`#1 - Chapter 1 Flashcards
Introduction
Whats a merger
A new company formed
A+B=C
Whats an acquisition
Assets of target fall under corporate umbrella of bidder.
A+B=A
How do you determine bidders and targets when unclear ?
The bidder is the firm with the higher market capitalization
How do you find the market cap of a firm
MarketCapitalization=SharePrice×TotalOutstandingShares
What are mergers of equals
Two companies of equal size with equal power in new conglomeration
What usually happens with mergers of equals
Usually one company end up being the dominant one, mergers of equals dont really exist
What’s a premium
Define an earn-out
Payment to the target contingent of future target performance
Whats a holdback provision
Payement to the target withheld for potential litigation or other adverse events
What are the two types of mergers
Horizontal and Vertical
Explain the rationale behind a horizontal merger
- Economies of scale and scope
- Synergies of combining best practices
T or F: Government regulations are low for horizontal mergers as they allow for more growth in their companies
False: Government regulations are high due to potential anticompetitive effects
Explain the rationale of veritcal mergers
Buyer-seller relationship
* Combination between firms at different stages
* Goal is information and transaction efficiency
What are the 5 elements that explain merger waves (Mitchel and Mulherin)
- Economic,Technological and regulatory shocks
- Sufficient Capital liquidity
- Misvaluation of firms (takover increase)
What is a tender offer
It is an offer made directly to shareholders
T/F: A tender offer is considered hostile, when it is made directly to the board, without approval of shareholders
False: a tender offer is hostile when the offer is made to shareholders without approval of the board
What are the different kind of tender offers and provisions
- Conditional VS Unconditional
- Restricted V.S Unrestricted
- “Any-or-all” tender offers
- Contested Offers
What is the difference between conditional and Unconditional tender offers
Conditional: will buy if a certain condition is met (e.g. a minimum number of shares is tendered)
Unconditional: will buy regardless of the total amnt of shares tendered
What is the difference between restricted and conditional tender offers
Restricted: only certain people can tender their shares, whilst conditional, applies to a number of shares/other condition.
What is a fairness opinion
Opinion issued by a firm on the value of the company being acquired
Often investement banks
A fair price is not the best price
What would happen, if no liability regulation were in place
- A firm would purchase a targets’ assets
- The target would then issue a liquidating dividend and dissolve the corporation
- Liabilites would not be satisffied
What is the successor liability
When all target shares are pruchased, liabilites are assumed as well
What is the trust fund doctrine
If a buyer pruchases a substantial portion of target assets, then the buyer is responsible for target liabilites.
Why would a firm go through target asset acquisition
Asset acquisition may provide an advantage to bidding firms of not requiring target shareholder approval
What is a holding company
Business entity that primarily exists to own and control shares in other companies rather than producing goods or services itself.
How does a holding company manage its subsidiaries to create a corporate structure.
Parent company owns sufficient stock in target to control target.
What percentage does a parent company need to control a target
Usually can be achieved for less than 51%, may be as low as 10%.
What are the advantages to Holding Companies
An alternative to 100% acquisitions:
* Lower cost (less shares bought)
* No control Premium
* Can get control without soliciting target shareholder approval
What are teh disadvantages of holding companies
- Triple taxation of dividends (if parent owns 80% or more, dividends are exempt from taxation)
- Easier to disasemble if Justice Department. Finds anti Trust/competitive problems
- Shareholder disagreements more likely
