Corp 5 Flashcards
What are the three types of mergers?
Horizontal
What is a horizontal merger?
A merger between two firms in the same line of business (former competitors).
What is a vertical merger?
A merger between companies at different stages of production (e.g.
What is a conglomerate merger?
A merger between two firms in unrelated lines of business.
What is a sensible reason for mergers related to cost reduction?
Economies of Scale (reducing per-unit costs by spreading fixed costs).
What is Economies of Scope?
Economic advantage from broadening the firm’s range of products.
What is a dubious reason for mergers?
Diversification (investors can diversify themselves).
What is the Bootstrap Game in mergers?
Short-term increase in EPS for the acquirer
What is a common management bias in mergers?
Excessive confidence or ambition
How is the economic gain of a merger calculated?
ΔCF (valuation of target including synergies) − cost of acquisition.
What is a proxy contest in takeovers?
Dissident shareholders attempt to gather voting proxies to elect a new board.
What is a tender offer?
A takeover bid where cash is offered directly to shareholders.
What is a white knight in takeover defenses?
A friendly acquirer sought by a target to avoid a hostile takeover.
What is a poison pill?
A measure allowing shareholders to buy more shares cheaply if a bidder acquires a large stake.
What is a leveraged buyout (LBO)?
Acquisition using substantial borrowed funds
What is a management buyout (MBO)?
Acquisition of the firm by its own management in an LBO.
What is a divestiture?
Selling some of a firm’s assets to another entity as a going concern.
What is a spin-off?
Separating a business unit and giving shareholders shares of the new entity.
What is a carve-out?
Issuing shares of a new firm to the public
Who usually benefits from mergers?
Target shareholders
Who usually loses in a merger?
Acquirer shareholders (overpayment)
What is the key difference between cash and stock financing in mergers?
Cash cost is fixed; stock cost depends on post-merger share price.
What is industry consolidation as a merger motive?
Mergers to cut excess capacity and improve efficiency in crowded industries.
What is vertical integration’s risk?
Over-integration can increase costs
What is a shark repellent in takeover defenses?
Charter amendments to deter takeover attempts.
