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Corporate Restructuring and Governance > 9. Takeovers, M&A's: Causes > Flashcards

9. Takeovers, M&A's: Causes Flashcards

1
Q

LOs of Takeovers and M&A’ Definition and Activity

A
  • Define some terms used
  • Show the significance of takeovers
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2
Q

Merger Definition

A
  • When two firms combine into one firm.
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3
Q

Acquisition Definition

A
  • When one firm buys another firm.
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4
Q

M&A Consideration

A
  • Often considered to be conducted on friendly terms between the Boards of the two firms (sometimes referred to as friendly takeover)
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5
Q

Takeover Definition

A
  • When one firm buys another firm, but without the agreement of the Board of the firm being bought (sometimes referred to as a hostile takeover)
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6
Q

Target Definition

A

The firm being bought

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7
Q

Acquirer Definition

A

The firm buying (‘the bidder’ pre-acquisition

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8
Q

M&A’s worldwide statistics

A

Steady increase since 1986 to 2022, number of transactions at 50,000 whilst reaching 4 trillion in 2022.

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9
Q

UK M&A’s United Kingdom

A
  • Steady increase since 1986, transactions cost 375billion in 2022 with close to 6,000 transactions.
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10
Q

Summary of definitions

A
  • Demonstrated the significance of M&A activity in the global and UK economy
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11
Q

Takeovers and the Market for Corporate Control

A
  • Weak corporate governance: Target
  • Natural Selection
  • Bargain buying
  • Weak corporate governance: acquirer
  • Managerial Objectives
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12
Q

LOs of Takeovers and the Market for Corporate Control

A
  • Use agency theory to explain why firms become takeover targets.
  • Use agency theory to explain why firms become acquirers
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13
Q

Takeovers and the Market for Corporate Control: Weak Corporate Governance for the Target Firm

A
  • Remedy in the target firm
  • PLCs are characterised by a separation of ownership and control.
  • Agency costs when managers do not use firms’ resources to pursue shareholders interests (profit-maximisation)
  • If internal control systems do not adequately reduce agency costs, the firm under-performs.
  • Takeovers are a remedy for the failure of internal control systems in target firms.
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14
Q

Takeovers and the Market for Corporate Control: Natural Selection

A
  • Managers might not maximise shareholder value: agency problems - weak corporate governance // failure to adapt to changing technology and market conditions // poor strategy
  • Mgmt teams compete for corporate resources in the market for corporate resources in the market for corporate control (Manne, 1965)
  • Only the better-performing firms/mgrs prosper
  • Threat of takeover reduces agency costs.
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15
Q

Takeovers and the Market for Corporate Control: Natural Selection and Stock Market Efficiency

A
  • Natural selection hypothesis rests that stock markets correctly value firms.
  • Stock markets randomly err, nominating targets and acquirers (Scherer, 1988); under valued firm could become a target, over-valued firm could become an acquirer
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16
Q

Takeovers and the Market for Corporate Control: NS and StockMarket Efficiency (Inefficient Market)

A
  • If financial markets are inefficient and managers are rational, managers could take advantage with their merger decisions.
  • Overvalued acquirers could use shares to pay for an acquisition
  • Undervalued targets bought using cash.
  • Shiefer and Vishny 2003
17
Q

Takeovers and the Market for Corporate Control: Weak Corporate Governance for the Acquirer

A
  • Failure in the acquiring firm.
  • PLCs are characterised by a separation of ownership and control.
  • Suppose manager derives utility from managing a larger firm or a firm with greater scope.
  • Takeover is quick way to pursue objective of firm size and scope.
  • Unprofitable takeovers occur due to the failure of internal control systems in acquiring firms.
  • Value-destroying takeover is an agency cost.
18
Q

Takeovers and the Market for Corporate Control: Managerial Objectives (Size)

A
  • Prestige, status, and pay linked to managing larger firms.
19
Q

Takeovers and the Market for Corporate Control: Managerial Objectives (Scope)

