Week 7 - Mergers & acquisitions

Question 1

4 sensible motives for M&A

5 dubious motives for M&A

Answer 1

Sensible
1. SYNERGIES
2. discipline target management
3. market inefficiency
4. redistribution from other parties, eg. tax inversion

Dubious
1. size & prestige
2. diversification
3. EPS accretion
4. reduced borrowing costs
5. overconfidence

Question 2

2 reasons why TARGETS get the MOST BENEFIT in an acquisition

Answer 2

1. competition in an AUCTION scenario
2. acquirers undertaking BAD MERGERS, eg. for empire building, hubris

Question 3

In an M&A, why do we always prefer cash deals over selling shares? (all-cash deals get higher mean returns)

Answer 3

Due to the ADDITIONAL RISK, on top of risk of standalone firm, of not knowing whether or not the MERGER was done for good reasons