Mergers and Aquisitions

Question 1

What are the three main types of mergers?

Answer 1

Horizontal: Same industry (e.g., HP + Compaq)

Vertical: Buyer and supplier (e.g., Google + Android)

Conglomerate: Unrelated industries (e.g., Alphabet + Nest Labs)

Question 2

What is an Acquisition Premium in a takeover?

Answer 2

It is the amount paid above the target’s pre-deal share price. Average premium ≈ 43%.

Question 3

What are synergies in M&A?

Answer 3

Synergies are cost savings or revenue enhancements from merging. These justify the acquisition premium.

Question 3

List key reasons firms pursue acquisitions.

Answer 3

Synergies

Economies of scale/scope

Vertical integration

Talent acquisition

Tax advantages

Diversification

Earnings growth

Managerial motives

Question 4

What are common payment methods in acquisitions?

Answer 4

Cash Offer: Buyer pays in cash

Stock Swap: Buyer offers its own shares in exchange

Exchange Ratio: Determines how many acquirer shares per target share

Question 5

What defines a hostile takeover?

Answer 5

A takeover opposed by the target’s board; the bidder appeals directly to shareholders.

Question 6

Name common defenses against hostile takeovers.

Answer 6

Poison Pill - It is a rights offering that gives the target shareholders the right to buy shares in either the target or an acquirer at a deeply discounted price.

Staggered Board - In many public companies, a board of directors whose three-year terms are staggered so that only one-third of the directors are up for election each year.

White Knight - A target company’s defense against a hostile takeover attempt in which it looks for another, friendlier company to acquire it

Golden Parachute - An extremely lucrative severance package that is guaranteed to a firm’s senior management in the event that the firm is taken over and the managers are let go

Recapitalization - With recapitalization, a company changes its capital structure to make itself less attractive as a target. e.g., takes on more debt or buys back shares.

Proxy Fight - FightIn a hostile takeover, the acquirer attempts to convince the target’s shareholders to unseat the target’s board by using their proxy votes to support the acquirers’ candidates for election to the target’s board.

Question 7

What is a leveraged buyout?

Answer 7

The acquirer borrows funds (secured against the target’s assets) to purchase the target, making the target responsible for the debt.

Question 8

Why do acquirers often overpay?

Answer 8

Due to bidding wars, competition, and managerial overconfidence (hubris hypothesis).