Reading 29 - Mergers and Acquisitions Flashcards
(37 cards)
What are the 3 categories M&A can be categorized into?
- Statutory Merger - The target ceases to exist and all assets and liabilities transfer to the acquirer
- Subsidiary Merger - The target company becomes a subsidiary of the company
- Consolidations - Both companies cease to exist in their prior form and come together in a new company
What are the 3 types of mergers?
- Horizontal - firms in similar lines of business combine
- Vertical - combine firms either further up or further down the supply chain
- Conglomerate - combine firms in unrelated businesses
What are some common motivations behind M&A activity?
- Achieving synergies
- Growing more rapidly
- Increases market power
- Gaining access to unique capabilities
- Diversifying
- Gaining personal benefits for managers
- Taking advantage of tax benefits
- Unlocking hidden value for a struggling company
- Achieving international business goals
- Bootstrapping earnings
What are some of the factors driving international M&A ?
- Taking advantage of market inefficiencies
- Working around disadvantageous government policies
- Use technology in new market
- Product differentiation
- Provide support to existing multinational clients
Explain what bootstrapping of EPS is……
Is a way of packaging the combined earnings from two companies after a merger so that the merger generates an increase in the earnings per share of the acquirer, even when no real economic gains have been achieved
What are the stages in the industry life cycle?
- Pioneer/developement
- Rapid growth phase
- Mature growth phase
- Stabilization phase
- Decline Phase
What types of mergers occur during the Pioneer/Development phase?
Conglomorate and Horizontal
What types of mergers occur during the Rapid Growth phase?
Conglomerate and Horizontal
What types of mergers occur during the Mature growth phase?
Horizontal & Vertical
What types of mergers occur during the Stabilization phase?
Horizontal
What types of mergers occur during the Decline phase?
Horizontal
Vertical
Congolmerate
What are the two basic forms of acquisitions?
- Stock purchase
- Asset purchase
What are some important issues regarding all stock purchases?
- Shareholders must approve the transaction with a majority shareholder vote
- Shareholders will bear any tax consequences associated with the tranaction
- Purchases involve purchasing the entire company and not just a portion of it
What are some important issues relating to asset purchases?
- shareholder approval is generally not required
- there are no tax consequences for the shareholder
What are the 3 main factors that should be considered when an acquirer is negotiaing with a target over the method of payment?
- Distribution between risk and reward for the acquirer and target shareholders
- Relative valuations of companies involved
- Changes in capital structure
What is a bear hug?
A hostile merger offer
If the target’s company’s management does not support he deal, the acquirer submits a merger proposal directly to the target’s board of directors
What are some pre-offer takeover defense mechanisms?
- Poison Pill - gives current shareholders the right to purchase additional shares at extremely attractive prices
- Poison Put - gives bondholders the option to demand immediate repayment of their bonds if there is a hostile takeover
- Restrictive takeover laws
- Staggered board
- Restricted voting rights
- Supermajority voting provision for mergers
- Fair price amendment
- Golden parachutes
What are some post-offer takeover defense mechanisms?
- “Just say no defense”
- Litigation
- Greenmail - a payoff to the potential acquirer to go away
- Share repurchase
- Leveraged capitalization
- Crown jewel defense - target may decide to sell a subsidiary or major asset to a neutral third party
- Pac-man defense
- White knight defense
- White squire defense - a friendly 3rd party that buys a minority stake
How do you calculate the Herfindahl-Hirshman Index (HHI) ?
If post-merger the HHI is < 1,000 is an antitrust action likely?
No, this is not a concentrated industry
If post-merger the HHI is > 1,000 but < 1,800 is an antitrust action likely?
A antitrust challenge is possible because this is a moderately concentrated industry
If post-merger the HHI is > 1,800 is an antitrust action likely?
An antitrust challenge is virtually certain
What are the steps in comparable company analysis?
- Identify the set of comparable firms
- Calculate various relative value measures based on the current market prices of companies in the sample
- Calculate the descriptive statistics for the relative value metrics and apply those measures to the target firm
- Estimate the takeover premium
- Calculate the estimated takover price for the target as the sum of estimated stock value vased on comparables and the takeover premium
What are some of the advantages and disadvantages of using Discounted cash flow analysis to value a target company?
Adv:
- It is relatively easy to model
- Easy to customize
- estimate of value if based on forecasts of fundamental conditions
Dis:
- Difficult to apply when FCF is negative
- estimates of cash flows are highly subject to error
- discount rates change over time
