Chapter 1 - Intro Flashcards
What dictates patterns observed in many other countries (eg Australia)?
US and European deal volume patterns
Pattern in China
Different (from Us and Europe); Chinese govt took measures to restrain capital flows
Pattern in India
Growth in M&A
Pattern in Japan
Steady growth
Pattern in Brazil and Argentina
Hardship in M&A growth (Mexico seeming more promising in comparison)
Consolidation
Business combo whereby two or more firms join to form a wholly new firm (eg A + B = C)
Merger
Business combo whereby one or more firms join an existing firm (eg A + B = A)
Horizontal merger
When two competitors combine
Vertical merger
Combination of companies that have buyer-seller relationship
Conglomerate merger
Combination of companies that are not competitors and do not have buyer-seller relationship either
Anticompetitive effect of mergers
US adopted liberal stance; EU more cautious
Merger payment
Can be cash, securities or combo of both. (all-cash compensation may force bidder to incur debt => add complexity if more external financing req.)
Contingent value rights (CVR)
secure a certain future value if specific events take place (eg sales target is met)
Holdback provision
withholding of part of merger compensation (eg escrow account) which will be available if specific event takes place
Merger professionals
- Investment bankers
- Legal M&A advisors
- Accountants
- Valuation experts
Investment bankers
Can work on sell side or buy side
Buy side bankers
Assist buyers in developing proposal with certain deal structure
Sell side bankers
Screen potential buyers according to degree of interest and payment capability
Legal M&A advisors
Especially relevant in hostile takeovers (taking place via legal manoeuvres); help with filing at SEC and legal due diligence process
Accountants
Carry out accounting due diligence and prepare proforma financial statements set forth by management or other factors
Valuation experts
Determine value of company; establish model that encompasses multiple assumptions (eg revenue, growth rates, costs) which could be suppressed after the deal
Risk arbitrage
Purchase of stocks in low-priced markets of firms that may be taken over and sale of those stocks in high-priced markets (profit = takeover premium if the deal actually occurs)
Leveraged buyout (LBO)
Acquisition of a public company where the target firm is delisted from stock exchange (also referred to as “going private”); acquirer could sometimes be management of target firm (ie management buyout)
Material adverse change clause
Allows either party to walk away from deal if major change in circumstances that could alter the deal takes place
Auction vs privately negotiated transactions
Little difference in shareholder wealth effects
Confidentiality agreement (or NDA)
Governs responsibilities of providers and recipients of nonpublic info from target
Standstill agreements
limit actions of bidder (eg purchase of target shares)
Term sheet
Contains major terms of deal in writing, typically identifying buyer and seller, purchase price, and relevant factors influencing price
Letter of intent (LOI)
Shows more detailed terms of agreement but it may not necessarily be binding on the parties (ie it could signal that one of the parties may not be ready to make the deal)
Merger negotiations
Firms may not mislead market by spreading inaccurate or deceptive info
Asset purchase agreement
Outlines assets acquired and liabilities incurred in the deal
Asset basis step-up
Done by buyer; an increase of value of acquired assets to fair market value as opposed to carrying forwards the value in seller’s balance sheet (more depreciation = less taxes)
Third party consents
May be necessary if there exists clauses in financing agreements enabling target to secure assets
Stock entity deals
- Generally involves closely held firms
- No conveyance issues (ie contractual restrictions on transfer of assets)
- No appraisal rights, which sidesteps litigation issues related to fair value
- Buyer could have to assume certain unwanted liabilities
- Sent directly to target’s shareholders => deal may not be completed if some of those SH oppose it
Merger entity deals
- Generally involves publicly held firms
- Constituent corporations are the two companies doing the deal and the surviving one is the survivor
- [Delaware] majority of SH must approve the deal, those dissatisfied may opt for defending their appraisals in court
Forward (or statutory) merger
- Target merges directly into acquirer and then disappears
- Acquirer assumes target’s liabilities but no conveyance issues
- [Delaware law] treats them as asset deals followed by liquidation of target => may pose as deterrent if 3rd party consents exist
- Voting approval of SHs of BOTH acquirer and target required as per Delaware laws (option: subsidiary deal)
