Mergers & Acquisitions Flashcards
(14 cards)
What are Good Motives for Mergers & Acquisitions?
Increased market power
Economies of scale
Economies of vertical integration
Combine complementary resources
Tax benefits
Eliminate inefficient management
How is Increased Market Power a Good Motive for M&As?
Reduce no. of participating firms in market.
Larger market share = more pricing power.
Extreme case = monopoly, but there are strict laws against this.
How is Economies of Scale a Good Motive for M&As?
Larger the company = lower cost per unit of output.
Economies of product/marketing/administration and R&D, and financial economies.
May also experience diseconomies of scale after optimum size is reached.
How is Economies of Vertical Integration a Good Motive for M&As?
Production based on complex supply chains. Suppliers “upstream” & retailers “downstream”.
Breach of supply of parts or sale of final product causes problems to other sides.
M&A can reduce agency problems between firms in supply chain
How is Combined Complementary Resources a Good Motive for M&As?
“Missing pieces” of firm filled by another firm.
Could be complementary products: both firms sold separate products pre-merger that could now be bundles.
Complementary geographies: firms sell similar products across geographies and customers.
How is Tax Benefits a Good Motive for M&As?
Tax inversion -
Merger with company in lower tax regime and domicile new company there.
Netting earnings -
Firm with taxable profits can lower tax bill with merger through taxable losses.
Debt capacity -
Merger allows increased debt & larger TS.
Surplus funds -
More tax advantageous for shareholders if surplus funds are used in merger rather than paid as dividend.
What are Bad Motives for M&As?
Earning Growth
Diversification
How is Earning Growth a Bad Motive for M&As?
EPS goes up, but doesn’t necessarily mean intrinsic value of firm has increased.
No synergies in a merger.
How is Diversification a Bad Motive for M&As?
Investors can build a diverse portfolio by themselves at a low cost.
Can lead to destruction of shareholder value through value-diluting deals.
How to Defend Against Acquisitions?
Corporate Charter
Standstill Agreement
Share Rights Plan
Leverage Buyout (LBO)
What is the Corporate Charter as a Defence Against Acquisition?
Establishes conditions to make takeovers more difficult.
Classified/Staggered Boards -
Only fraction of Board of Directors elected each yr, prolonging time acquirer needs to obtain majority seats.
Supermajority -
Increase % of voting shares to approve merger to above 50% of shareholders.
What is the Standstill Agreement as a Defence Against Acquisition?
Contract between target company and acquirer where acquirer agrees to limit/stop buying target’s shares for a specific period in return for an incentive (premium).
Buys time, prevents a creeping takeover.
What is the Share Rights (/Poison) Plan as a Defence Against Acquisition?
New shares to every customer accept acquirer at a deep discount.
Dilutes holdings of bidder, powerful disruptor.
Illegal in Europe without shareholder approval. Common in US.
What is the Leverage Buyout (LBO) as a Defence Against Acquisition?
Management of target company buys out company themselves using high levels of debt, to then make company private.
Shares are delisted. Other shareholders forced to accept cash for their shares.
