers & Acquisitions

Question 1

def merger

Answer 1

= absorption of assets or liabilities of another firm

Question 2

def acquistion

Answer 2

= larger corporation purchases assets or stock of a smaller corporation –> control

Question 3

state 3 types of mergers

Answer 3

1. vertical
2. horizontal
3. conglomerate

Question 4

def vertical merger. what is the most important reason for this type?

Answer 4

two companies who work in the same industry, but in the different parts of the supply chain
most important reason: cost efficiency

Question 5

when does horizontal merger happen? what is the main reason for this kind?

Answer 5

mostly happens amongst competitors within the same geographical market (and the same industry)
reason for merger: economies of scale, increased sales, knowledge spillover

Question 6

def target

Answer 6

the corporation being purchased, when there is a clear buyer and seller

Question 7

def bidder

Answer 7

The corporation that makes the purchase, when there is a clear buyer and seller. Also known as the acquiring firm

Question 8

def friendly m&a

Answer 8

The transaction takes place with the approval of each firm’s management

Question 9

def hostile m&a

Answer 9

The transaction is not approved by the management of the target firm

Question 10

def conglomerate merger

Answer 10

any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas

Question 11

state 4 disadvantages of conglomerate mergers

Answer 11

• no past experience
• shift in focus
• complications
• governance issues

Question 12

state 4 disadvantages of conglomerate mergers

Answer 12

• no past experience
• shift in focus
• complications
• governance issues

Question 13

state 9 motives for mergers

Answer 13

1. synergies
2. unique capabilities
3. diversification of operations
4. adding hidden value (intangibles)
5. rapid growth (external)
6. market power
7. bootstrapping EPS (=increasing earnings per share)
8. personal incentives of managers
9. tax issues (less taxable income)

Question 14

which motives for mergers are positive? (6)

Answer 14

• efficient use of resources
• cost savings
• better management
• technology transfer (spillover)
• more options for strategic objectives
• additional revenue generation

Question 15

which motives for mergers are negatives? (5)

Answer 15

• tax advantages
• increased market power (near-monopoly)
• using up free cash flow
• overconfidence
• generation of fees for corporate lawyers

Question 16

state 5 strategies against unwanted mergers and define them

Answer 16

1. pac man (counter bid the predator)
2. white knight (arrange another bid from a friendly company)
3. poison pill (make bid costly)
4. poison put (bondholders of target can demand immediate repayment in full if there is a change in ownership)
5. crown jewels (sell off bits the predator is most interested in)

Question 17

def golden parachute

Answer 17

a defence tactics to prevent unwanted mergers. key executives get contract provisions that gets them a giant bonus in the case they are fired (so the merger would be too expensive to be bought)

Question 18

def shark repellent tactics

Answer 18

defence tactics to prevent unwanted mergers

Question 19

def poison pill

Answer 19

defense tactic. shareholders get rights to buy more shares at a discount in case of a merger

Question 20

def greenmail

Answer 20

the process in which a buyer acquires a large # of company’s shares and threatens a company takeover. it is not initiated tho, but it forces the company to buy back their own shares at premium

Question 21

state the 5 key determinants of a successful merger.

Answer 21

1. compatibility of mission and direction
2. beneficial economies of scale
3. cultural harmonisation
4. geographically close headquarters
5. possibility of growth (new markets etc.)