D - Acquisitions and mergers

Question 0

What are the main types of cost synergies?

Answer 0

Reduced duplicate functions and related costs

Economies of scale

Question 1

What are the main types of revenue synergies?

Answer 1

Higher revenues for combined entity

Higher return on equity

A longer period where company can maintain competitive advantage

Question 2

What are the main types of financial synergies?

Answer 2

Increased debt capacity

The transfer of funds between group companies to where it can be utilized best

Question 3

What aspects of accepting the acquisition payment method of convertible bonds should be considered?(3)

Answer 3

Whether the conversion option is in-the-money

The timing of the dilution of ownership with conversion option

Whether control movement shifts from current majority holders

Question 4

What is the relationship between synergy benefits and the premium associated with the acquisition payment method?

Answer 4

The higher the premium, the more synergy benefits transferred to the company being acquired

It is also useful to calculate premium benefits associated with each payment option

Question 5

What are some of the major issues relating to the global regulatory framework for mergers and acquisitions?

Answer 5

From an EU directive point of view:
- squeeze out rights (80-95%) available but would require convincing a high majority

• sell out rights available to minority shareholders
• principle of equal treatment to all shareholders implying any offer should not discriminate

Question 6

What items should one discuss/include on a report to BOD regarding acquisitions? (6)

Answer 6

• header and intro highlighting what is to be discussed in the report
• assumptions made in calculations
• the share value increase for both companies
• any other proposals being considered and it’s impact on the offer
• discussion on what offer each shareholder would accept
• a conclusion on the position to be taken for the company in question

Question 7

What are the main advantages and disadvantages of cash as consideration for an acquisition? (5)

Answer 7

Advantages

• quick if cash is readily available
• price is certain
• target shareholders are not involved in the new company

Disadvantages

• use up cash resources
• there maybe tax implications for shareholders

Question 8

What are the advantages and disadvantages of a share for share consideration for an acquisition? (5)

Answer 8

Advantages

• can finance large acquisitions
• does not affect liquidity

Disadvantages

• maybe offering unknown price
• share/loss of ownership
• synergy benefits maybe largely disproportionate