4) WHY FIRMS ENGAGE IN M&A Flashcards
economic motivations for M&A
concerned with how the deal will achieve/improve the firm’s competitive advantage.
strategic motivations for M&A
how the deal will achieve/improve the firm’s
capabilities advantage.
Specifically, the acquisition of resources and capabilities that create value when integrated with the acquirer’s existing R&C.
for the resources and capabilities that are finite or can’t be easily replicated like ……
what does the strategic perspective consider?
- In the case of R&C that are finite or can’t be readily replicated (eg, land, patents, customer base, exclusive contracts),
- Considers how certain acquisitions may block competitors.
economic reasons for improving firm’s competitive advantage through M&A
eg, economies of scale, economics of
scope, network economies, learning economies, cost economies, efficiency gains etc.
Finance Theory motivations for M&A (Agency, managerial incentives, monitoring and disciplining mechanisms )
Finance theory applied to M&A is concerned with firm fundamentals, agency issues and investment efficiency.
what does finance theory look at
over/undervaluation of assets, how signals to the market are managed, the trade off between specialisation and diversification, etc.
Behavioural motivations for M&A
behavioural theory applied to M&A is concerned with decision-making processes of key players in a transaction and, in particular, how their decision may differ from perfect rationality.
what does the behavioural theory consider?
influence of hubris, overconfidence, status,
pride, emotion, loss aversion and regret. This theory can provide an explanation for the occurrence of the winner’s curse in acquisitions.
winner’s curse
tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item. … As a result, the largest overestimation of an item’s value ends up winning the auction
if there is a large shareholder (>10%) blocking the transaction what risk does this pose?
the bidder would not
be able to gain full control of the target as they would be blocked from reaching the compulsory acquisition threshold
way to overcome large shareholder (>10%) blocking the transaction
bidder may need to look at whether a scheme of arrangement is possible if they wish to make an acquisition, noting that this approach would require the cooperation of the target.
Alternatively, consider inorganic growth methods such as a strategic alliance and whether this would deliver the same strategic benefits.
if competition regulation body has ‘serious concerns’ over level of market power the potential acquirer already holds what risk does this pose?
unlikely for a horizontal merger to be permitted.
if competition regulation body has ‘serious concerns’ over level of market power the potential acquirer already holds - what opportunity is there?
alternative inorganic growth options, or ways of restructuring their
business that would alleviate competition issues and permit further acquisitions
What restructuring process for a single business department underperforming the rest of the organisation?
divestment
Company should consider whether it wants
to maintain control of the business and/or raise cash through the divestment.
What restructuring process for company wishing to raise cash and has a portfolio of non-core assets? .
The non-core assets may be sold to third parties
What restructuring process for business operating in two clearly defined business areas with different
growth strategies over the next 24 months?
Consider whether it wishes to raise cash and/or maintain control of these
businesses.
Typically, given the information in the question an optimal strategy would be a carve out or demerger of the separate business areas.
what risks are likely to affect the probability of the deal success during deal negotiation?
- Shareholder approval (scheme of arrangement thresholds)
- Regulatory approval (ACCC)
- Deal financing arrangements secured
- Don’t need to worry too much about individual large shareholders, even target
founder (though of course securing their support goes along way towards achieving the necessary shareholder support required for the deal).
what risks are likely to affect the probability of the deal success during deal integration?
once deal successfully closed, deal success hinges on unlocking synergistic value of the merger – that is, deal integration.
Issue is to consider is how companies operations are affected by the series of prior acquisitions and how
well-positioned they are to allocate resources to ensure a timely and optimal
integration of the businesses.
for the HHI, the higher the value, the more
concentrated (less competitive) the industry is
for the HHI, the lower the value, the lower
the less concentrated it is
(if close to 0 no one has a big market share, everything is very fragmented and tends towards almost perfect competition)
4 key motivations for inorganic growth
1) Maturing product line
2) Regulatory limits
3) Value creation
4) Acquisition of resources and capabilities
Additional motivations for inorganic growth
o Managerial hubris – they think they can do a good job but can’t but still enter o Market manias o Agency costs o Industry shocks o Acquirer overvaluation
behavioural theory: rational managers are motivated by XXXX in rational markets
1) competitive advantage
2) rational response to shocks
3) exploit profitable opportunities
4) market for corporate control disciplines poor managers
behavioural theory: rational managers in irrational markets
want to exploit overvalued share price/info asymmetry in all share deals
