8.1 Mergers and Acquisitions (M&As) Flashcards
Which of the following is a defensive tactic against a hostile takeover by tender offer?
A. Leveraged buyout (LBO).
B. Saturday night special.
C. Conglomerate merger.
D. Acquisition.
A. Leveraged buyout (LBO).
A leveraged buyout (LBO) entails the company going private. A small group of investors, usually including senior management, purchases the publicly owned stock. The stock is then delisted because it will no longer be traded. Thus, a LBO competes with a hostile tender offer as an alternative.
Which type of acquisition does not require shareholders to have a formal vote to approve?
A. Merger.
B. Acquisition of all of the firm’s assets.
C. Consolidation.
D. Acquisition of stock.
D. Acquisition of stock.
Purchasing the stock of another company is advantageous when management and the board of directors of the purchased company are hostile to the combination because the acquisition does not require a formal vote by the shareholders. Thus, the management and the board of directors cannot influence shareholders. Also, after the acquisition, both companies continue to operate separately.
A horizontal merger is a merger between
A. A producer and its supplier.
B. Two or more firms in the same market.
C. Two or more firms at different stages of the production process.
D. Two or more firms from different and unrelated markets
B. Two or more firms in the same market.
A horizontal merger is one between competitors in the same market. From the viewpoint of the Justice Department, it is the most closely scrutinized type of merger because it has the greatest tendency to reduce competition.
The acquisition of a retail shoe store by a shoe manufacturer is an example of
A. Vertical integration.
B. Market extension.
C. A conglomerate.
D. Horizontal integration.
A. Vertical integration.
The acquisition of a shoe retailer by a shoe manufacturer is an example of vertical integration. Vertical integration is typified by a merger or acquisition involving companies that are in the same industry but at different levels in the supply chain. In other words, one of the companies supplies inputs for the other.
The synergy of a business combination can be determined by
A. Using the risk adjusted discount rate to discount the change in revenues of the newly-formed entity.
B. Calculating the change in revenue minus the change in cost.
C. Calculating the change in revenue minus the change in taxes.
D. Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity
D. Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity.
Synergy equals the value of the combined firm minus the sum of the values of the separate firms. These values can be calculated using the capital budgeting technique of discounted cash flow analysis. The difference between the cash flows of the combined firm and the sum of the cash flows of the separate firms is discounted at the appropriate rate, usually the cost of equity of the acquired firm. The components of the incremental cash flows are the incremental revenues, costs, taxes, and capital needs.
Firm A is considering acquiring Firm B for $2,000,000. Firm A has a value of $4,000,000 and Firm B has a value of $1,000,000 prior to the merger. The merged firm will have a combined value of $7,000,000. The synergy of the merger is
A. $(1,000,000)
B. $(2,000,000)
C. $2,000,000
D. $1,000,000
C. $2,000,000
Synergy exist when the value of the combined firm exceeds the sum of the values of the separate firms. Thus, adding $4,000,000 of Firm A to the $1,000,000 of Firm B produces an initial value of $5,000,000. Afterward, the combined firm is worth $7,000,000. Thus, there has been synergy of $2,000,000.
