9. Takeovers, M&A's: Causes Flashcards
LOs of Takeovers and M&A’ Definition and Activity
- Define some terms used
- Show the significance of takeovers
Merger Definition
- When two firms combine into one firm.
Acquisition Definition
- When one firm buys another firm.
M&A Consideration
- Often considered to be conducted on friendly terms between the Boards of the two firms (sometimes referred to as friendly takeover)
Takeover Definition
- 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)
Target Definition
The firm being bought
Acquirer Definition
The firm buying (‘the bidder’ pre-acquisition
M&A’s worldwide statistics
Steady increase since 1986 to 2022, number of transactions at 50,000 whilst reaching 4 trillion in 2022.
UK M&A’s United Kingdom
- Steady increase since 1986, transactions cost 375billion in 2022 with close to 6,000 transactions.
Summary of definitions
- Demonstrated the significance of M&A activity in the global and UK economy
Takeovers and the Market for Corporate Control
- Weak corporate governance: Target
- Natural Selection
- Bargain buying
- Weak corporate governance: acquirer
- Managerial Objectives
LOs of Takeovers and the Market for Corporate Control
- Use agency theory to explain why firms become takeover targets.
- Use agency theory to explain why firms become acquirers
Takeovers and the Market for Corporate Control: Weak Corporate Governance for the Target Firm
- 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.
Takeovers and the Market for Corporate Control: Natural Selection
- 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.
Takeovers and the Market for Corporate Control: Natural Selection and Stock Market Efficiency
- 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
Takeovers and the Market for Corporate Control: NS and StockMarket Efficiency (Inefficient Market)
- 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
Takeovers and the Market for Corporate Control: Weak Corporate Governance for the Acquirer
- 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.
Takeovers and the Market for Corporate Control: Managerial Objectives (Size)
- Prestige, status, and pay linked to managing larger firms.
Takeovers and the Market for Corporate Control: Managerial Objectives (Scope)
- 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.
Takeovers and the Market for Corporate Control: Summary
- 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.
Business and Strategic Motives
- Economies of Scale and Scope
- Synergies: Asset Complimentarity
- Market Power
- Reducing TC’s
Business and Strategic Motives: LOs
- Explain business and strategic motives for M&A’s
Business and Strategic Motives: Exploiting Economies of Scale
- 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
Business and Strategic Motives: Economies of Scope
- 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.
Business and Strategic Motives: Synergies - Asset Complimentarity
- 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.
Business and Strategic Motives: Market Power
- Increases prices to buyers and decrease purchase prices from sellers // Bakkavor acquired firms to give better negotiating power with supermarkets.
Business and Strategic Motives: Market Power (What could happen bad)?
- Increase in market power can result in intervention from competition authorities.
- CMA blocked proposed Asda-Sainsbury merger
Business and Strategic Motives: Reducing Transaction Costs
- 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.
Business and Strategic Motives: Summary of Findings
- Analysed a variety of business and strategic motivations for M&A, all predict an improvement in post M&A performance
Types of M&A
- Vertical integration
- Horizontal Integration
Types of M&A: LOs
- Explain Vertical Integration and Horizontal Integration
Types of M&A: Vertical Integration Definition
- Merger of firms operating at different stages of production process (Disney and Pixar)
Types of M&A: Vertical Integration Motivations
- 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)
Types of M&A: Horizontal Integration Definition
- Involves merger of firms that operate in the same business activity (consolidation in payment systems)
Types of M&A: Motivations of Horizontal Integration
- Exploit economies of scale and scope
- Increase market power
- Exploit synergies between complementary assets
- Reduce business risk with unrelated diversification
- Consolidation
Types of M&A: Summary of Findings
- 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
