F3 - 9. Mergers and Acquisitions Flashcards
What are the 4 main types of M&A?
- Takeover (acquisition)
- Merger (mutual)
- Reverse takeover (private buys public)
- Vertical integration (in supply chain)
What are the 5 main reasons for an M&A?
- Improved market reach/power
- Eliminate a competitor
- Asset strip
- Use surplus cash
- Gain synergies
What are the 4 types of operating synergies?
- Economies of scale
- Avoiding duplication
- Eliminate inefficiencies in target
- Vertical integration (gain strengths)
What are the 3 main types of financial synergies?
- Financial (easier to raise capital)
- Tax (group loss, but may WHT)
- Reduced risk (diversification)
What are the 3 other types of synergy from M&A?
- Speed
- Market power
- Improved knowledge/technology
What are the 2 main blockers of achieving synergies from M&A?
- Clashing cultures
- Inability to merge systems
What are the pros (1) and cons (2) of cash consideration for a buyer?
+ Better price
- Liquidity
- Additional finance needed
What are the pros (1) and cons (2) of cash consideration for a seller?
+ Certain amount
- Immediate tax (capital gain) issues
- No ongoing stake
What are the pros (3) and cons (1) of share consideration for a buyer?
+ Preserves liquidity
+ Reduces gearing
+ Ensures ongoing co-operation
- Dilution of control + EPS for current shareholders
What are the pros (1) and cons (2) of share consideration for a seller?
+ No immediate tax issues (deferred gain)
- Uncertain value received
- Transaction costs to sell
What are the pros (2) and cons (2) of debt consideration for a buyer?
+ Avoids dilution of control
+ Preserves liquidity
- Increases gearing
- Increases interest payments
What are the pros (1) and cons (1) of debt consideration for a seller?
+ Lower risk than shares
- Lower return than equity
What are the pros (2) and cons (1) of earn-out arrangements for a buyer?
+ Continued cooperation
+ Reduced risk
- Could end up paying more under high performance
What are the pros (1) and cons (1) of earn-out arrangements for a seller?
+ Can maximise what they receive
- Uncertainty
What are the bounds for an initial acquisition offer?
Above current share price, below [Market Value A+B - Market Value A]
What are the 2 methods for valuing a post M&A joint entity?
- MVa+b = MVa + MVb + PV of synergies
- MVa+b = PE ratio of a x combined sustainable earnings
- MVa+b = PV of future combined free cash flows (which cost of capital?)
How do you quantify the impact on existing shareholders of an M&A?
(New MV / new number of shares) - old share price x holding
What are the 2 areas of acquisitions that regulation focuses on?
- Potential market power
- Behaviour during bid process (fair, transparent, open to shareholders)
What are the 4 defence tactics that can be adopted prior to a bid?
- Communication with shareholders
- Poison pill (rights at deep discount)
- Shark repellent (alter constitution to super majority)
- Asset revaluation
What are the 4 defence tactics that can be adopted post bid?
- Find white knight
- Refer to competition authorities
- Prompt response (reject in 14 days)
- Pacman defence (counterbid)
What are Drucker’s 5 golden rules for post M&A integration?
- Share common core of unity (tech, market, finances)
- Consider 2 way offerings
- Treat products and customers of target with respect
- Provide top management with skills
- Cross company promotions
What are the 5 key post M&A value enhancement strategies?
- Review for cost cuttings, staffing and synergies
- Review redundant assets and resources
- Good communication to key stakeholders
- Identify economies of scale
- Align corporate objectives
What will be the priority of shareholders in the parent in an M&A?
Getting maximum value for money
What will be the priority of shareholders of the target in an M&A?
Offered a decent price and in appropriate form of consideration
What will be the priority of customers and suppliers post M&A?
Continuing relationship/quality of product and service
What will be the priority of employees post M&A?
Guaranteed continued employment and prosepects
What will be the priority of management of both businesses post M&A?
That they are able to work effectively together
