Chap 6: M&A

Question 1

The different types of mergers

Answer 1

• Horizontal merger: target and acquirer are in the same industry
• Vertical merger: target’s industry buys from or sells to acquirer’s industry (concrete and cement)
• Conglomerate merger: target and acquirer operate in unrelated industries
• Stock swap: target shareholders are swaping old stock for new stock in either the acquirer or a new created merged firm

Question 2

Acquisition premium

Answer 2

It is paid by an acquirer in a takeovern it is the percentage difference between the acquisition price and the pre-merger price of the target

Question 3

Reasons to acquire

Answer 3

Large synergies is the most common justification that bidders give for the premium they pay for a target:
- Cost reduction synergies: layoffs of overlapping employes and elimination of redundant ressources
- Revenue-enhancement synergies: ability to make contract that bundle part of your activity with some other (LVMH)

• Economies of Scale: savings a large company can enjoy from producing goods in high volume that are not available to a small company
• Economies of Scope: savings a large company can realize that come from combining the marketing distribution of different types of related products

Coordination in vertical integration

Gain expertise in particular areas to compete more efficiently

Monopoly gains: merging with or acquiring a major rival enables a firm toreduce competition within the industry and increase profit

Efficiency Gains: elimination of duplication, fixing poorly managed firms

Tax Saving: Imagine 2 firms; one with profit and one with profit. It can be interesting for the firm who make profit to buy the firm who accumulated losses to reduce its accounting revenues and reduce taxes.

Question 4

Reasons for conglomerate

Answer 4

• Risk reduction: large firms bear less unsystematic risk
• Debt capacity and borrowing cost: larger firms are more diversified so lower proba of bankrupcy –> increase leverage and lower its cost of capital
• Asset allocation: a diversfied conglomerate may benefit by being able to quickly reallocate asets across industry
• Advantage for liquidity: The liquidity that the bidder provides to the owners of a private firm can be valuable and often is an important incentive for the target shareholders to agree the takeover.
• Earning growth: manipulation of buying a firm in order to change the EPS

Question 5

Price paid for a target =

Answer 5

Target’s pre-bid market capitalization + premium paid in the acquisition

Question 6

Condition for positive NPV of the takeover

Answer 6

premium paid =< synergies created

Question 7

2 methods to pay the target shareholder

Answer 7

• Cash: the bidder simply pays for the target, including a premium in cash
• Stock-swap transaction: the bidder pays for the target by issuing new stock and giving it to the target shareholders
  A stock-swap merger is a positive NPV investment for the acquiring shareholders if share price of the merged firm >= pre-merger price of the acquiring firm

Question 8

Merger arbitrage

Answer 8

Once a tender offer is announced, the uncertainty about whether the takeover will succeed adds volatility to the stock price which creates an opportunity for investors to speculate on the outcome of the deal

Question 9

Merger arbitrage spread =

Answer 9

Target stock’s price - implied offer price

Question 10

Types of Takeover

Answer 10

• Friendly takeover: When a target’s board of directors supports a merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote
• Hostile takeover: an individual or organization purchases a large fraction of a target corporation’s stock and in doing so gets enough votes to replace the target’s board of directors and CEO

Question 11

Takeover defenses

Answer 11

Proxy Fight: at shareholder level, try to get shareholders seats in order to control the firm

1) Poison Pills: the goal is to offer to existing shareholders of the target an option to buy shares at a very low price.

2) Staggered Boards: A bidder’s candidate would have to win a proxy fight two years in a row before the bidder had a majority presence on the target board

3) White Knights: A target company’s defense against a hostile takeover attempt in which it looks for another, friendlier company to acquire it

4) Golden Parachutes: An extremely lucrative severance package that is guaranteed to a firm’s senior management in the event that the firm is taken over and the managers are let go.

5) Recapitalization: With recapitalization, a company changes its capital structure to make itself less attractive as a target