Topic 12 Mergers

Question 1

3 types of acquisitions

Answer 1

Conglomerate mergers - companies in unrelated businesses
horizontal merger - two firms in the same industry
vertical merger - companies in different stages of production

Question 2

2 bad reasons to merge

Answer 2

1) increasing EPS
-increased EPS does not mean increased economic value
2) Managerial Motives
-Conflict of interest due to empire-building
-Overconfidence in running a merged firm and reducing costs

Question 3

Stock Merger

Answer 3

Before merger announcement
Cost= NPriceA -PV(B)
After merger announcement
Cost = N PriceAB - PV(B)

Question 4

Tax Considerations of a Merger

Answer 4

Tax-free merger - Target firm shareholders exchange shares and therefore the stock merger is basically tax-free

Taxable merger- target firm shareholders are de-facto selling shares and therefore taxed, cash mergers are taxable, and assets of new firm might be taxed for capital gains

Question 5

2 types of hostile takeover

Answer 5

1) Proxy fight - a proxy is a right to vote on behalf of another shareholder
-> Dissident shareholders attempt to obtain enough proxies to vote out the Board
*difficult and expensive

2) Tender Offer
-Make an offer to buy shareholders
-> The Williams Act requires firms that own 5% or more shares of another company to report to SEC

Question 6

Antitakeover Amendments to Corporate Charter

Answer 6

1) Staggered Board - the board is separated into groups and only one group can be elected each year
2) Supermajority - High percentage of shares necessary to approve a merger
3) Restricted voting rights - shareholders who acquire more than a specified number of shares have no voting rights
4) waiting period - waiting period for acquisitions
5) Poison pill - existing shareholders may be able to acquire more shares at a bargain price if the bidder acquires a certain amount
6) Poison Put - existing bondholders can demand repayment if there is a change in control due to a hostile takeover