Chapter 11

Question 1

Merger

Answer 1

Joining together of two or more entities, where the entities join together to submerge their seperate indentities to a new entity

Question 2

Acquisition/takeover

Answer 2

When one enitity acquites a majority shareholding in another and submerges the identity of the acquired entity into its own

Question 3

Three classifications of merger/acquisition

Answer 3

Horizontal integration
Vertical integration
Conglomerate

Question 4

Horizontal integration

Answer 4

Two entities in the same line of business combine

Question 5

Vertical integration

Answer 5

Acquisition of one entity by another at a different level in the supply chain

Question 6

Conglomerate

Answer 6

Two entities in unrelated businesses combine

Question 7

Reasons for merger/acquisition

Answer 7

Synergies
Increased market share/power
Economies of scale
Combining complementary needs
Improving efficiency
Lack of profitable investment opportunities
Tax relief
Reduced competition
Asset stripping
Big data opportunities

Question 8

Definition of synergy

Answer 8

Two or more entities coming together to produce a result not independently obtainable

Question 9

Three main types of synergies

Answer 9

Revenue synergies
Financial synergies
Cost synergies and other synergistic effects

Question 10

Revenue synergies

Answer 10

Market power
Economies of vertical integration
Complementary resources

Question 11

Financial synergies

Answer 11

Elimination of inefficiency
Diversification
Diversification and financing
Surplus cash

Question 12

Cost synergies and other synergistic effects

Answer 12

Economies of scal
Surplus managerial talent
Speed
Bootstrapping

Question 13

Reasons why mergers fail

Answer 13

Synergy does not automatically arise
Premium paid on acquisition by the acquirer was too high
Opportunity cost of the investment could be too high
Cultural clashes

Question 14

Tax implications of mergers and acquisitions

Answer 14

Differences in tax rates and double tax treaties
Group loss relief
Withholding tax

Question 15

Role of competition authorities

Answer 15

Stengthen competition
Prevent or reduce anti-competive activities
Consider public interest

Question 16

Reasons for divestment

Answer 16

Sum of the parts of the entity may be worth more than the whole
Divesting unwanted or less profitable parts
Shift the strategic focus onto the core activities
Raise cash in response to a crisis

Question 17

Methods of divestment

Answer 17

Sell Off
Spin Off
Management Buy Out

Question 18

Sell off

Answer 18

Trade sale
The sale sof an entity to a third party, usually in return for cash

Question 19

Spin Off

Answer 19

Demerger
A new entity is created, where the shares of that new entity are owned by the shareholders of the entity that made the transfer of assets into the new entity

Question 20

Management buy out

Answer 20

Purchase of a buiness from its existing owners by members of the management team, generally in association with a financing institution

Question 21

Exit routes for debt holders

Answer 21

Specified repayment date

Question 22

Exit routes for equity holders

Answer 22

IPO
Trade sale
Independent sale to another shareholder