4) WHY FIRMS ENGAGE IN M&A

Question 1

economic motivations for M&A

Answer 1

concerned with how the deal will achieve/improve the firm’s competitive advantage.

Question 2

strategic motivations for M&A

Answer 2

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.

Question 3

for the resources and capabilities that are finite or can’t be easily replicated like ……
what does the strategic perspective consider?

Answer 3

• 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.

Question 4

economic reasons for improving firm’s competitive advantage through M&A

Answer 4

eg, economies of scale, economics of

scope, network economies, learning economies, cost economies, efficiency gains etc.

Question 5

Finance Theory motivations for M&A (Agency, managerial incentives, monitoring and disciplining mechanisms )

Answer 5

Finance theory applied to M&A is concerned with firm fundamentals, agency issues and investment efficiency.

Question 6

what does finance theory look at

Answer 6

over/undervaluation of assets, how signals to the market are managed, the trade off between specialisation and diversification, etc.

Question 7

Behavioural motivations for M&A

Answer 7

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.

Question 8

what does the behavioural theory consider?

Answer 8

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.

Question 9

winner’s curse

Answer 9

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

Question 10

if there is a large shareholder (>10%) blocking the transaction what risk does this pose?

Answer 10

the bidder would not

be able to gain full control of the target as they would be blocked from reaching the compulsory acquisition threshold

Question 11

way to overcome large shareholder (>10%) blocking the transaction

Answer 11

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.

Question 12

if competition regulation body has ‘serious concerns’ over level of market power the potential acquirer already holds what risk does this pose?

Answer 12

unlikely for a horizontal merger to be permitted.

Question 13

if competition regulation body has ‘serious concerns’ over level of market power the potential acquirer already holds - what opportunity is there?

Answer 13

alternative inorganic growth options, or ways of restructuring their
business that would alleviate competition issues and permit further acquisitions

Question 14

What restructuring process for a single business department underperforming the rest of the organisation?

Answer 14

divestment
Company should consider whether it wants
to maintain control of the business and/or raise cash through the divestment.

Question 15

What restructuring process for company wishing to raise cash and has a portfolio of non-core assets? .

Answer 15

The non-core assets may be sold to third parties

Question 16

What restructuring process for business operating in two clearly defined business areas with different
growth strategies over the next 24 months?

Answer 16

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.

Question 17

what risks are likely to affect the probability of the deal success during deal negotiation?

Answer 17

• 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).

Question 18

what risks are likely to affect the probability of the deal success during deal integration?

Answer 18

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.

Question 19

for the HHI, the higher the value, the more

Answer 19

concentrated (less competitive) the industry is

Question 20

for the HHI, the lower the value, the lower

Answer 20

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)

Question 21

4 key motivations for inorganic growth

Answer 21

1) Maturing product line
2) Regulatory limits
3) Value creation
4) Acquisition of resources and capabilities

Question 22

Additional motivations for inorganic growth

Answer 22

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

Question 23

behavioural theory: rational managers are motivated by XXXX in rational markets

Answer 23

1) competitive advantage
2) rational response to shocks
3) exploit profitable opportunities
4) market for corporate control disciplines poor managers

Question 24

behavioural theory: rational managers in irrational markets

Answer 24

want to exploit overvalued share price/info asymmetry in all share deals

Question 25

behavioural theory: irrational managers in rational markets

Answer 25

show hubris and bad deals punished via falling share price

Question 26

behavioural theory: irrational managers in irrational markets

Answer 26

managers and markets display deal frenzy, FOMO deal competition, poor value deals receive shareholder support

Question 27

implications of game theory for M&A

Answer 27

o First movers may have an advantage generally
o If the first mover makes a large acquisition (signals commitment), competitors may be deterred
o It depends on the availability of similar acquisitions to pursue which would negate the first mover’s gain

This results in an equilibrium where M&A leads to a concentrated market

Question 28

for game theory, in reality, M&A decisions occur sequentially so must think about things

Answer 28

(more than one transaction, many possible targets, may revise bid) – must think about things more dynamically

Question 29

Porter’s 3 generic competitive strategies

Answer 29

1) cost leadership
2) product differentiation
3) niche plays

Question 30

1) cost leadership

Answer 30

efficient use of resources and capabilities along firm’s value chain.

choose market segment in which to compete, then compete based on cost

Question 31

2) product differentiation

Answer 31

attributes of the product induce customers to pay a premium

choose market segment in which to compete, compete based on productt

Question 32

3) niche plays

Answer 32

target a specific market segment

the segment has limited competition

Question 33

agency model and MandA

Answer 33

if manager owned 100% of firm, the max their own utility at point where 
marginal utility (firm costs) = marginal utility (prerequisite)

Question 34

marginal utility (firm costs) = marginal utility (prerequisite)

what does this mean?

Answer 34

means any excess prerequisite spending is a tradeoff from the value of the firm

– However, if the manager owns <100% of the firm, they bear only a fraction of the expense of the perquisite spending while continuing to receive all the benefit
o In this case, perquisite spending is higher
o Prospective minority shareholders realise this, and value shares lower