Chapter 10 - Mergers and Acquisitions

Question 1

Reverse Takeover

Answer 1

Smaller company taking over bigger one

Question 2

Why acquire another business?

Answer 2

• S ynergies
• Economies of scale e.g. staff reductions
• Improved market reach
• Cheaper finance
• Acquire new technology e.g. patent
• Knowledge / Big data
• Use surplus cash - avoid being taken over

Question 3

Forms of Consideration

Answer 3

• Cash - drain cashflows, borrowing increases gearing, tax implications for target shareholders
• Shares - dilute EPS/control, reduce gearing, defers capital gains to taregt shareholders
• Convertibles - increase gearing but may reduce if converted, lower risk for shareholders
• Bonds - increases gearing/interest payments
• Earn out - guaranteed payment in instalments plus additional linked to targets

Question 4

‘Paper’ based bid

Answer 4

Shares used to finance acquisition

Question 5

Regulation of takeovers

Answer 5

Market power

• Competition authorities act in public interest
• e.g. over 25% market share

City Code

• Cover whole bid process (up to time barrier for re-bidding)
• Sufficient info.
• Shareholders make own decision
• If >30% must make offer to remaining shareholders

Question 6

Defensive tactics

Answer 6

Before bid

• Effective communication
• Poison pill - alter ‘articles’ to take effect in takeover
  
  • Flip-in pill - existing shareholders can buy @ deep discount
• Shark repellent - require ‘super-majority’ to accept
• Asset revaluation - make balance sheet healthier
• Declare special dividend - dilutes cash

After bid

• Revised financial forecasts - better performance
• Rejection letter within 14 days
• White knight - friendlier bidder
• Get referred to competition authorities
• Issue negative statements about bidder
• Pacman - counterbid for predator

Question 7

Categories of Synergies

Answer 7

Operating economies

• Economies of scale
• Elimination of inefficiencies
• Staff reductions
• Combine expertise in different areas
• Vertical integration

Financial economies

• Financial - cheaper finance
• Tax
• Reduced risk
• Bootstrapping - increase EPS

Other benefits

• New technology
• Knowledge / Big data
• Quicker than growing organically
• Reduced competition (if in same market)

Question 8

Reverse synergy

Answer 8

• Dis-economies of scale
• Clash of cultures
• Different IT systems