A
  • Diversify firm’s sources of revenue to reduce the risk of firm failure.
  • Risk averse managers with human capital and equity tied to the firm want to reduce risk exposure.
  • Benefits managers more than shareholders, shareholders can already diversify risk.
20
Q

Takeovers and the Market for Corporate Control: Summary

A
  • Agency theory able to explain why under-performing firms with weak corporate governance become takeover targets.
  • Agency theory able to explain why firms with weak corporate governance can be come acquirers - can lead to over-diversification and under-performance.
21
Q

Business and Strategic Motives

A
  • Economies of Scale and Scope
  • Synergies: Asset Complimentarity
  • Market Power
  • Reducing TC’s
22
Q

Business and Strategic Motives: LOs

A
  • Explain business and strategic motives for M&A’s
23
Q

Business and Strategic Motives: Exploiting Economies of Scale

A
  • Achieved if firm achieves lower unit costs when output is increased.
  • Spread fixed costs over a higher level of output
  • British Airways and Iberia - consolidate operational costs
24
Q

Business and Strategic Motives: Economies of Scope

A
  • Achieved if firm achieves lower unit costs when increasing product range.
  • Spread costs by exploiting common technologies, assets, distribution channels
  • Pharma firms spread fixed costs of R&D by increasing product range.
25
Q

Business and Strategic Motives: Synergies - Asset Complimentarity

A
  • Firms are bundles of resources/assets
  • Assets are complementary if they are able to create greater value than when used separately.
  • Synergies describe value created from assert complementarity.
  • M&A is motivation for exploiting synergies - strategic fit between two firms.
  • Walgreens and Boots Alliance complementary geographic footprint, Pixar’s computer animation know-how and Disney distribution network.
26
Q

Business and Strategic Motives: Market Power

A
  • Increases prices to buyers and decrease purchase prices from sellers // Bakkavor acquired firms to give better negotiating power with supermarkets.
27
Q

Business and Strategic Motives: Market Power (What could happen bad)?

A
  • Increase in market power can result in intervention from competition authorities.
  • CMA blocked proposed Asda-Sainsbury merger
28
Q

Business and Strategic Motives: Reducing Transaction Costs

A
  • Transaction Costs cost of using the market mechanism.
  • Incomplete contracts contribute to the hold-up problem when investments are transaction-specific.
  • Investments not made if there is a hold up problem.
  • Vertical integration via M&A used to resolve hold-up problem, so investments are made.
29
Q

Business and Strategic Motives: Summary of Findings

A
  • Analysed a variety of business and strategic motivations for M&A, all predict an improvement in post M&A performance
30
Q

Types of M&A

A
  • Vertical integration
  • Horizontal Integration
31
Q

Types of M&A: LOs

A
  • Explain Vertical Integration and Horizontal Integration
32
Q

Types of M&A: Vertical Integration Definition

A
  • Merger of firms operating at different stages of production process (Disney and Pixar)
33
Q

Types of M&A: Vertical Integration Motivations

A
  • Technological economies (Iron and Steel Production)
  • Coordination and control of production - by controlling its own supply, firm can better resolve supply problems (Esso owns drilling, refining and retail)
  • Coordination of investment decisions.
  • Resolve hold-up problem (Brewery and Pub chain)
34
Q

Types of M&A: Horizontal Integration Definition

A
  • Involves merger of firms that operate in the same business activity (consolidation in payment systems)
35
Q

Types of M&A: Motivations of Horizontal Integration

A
  • Exploit economies of scale and scope
  • Increase market power
  • Exploit synergies between complementary assets
  • Reduce business risk with unrelated diversification
  • Consolidation
36
Q

Types of M&A: Summary of Findings

A
  • Vertical and Horizontal Mergers are defined by whether M&A occurs across different parts of the value chain or the same part.
  • Business motives for M&A explain vertical and horizontal M&A

Corporate Restructuring and Governance (8 decks)

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