Week 9: Mergers and Acquisitions

Question 1

What is a merger?

Answer 1

A transaction that combines two firms into one new firm. Both companies stocks are surrendered and a new stock is issued.

Question 2

What is an acquisition?

Answer 2

When firm firm purchases another. The buyers stock continues to be traded.

Question 3

What is the buyer and the seller refered to as?

Answer 3

Buyer: Acquirer
Seller: Target

Question 4

Characteristics of mergers and acqusitions?

Answer 4

Merges come in waves, positively related to share price indices. Acqusitions are initiated by higher performing firms

Question 5

Types of M&A

Answer 5

1) Horizontal/ strategic merger- When the target and acquirer are in the same industry.
2) Vertical merger - Two firms within the same industry supply chain merge. E.g. a pub and a brewrey.
3) Conglomerate/ diversifying merger- Involves companies in unrelated lines of business.

Question 6

What are the advantages and disadvantages horizontal/strategic merger?

Answer 6

ADV:
- Synergises operations. One factory instead of 2.

DIS:
- Makes acquirer undiversified
Many cause monopoly problems for the industry
- Integrarting challanges may reduce efficiency

Question 7

Pros and Cons of vertical merger:

Answer 7

PROS:
- Increase efficency/ save costs
- Greater control of the supply chain

CONS:
- can create anti-competitivness

Question 8

Pros and cons of conglomerate?

Answer 8

PROS:
Diversifying investment risk

CONS:
Difficult to manage

Question 9

What drives firms to merge?

Answer 9

1) Economic perspective- Monopoly power, Economies of scale, transaction costs in markets.

2) Strategic perspective- Complemantary resources, surplus funds

3) Managerial perspective- Conflict of interest, overconfident manager.

Question 10

Explain market power

Answer 10

If firm A and B join together, consumers will be forced to buy from them even if they increase their price.

Question 11

What is a killer acquisition?

Answer 11

When a firm buys another with the sole purpose of discontinuing it to reduce competition.

Question 12

Why is overconfidence bad?

Answer 12

It can lead to bad deals.

Question 13

Explain the cadbury’s case

Answer 13

Kraft food bought cadburys. They agreed to increase share price and dividends. However it led to one of their factories closing down and loss of 400 jobs.
Therefore, shareholders benefited financially, but other stakeholders like employees have been harmed through loss of jobs.

Question 14

What are some of the remedies for the losers of M&A?

Answer 14

2011 changes to takeover code:
- Bidders need to state their intentions after the takeover.
- Staff representitives can give views on takeover.

Question 15

What are deliberate: paid for deals?

Answer 15

When the CEO gets paid to complete a M&A transaction. These may be done quickly, but poorly planned leading to failure.

Question 16

Explain the sainsbury’s- Asda meger

Answer 16

This merger was blocked by competition watchdog as it will disadvantage many shoppers. This is because this will reduce competition, allowing them to increase prices as customers will have no choice but to buy it.

Question 17

How can suppliers will or lose?

Answer 17

Win: If the business becomes more efficient, they will need more products. Growing the pie.

Loose: They will have higher barganing power, thus demand lower prices.

Question 18

What is a national interest test?

Answer 18

this is process used to ensure that mergers decisions align with a country’s broader national goals. This is important to ensure social cohesion, national security, economic stability and growth.

Question 19

What are the critiques of National Security Intrest bill?

Answer 19

• It gives governments very broad powers to review and potentially cancel business deals.