Chapter 11 - Financial and strategic implications of mergers and acquisitions Flashcards
What is a merger?
Joining together of two or more entities, where the entities join together to submerge their seperate identities into a new entity
What is an acquisition/takeover?
When one entity acquires the majority shareholding in another and submerges the identity of the acquired entity into its own
What are the three classifications of merger/acquisition?
Horizontal integration - two entities in the same line of business combine
Vertical integration - the acquisition of one entity by another at a different level in the supply chain
Conglomerate - when two entities in unrelated businesses combine
What are some specific reasons for merger/acquisition?
Synergies
Increased market share/power
Economies of scale
Combining complementary needs
Improving efficiency
A lack of profitable investment opportunities
Tax relief
Reduced competition
Asset stripping
Big data opportunities
What is a synergy?
Two or more entities coming together to produce a result not independently obtainable
What are the three main types of synergy?
Revenue synergies - market power, economies of vertical integration, complementary resources
Financial synergies - Elimination of inefficiency, diversification, diversification and financing, surplus cash
Cost synergies and other synergistic effects - economies of scale, surplus managerial talent, speed, bootstrapping
What are the impacts of synergies on stakeholders?
Acquiring company’s shareholders - creation of synergy should benefit the acquiring company’s shareholders
Target company’s shareholders - Premium usually paid to encourage them to sell their shares
Managers and staff - redundancies are often made to generate synergies BUT a bigger combined company may give better career opportunities
Why would a merger/acquisition fail?
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 clash
What are the tax implications of mergers and acquisition?
Differences in tax rates and double tax treaties
Group loss relief - members of a group of companies may surrender losses to other profitable group members for corresponding accounting periods.
Withholding tax
What is the role of competition authorities?
To strengthen competition
To prevent or reduce anti-competitive activies
To consider the public interest
What are the reasons for divestment?
The sum of the parts of the entity may be worth more than the whole
Divesting unwanted or less profitable parts
To shift the strategic focus onto the core activities
To raise cash in response to crisis
What are the three methods of divestment?
Sell off (trade sale)
Spin off (Demerger)
Management buyout (MBO)
What is a sell off (trade sale)?
Sale of part of an entity to a third party, usually in return for cash.
Used to protect the rest of the business from takeover, or to generate cash in a time of crisis.
May disrupt the rest of the organisation if key staff or products from within the entity are part of the business unit sold off.
What is a spin off (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 new entity.
What is a management buyout?
Purchase of a business from its existing owners by members of the management team, generally in association with a financing institution
