MODULE 05 Flashcards
Merger and acquisition popularity varies by:
-By time period (can be in or out of fashion)
-With the stock market (as stock prices increase so does the frequency of mergers)
Two growth targets:
Internal Expansion and External Expansion
Internal Expansion
-Engage in product research and development
-Emphasize marketing and promotional activities (grow market share)
External Expansion
-Acquire one or more other firms
-Rapid growth
Advantages of external expansion
- Operating Synergies
- Entry into new markets
3.Income tax benefits - Diversification
- Divestitures
– benefits as the result of compatibility
Operating Synergies
between supplier and a customer) provide synergies through elimination of costs related to negotiation
Vertical Mergers
between competitors) provide synergies through combination of facilities, outlets and elimination of unnecessary duplication of costs
Horizontal mergers
-Purchase company already successfully operating in a new market
-Particularly beneficial for international markets
Entry into new markets
-Decrease taxes by consolidating with less profitable company
-Some restrictions here though, Tax Reform Act of 1986 limits the use of NOLs in merged companies
Income Tax Benefits
can increase flexibility, protect proprietary information, spread our economic risk to different sectors, etc.
Diversification
can more easily sell off divisions that are not part of the core business
Divestitures
the boards of directors from the merging companies negotiate mutually agreeable terms
Friendly Combination
board of directors from the company targeted for acquisition resists the combination
Hostile (Unfriendly) Combination
bypasses the board of directors and solicits shareholders directly (e.g., published in newspaper)
Tender offer
-offer additional shares to current stockholders at discount
-Acquirer now has to purchase
more shares to gain control
-Acquirer now has to spend
more money to gain control
Poison Pill
target pays a premium to purchase its own stock back from acquirer (synonymous to paying a blackmailer)
-Once payment accepted acquirer
agrees not to purchase shares of
target for X years
- In the 1980s some companies
suspected of launching fake take
over campaigns just to get
greenmail profits
Green Mail
– encourage a different firm to acquire target first
White Knight or White Squire
the target attempts to take over the acquirer (i.e., the best defense is a good offense)
Pac-Man Defense
sell whatever assets the target has that the acquirer really wants
-Downside: target probably really
wanted that asset too and now
has to operate without it
Selling the crown jewels
managers and third-party investors purchase controlling interest and take firm private
- Typically incur substantial debt in
the process (hence, leveraged)
Leveraged Buyouts
Acquirer purchases 100% of the net assets of the target firm
Asset Acquisition
-Acquirer purchases only enough stock to gain control
-Typically lower cost than asset acquisition
-Can avoid direct negotiation with target management
-Can be advantageous to maintain target as separate legal entity
Stock Acquisition
Acquirer Gives Up: exchange of stock, cash, property, issuance of debt securities, or some combination of these
Acquirer Receives: Target’s assets and liabilities
Accounting: Target’s assets and liabilities transferred to Acquirer’s books
Acquirer + Target = Acquirer (One Set of Financial Statements)
Statutory Merger (Asset Acquisition)
