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Question 1

What is a takeover

Answer 1

Transfer of control of a firm from one group of shareholders to another

Question 2

Who is the bidder

Answer 2

Firm that has decided to take over another firm and the other firm is the target

Question 3

What are mergers

Answer 3

Absorption of one firm by another

Acquiring firm retains name and identity and acquires all assets and liabilities of acquired firm

Acquired firm ceases to exist after merger

Question 4

What is consolidation

Answer 4

New firm is created

Acquiring and acquired firm cease to exist and become part of new firm

Question 5

What is acquisition of shares

Answer 5

Acquiring purchases target firms voting shares in exchange for cash, equity or other securities

A tender offer is a public offer to buy shares of target firm

Question 6

What is acquisition of assets

Answer 6

Acquirer buys all of firms assets

A pre-pack is where a firm sells all of its assets including employees to another firm and declares bankruptcy

Question 7

What is horizontal acquisition

Answer 7

Acquirer and acquired are in same industry

Question 8

What is vertical acquisition

Answer 8

Acquirer and acquired are at different stages of production process in same industry

Question 9

What is conglomerate acquisition

Answer 9

Acquirer and acquired have no link

Question 10

What is synergy

Answer 10

2 companies together are better than 2 separate companies

Question 11

What are the sources of synergy

Answer 11

Revenue enhancement

Cost reduction

Tax gains

Question 12

What is revenue enhancement

Answer 12

Marketing gains

Strategic benefits

Market or monopoly power

Question 13

What is cost reduction

Answer 13

Economies of scale

Economies of vertical integration

Technology transfer

Complementary resources

Elimination of inefficient management

Reduced capital requirements

Question 14

What are tax gains

Answer 14

Use of tax losses

Use of unused debt capacity

Use of surplus funds

Asset write ups 

Question 15

How do you make a valuation of mergers

Answer 15

Value target as a stand alone firm

Calibrate valuation

Value synergies

Value merger 

Question 16

What is a friendly takeover

Answer 16

Acquirer decides on a target

Selects tactic to carry out acquisition

Decides on highest price it’s willing to pay

Set an initial bid price and makes contact with target firm

Many meetings and negotiations occur

Targets board approves acquisition

Finally an affirmative vote by targets shareholders is needed

Question 17

What is a hostile takeover

Answer 17

Hostile – targets management resists

Toehold – start to purchase targets equity in secret followed by tender offer. When tender offer ends, bidder sees whether has got enough shares to have control

Street sweep – buy shares on open market until has enough control

Proxy fight – attempt to gain control of firm by soliciting sufficient number of shareholder votes to replace existing management

Question 18

What are defensive tactics before a takeover

Answer 18

Corporate charters

Golden parachutes

Poison pills

Question 19

What are defensive tactics during a takeover

Answer 19

Greenmail and standstill agreements

Recapitalisations and re-purchases

Going private and leverage buyout

Asset restructurings

Question 20

What happens to managers of bidding firms

Answer 20

Managers receive bonuses when acquiring firms

Their pay and prestige are often related to size of firm. Managers are disposed to look favourable on size increases acquisitions, even ones with negative NPV

Question 21

What happens to managers of target firms

Answer 21

Employ defensive tactics even if takeover is beneficial to shareholders in order to safeguard their jobs

Managers that cannot avoid a takeover may bargain with bidder taking a good deal for themselves at expense of their shareholders

Question 22

What are the accounting and tax considerations for mergers and acquisitions

Answer 22

Accounting treatment of mergers and acquisitions should recognise fair value of all assets and liabilities on acquisition date. IFRS 3 states that it should be presented in such a way as to allow shareholders to understand true value of mergers and acquisitions

Identify acquirer

Determine acquisition date

Recognise and measure identifiable assets that have been acquired, liabilities assumed, and any non controlling interest in acquiree

Recognise and measure Goodwill or gain from bargain purchase as of acquisition date


Question 23

When does a publicly traded firm go private

Answer 23

When a private group usually composed of existing management purchases its equity

Question 24

In leveraged buyouts, what is the cash of the price normally financed with

Answer 24

Large amounts of debt

Question 25

What creates value in a leveraged buyout

Answer 25

Extra debt provides tax deduction which creates value. LBO may simply increase debt level to its optimum.

Increased efficiency as they own firm so interested to work harder and because interest payments need to be made they have to increase efficiency

Studies have shown that LBOs on average have created value – premiums are positive, LBOs that go public generate higher return for management group, operating performance increases after LBO

Question 26

What are types of divestitures

Answer 26

Sale – a division, business unit, segment, or set of assets are sold to another company. Reasons – defend against hostile takeovers, provides cash to poor liquidity firms, selloffs streamline a firm making it easier to value, firms may simply want to sell unprofitable divisions

Spinoffs – a parent firm turns a division into a separate entity and distributes shares in this entity to parents shareholders (no cash is received). Reasons – publicly traded division increases transparency in market making it easier to value company and spin off, equity acts as an incentive for managers to work harder, tax consequences of a spin off are generally better than from a sale because parent receives no cash from spinoff

Carve out – same as spinoff but shares in this entity are sold to public via an IPO

Split up – splitting of company into 2 or more companies