Mergers & Acquisitions Flashcards
(42 cards)
Acquisition
purchase of some portion of one company by another
Statutory Merger
Purchase of all assets and liabilities of one company by another - one firm remains and the other ceases to exist as a separate entity
Subsidiary Merger
company being purchased becomes a subsidiary of the purchaser - common if the acquirer wants to retain the strong brand or good image of the acquired firm
Consolidation
both companies terminate their previous legal existence and become part of a newly formed company - common if both companies are of a similar size
Target Copany
refers to the company being acquired
Acquiring Company
refers to the company acquiring the target
Horizontal Merger
merging companies are in the same kind of business - usually competitors
Horizontal Mergers help achieve
economies of scale - savings through consolidation of operations and elimination of duplicate resources, gain market power due to decrease in competition and increase in size of acquiring firm
Vertical Merger
Acquirer buys another company in the same production chain - creates cost savings and gives greater control over the production process
Backward Integration
acquirer purchases a target that is up the value chain (e.g. a supplier)
Forward Integration
acquirer purchases a target that is down the value chain (e.g. a supplier)
Conglomerate Merger
acquirer purchases a company unrelated to its core business
Motives for Mergers - Synergy
combined company will be worth more than the sum of its parts - merger synergies either decrease costs (economies of sale) or increase revenues
Motives for Mergers - External Growth
Buy resources externally - common for mature industries, risk mitigation since can merge with an existing company rather than entering unfamiliar market and establishing resources internally
Motives for Mergers - Increasing Market Power
horizontal integration in industries with concentrated market share or few competitors can increase market power - more ability to influence market share
Other Motives for Mergers (4)
acquiring unique capabilities and resources
unlock hidden value - may purchase target for less than its break up value
Tax consideration - buy target with accumulated tax losses
Cross Border Motivations
Motives for Mergers - Diversification
if conglomerate invests in companies from a variety of industries the variability in cash flows decreases as the industries are not correlated
Motives for Mergers - Managerial Personal Incentives
executive compensation highly correlated with company size, motivation to engage in mergers to maximise size rather than shareholder value
Motives for Mergers - Bootstrapping Earnings
When a companies earnings increase as a consequence of the merger itself rather than the resulting economic benefits of the combination, P/E acquirer > P/E target and acquirer - P/E does not decline after the merger
Industry Life Cycle (5)
Embryonic - smaller, younger companies may sell themselves to larger companies in mature or declining industries
Growth - may cause large capital requirements to expand
Shakeout - drop in entry of new competitors, horizontal and vertical mergers likely to achieve economies of scale, savings and operational efficiency
Market Maturity - increasing competition and capacity constraints, mergers may be undertaken to achieve economies of sale in research, production to match low cost and price performance
Decline - industry faces overcapacity - horizontal mergers may be undertaken to ensure survival, vertical to increase efficiency and profit margins, may acquire young companoes
Stock Purchase Acquisition
acquirer gives the target company’s shareholders some combination of cash and securities in exchange for shares in the target company’s stock
Asset Purchase Acquisition
Acquirer purchases the target company’s assets and payment is made directly to the company
Method of Payment for Mergers (3)
Cash - from the acquiring company’s exisiting assets or debt issue
Securities Offering
Exchange Ratio - number of shares that stockholders in the target company receive in exchange for each of their shares in the target company
Friendly Merger
approach target management directly, due dilligence done
