CF chapter 28

Question 1

Horizonal merger

Answer 1

Target and acquirer are in the same industry

Question 2

Vertical merger

Answer 2

Target’sindustry buys from or sells to acquirer’sindustry

Question 3

Conglomerate merger

Answer 3

Target and acquirer operate in unrelated industries

Question 4

Term swap

Answer 4

Summary of price and method of payment in the merger transaction

Consideration paid to target shareholders can be very complex

Question 5

Reasons to acquire (By far the most common justification that bidders give for the premium they pay
for the target)

Answer 5

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

Question 6

Economies of scale (synergies)

Answer 6

larger companies enjoy savings from producing goods in high volume that are not available to small companies

Question 7

Economies of scope (synergies)

Answer 7

savings large companies can realize that come from
combining the marketing and distribution of different types of related products

Question 8

Vertical integration (synergies)

Answer 8

easier coordination in achieving a common goal or product strategy

Question 9

Expertiese (synergies)

Answer 9

buying new technologies (patents) and experienced workers directly may bemore efficient than inventing/hiring them

Question 10

Monopoly (synergies)

Answer 10

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

Question 11

Efficiency gains (synergies)

Answer 11

acquirers often claim that they can run the target organization more efficiently than exsiting management

Question 12

Tax savings from operational losses

Answer 12

conglomerate merger may enjoy losses in onedivision being offset against profits in another division

Question 13

Tender offer (takeover process)

Answer 13

A tender offer is a bid to purchase some or all of shareholders’ stock in a corporation

Question 14

Post merger (equity) value

Answer 14

pre-merger (equity) value of acquiring company + pre-merger (equity) value of target company + (present) value of the synergies created by the merger

Question 15

Post merger share price

Answer 15

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

Question 16

(US) differential taxation

Answer 16

Cash receipts by target shareholders are immediately taxed since it triggers capital gains realization

Stock swaps allows target shareholders to defer capital gains realization

Question 17

Accounting

Answer 17

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

Question 18

Leverage buyout option

Answer 18

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

Question 19

Poison pill (takeover defense)

Answer 19

a rights offering giving target shareholders the opportunity to buy shares in either the
target or an acquirer at a deeply discounted price

Question 20

Golden parachute

Answer 20

incumbent management receives an extremely lucrative and guaranteed package
in the event that the firm is taken over and the managers are let go

Question 21

Proxy fight (takeover defence)

Answer 21

the acquirer attempts to convince the target’sshareholders to remove the target board
by using their proxy votes and support the acquirer’scandidates