23 Mergers and Acquisitions Flashcards
Should companies or shareholders diversify
- Why should companies diversify, shouldn’t it be the shareholders job to do this
- It is far easier and more cost efficient to do on the stock market and allow the companies to focus on maximising returns
What is a merger
The term merger is often used to describe the coming together of two companies of roughly equal size in agreement with the management and shareholders of the two groups
What is a takeover
Takeover is where one company acquires control of another company, usually smaller. Once the takeover occurs the shareholders of the target company come under entirely new ownership
What are the three types of merger
- Horizontal
- Vertical
- Conglomerate
What are horizontal mergers
- Where a merger is between two firms in the same line of business.
- Firms producing similar or competitive products in the same kind of market
- Credit Suisse and UBS
- Reduction in competition and increased market power
o Greater economies of scale
What are vertical mergers
- Are those between firms in different stages of production and marketing process for some product.
- An example of such a merger would be a supermarket chain acquiring a food processing product.
- It may be more profitable to organise different stages in the production process within one organisation rather than relying on contractual arrangements
What are conglomerate mergers
- Involves companies in unrelated line of business.
- Majority of mergers are conglomerate.
- They are undertaken to obtain the perceived advantage of diversification and associated reduction of risk.
o Tries to get rid of the unsystematic risk from industry
Should companies diversify
- Shareholders should be the ones to diversity
- As managers should just be looking to maximise returns for the shareholders and not themselves
- Suggests that management should not be diversifying through conglomerate mergers
What are the 11 main reasons for mergers
- Risk Diversification
- Increase Economic Efficiency
- Management Acquisition
- Lower Financing Costs
- Competitive Considerations
- As Use of Surplus Funds
- Economies of Scale
- Economies of Scope
- Market Power
- Synergy
- Survival
Why would companies merge for risk diversification
One of the primary reasons for conglomerate mergers is that the overall income stream of the holding company will be less volatile if the cash flows come from a wide variety of products
Why would companies merge for an increase in economic efficiency
- Many small firms are acquired by large firms to improve economic efficiency.
- Small firm may have a unique product, which may provide the missing ingredient for the greater success of the larger company
Why would companies merge for management acquisition
- A company may recognise that it does not have, nor is likely to have, in the near future a management team of sufficient quality to ensure continued growth.
- It may seek amalgamation with another company having competent management
Why would companies merge to lower finance costs
- Merged firms are able to borrow more cheaply than separate units.
- When two firms are separate they can not guarantee each other’s debt
Why would companies merge for competitive considerations
- A firm may wish to undertake a merger in order to prevent this from being done by a rival.
- Regardless of any other benefit, it maybe justifiable if it prevents competitors from gaining a dominant position
Why would companies merge as the use of surplus funds
- A firm may be generating considerable amounts of cash but has few profitable investment opportunities.
- Could distribute as increasing dividend payment.
- Management may turn to mergers as a way of redeploying their cash
