CF chapter 28 Flashcards
Horizonal merger
Target and acquirer are in the same industry
Vertical merger
Target’sindustry buys from or sells to acquirer’sindustry
Conglomerate merger
Target and acquirer operate in unrelated industries
Term swap
Summary of price and method of payment in the merger transaction
Consideration paid to target shareholders can be very complex
Reasons to acquire (By far the most common justification that bidders give for the premium they pay
for the target)
Synergies:
Cost reductions:
such as layoff of overlapping employees and elimination of redundant resources, are more common and easier to achieve
Revenue enhancements:
such as increased revenues from increased market
share, are much harder to predict and achieve
Economies of scale (synergies)
larger companies enjoy savings from producing goods in high volume that are not available to small companies
Economies of scope (synergies)
savings large companies can realize that come from
combining the marketing and distribution of different types of related products
Vertical integration (synergies)
easier coordination in achieving a common goal or product strategy
Expertiese (synergies)
buying new technologies (patents) and experienced workers directly may bemore efficient than inventing/hiring them
Monopoly (synergies)
buy your competitor in order to substantially reduce competition andincrease profits◦ Antitrust laws may limit such activity or even block specific mergers
Winner’scurse problem: all companies in the industry benefit from reduced competition, but only themerging company pays the associated costs
Efficiency gains (synergies)
acquirers often claim that they can run the target organization more efficiently than exsiting management
Tax savings from operational losses
conglomerate merger may enjoy losses in onedivision being offset against profits in another division
Tender offer (takeover process)
A tender offer is a bid to purchase some or all of shareholders’ stock in a corporation
Post merger (equity) value
pre-merger (equity) value of acquiring company + pre-merger (equity) value of target company + (present) value of the synergies created by the merger
Post merger share price
pre-merger (equity) value of acquiring company + pre-merger (equity) value of target company + (present) value of the synergies created by the merger / number of shares *x
(US) differential taxation
Cash receipts by target shareholders are immediately taxed since it triggers capital gains realization
Stock swaps allows target shareholders to defer capital gains realization
Accounting
Method of payment (cash and/or stock) is irrelevant for the combined firm’sfinancial statements
◦ Any surplus over the fair market value is recorded as goodwill and is amortized
Leverage buyout option
Usually hostile takeover by a corporate raider, where
◦ The raider announces a tender offer for a controlling interest (e.g. half of the outstanding shares) in
the target firm
◦ Instead of using his own cash to pay for these shares he borrows and pledges the shares as collateral
on the loan
◦ Note that he only needs this borrowed amount if the tender offer succeeds, so the banks can be certain that he will have
control of the collateral
◦ After taking control of the target company
◦ US legislation allows that the loans can be directly attached to the acquired company, so the company has borrowed, not the
raider
◦ The raider owns half of the shares, while the company is responsible for repaying the loan with interest
Poison pill (takeover defense)
a rights offering giving target shareholders the opportunity to buy shares in either the
target or an acquirer at a deeply discounted price
Golden parachute
incumbent management receives an extremely lucrative and guaranteed package
in the event that the firm is taken over and the managers are let go
Proxy fight (takeover defence)
the acquirer attempts to convince the target’sshareholders to remove the target board
by using their proxy votes and support the acquirer’scandidates
