8.1 Mergers and Aquisitions Flashcards
What is a Merger
A acquisition where 1st absorbs 2nd and 1st remains
- Acquiring remains as a combination
- Approval of both shareholders generally required
What is a Consolidation
Similar to Merger. But a new entity is formed (old die)
3 Types of Mergers
- Horizontal: Two companies in same line of biz
- Vertical: combine with a company’s suppliers or customers
- Conglomerate: Two companies with unrelated business industries
Characteristics of Mergers
- Payment is most frequently in stock
- The bidder is often a cash-rich firm in a mature industry and is seeking growth possibilities
- The acquired firm is usually growing and in need of cash
Acquisition is achieved by>
- Purchasing all assets of target
a. requires approval by 2nd shareholders
b. Pro: avoids minority interest that may arise on stock purachse
c. Con: costly legal transfer - Acquiring CONTROL (50%+ VOTING interest in 2nd)
The ability to directly or indirectly control mgt
a. Pro: can be effected if mgt of 2nd is hostile. Does not require a shareholder vote (just acquire stock)
Tender Offer
Characteristics
Hostile
Friendly
If trying to acquire target by stock acquisition, offer a fixed price directly to shareholders (at premium)
a. Friendly: Cash or Stock offer and Management has high percent of ownership.
- Company is successful, high growth
b. Hostile: Mature, underperforming comp. Mgt has low ownership.
- Pmt in Cash
- Acquirer is a corporate raider
M & A Motivations/Disinclination
Management Pro: increased salary, fringe benefits, power, and prestige
Management Con:Fear of negative personal consequences, i.e., being fired or replaced
Benefits of Mergers and Acquisitions
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- Diversification stabilizes earnings and reduces the risks to employees and creditors
- may provide specific new investment opportunities and future opportunities
- Greater market power because of reduced competition
- firm may be a target if its breakup value exceeds the cost of its acquisition
- Synergy-combined firm exceeds the sum of the values of the separate firms (See Synergy Card)
- Inefficient management may be replaced
- optimal capital structure may allow for increased use of debt financing (Tax deduction savings)
Synergy from Merger
- new product line and a stronger distribution system
- economies of scale.cost of production falls as a result of production level increases
- Financial synergy may reduce the cost of capital for both firms. cost of issuing both debt and equity securities is lower for larger firms
- Synergy of a business combination can be determined by using the risk adjusted discount rate to discount the incremental cash flows
Greenmail
defensive tactic .
after a bidder buys a large block or Makes Tender offer>
potential acquirer is offered the opportunity to sell his or her already acquired shares back at premium
Standstill agreement: bidder agrees not to acquire additional shares
Staggered Election of Directors
Defensive Tactic
require new shareholders to wait several years before being able to place their own people on the board.
Also. in Charter: may require a supermajority (e.g., 80%) for approval of a combination.
Golden Parachutes
Defensive Tactic
Requires large payments to specified executives if the executives are fired.
Fair Price Provisions
Defensive Tactic
Warrants are issued to shareholders that permit purchase of stock at a small percentage (often half) of market price in the event of a takeover attempt.
objective is not to deter takeovers but to ensure that all shareholders are treated equally
In the event of a friendly tender offer, the outstanding stock rights (warrants) may be repurchased by the corporation for a few cents per share, thus paving the way for the takeover
Voting-Rights Plans
Defensive Tactic
prevent shareholders who hold a certain ownership percentage from voting on takeover issues.
Leveraged Recapitalization
Defensive Tactic
0r RESTRUCTURING: occurs when a company obtains a substantial amount of new debt and uses the funds to pay a cash dividend.
results in a significant decrease in equity relative to debt,discourage a potential acquirer
Leveraged Buyouts (LBOs) and Going Private
Defensive Tactic
company is purchased using very little equity
a. company’s assets serve as collateral for a loan to finance the purchase.
high degree of risk in leveraged buyouts results from the fixed charges for interest on the loan and the lack of cash for expansion.
Poison Pill
Defensive Tactic
charter, bylaws, or contracts contain a wide variety of provisions that reduce the value of the target to potential tender offerors.
a. Flip-over rights. provide for its shareholders to acquire in exchange for their stock (in the target) a relatively greater interest (e.g., twice the shares of stock of equivalent value) in an acquiring entity.
b. Flip-in rights. Acquisition of more than a specified ownership interest (e.g., 25%) in the target corporation permits shareholders, except for the acquirer, to purchase additional shares at a reduced price.
Issuing Stock
Defensive Tactic
Defensive Tactic
target corporation significantly increases the amount of outstanding stock.
Reverse Tender
Defensive Tactic
target corporation may respond with a tender offer to acquire control of the tender offeror.
Employee Stock Ownership Plan (ESOP)
Defensive Tactic
trustees of an employee stock ownership plan are usually favorable to CURRENT management
likely to vote the shares allocated to the ESOP against a raider
White Knight
Defensive Tactic
Target management arranges an alternative tender offer with a different acquirer
Crown Jewel Transfer
Defensive Tactic
target corporation sells or otherwise disposes of one or more assets that made it a desirable target.
Legal Action
Defensive Tactic
target corporation may challenge one or more aspects of a tender offer. A resulting delay increases costs to the raider
List of Defensive Tactics against M&A
- Greenmail
- Staggered Election of Directors
- Golden Parachutes
- Fair Price Provisions
- Voting-Rights Plans
- Leveraged Recapitalization
- Leveraged Buyouts (LBOs) and Going Private
- Poison Pill
- Issuing Stock
- Reverse Tender
- Employee Stock Ownership Plan (ESOP)
- White Night
- Crown Jewel Transfer
- Legal Action
Divestiture Options
- involves the sale of an operating unit of a firm to a third party.
SPIN OFF
creation of a new separate entity. new entity’s shares distributed on a pro rata basis to existing shareholders of the parent. A type of DIVIDEND
Reasons for spin-offs and divestitures:
- governmental antitrust litigation
- refocusing of a firm’s operations
- raising capital
Divestiture Options
- involves the sale of an operating unit of a firm to a third party.
Equity Carve-Out
sale of a portion of the firm through a public offering
-way to quickly raise capital and bring in new management while still maintaining control.
Divestiture Options
- involves the sale of an operating unit of a firm to a third party.
Split-Up
entity splits into two or more entities
Shares in the original entity are exchanged for shares in the new entities
Divestiture Options
- involves the sale of an operating unit of a firm to a third party.
Tracking stock
Stock issued in a division or segment of a parent
they have no claims on the assets of the division or segment
Proxy Fight
attempt by dissident shareholders to control, or at least influence, the corporation by electing directors
proxy is a power of attorney authorizing a specified person to vote corporate stock.
Direct Foreign Investment Benefits
V buying Stock
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Trade Restrictions- Avoided
Taxes-Lower
Foreign Capital- Access
Depeciation
