Hoofdstuk 10 Mergers and acquisitions

Question 1

Acquisition

Answer 1

Purchases a second firm

Friendly or unfriedly

Question 2

Merger

Answer 2

The assets of two similar-sized firms are combined. One firm purchases some percentage of a second firm’s assets while the second firm simultaneously purchases some percentage of the first firm’s assets

Question 3

Value M&A

Answer 3

M&As have value when bidding and target firms are strategically related
Cannot generate monopoly profits

Question 4

Categories

Answer 4

Vertical merger: a firm acquires former suppliers or customers
Horizontal merger: a firm acquires a former competitor
Product extension merger: a firm gains access to complementary products through an acquisition
Market extension merger: a firm gains access to complementary markets through an acquisition
Conglomerate merger: there is no strategic relatedness between a bidding and a target firm

Question 5

Strategic relatedness

Answer 5

Lubatkin

• Technical economies (the physical processes inside a firm are altered so that the same amount of input produce a higher quantity of outputs)
• Pecuniary economies (ability of firms to dictate prices by exerting market power)
• Diversification economies (improve a firm’s performance relative to risk attributes, or lower risk attributes relative to performance)

Jensen and Ruback

• To reduce production or distribution costs (economies of scale, vertical integration, more efficient production or organizational technology, increased utilization of the bidder’s management team, reduction of agency costs by bringing organization-specific assets under common ownership)
• Financial motivations (access to underutilized tax shields, avoid bankruptcy, increase leverage, gain other tax advantages, market power, eliminate inefficient target management)

Question 6

To be economically valuable…

Answer 6

Links must build on real economies of scope between bidding and target firms and reflect either cost savings or revenue enhancements that are created by combining firms.
It must be less costly for the merged firm to realize than for outside equity holders on their own

Question 7

Motivations for M&A even though they usually do not generate profits for bidding firms

Answer 7

• To ensure survival (every firm does it)
• Free cash flow (spend money on something)
• Agency problems (diversify human capital and increase management compensation)
• Managerial hubris (managers belief they are better than the target firm’s management)
• The potential for above-normal profits

Question 8

Valuable, rare, and private economies of scope

Answer 8

A target is worth more to one bidder than it is to any other bidders. This must be unknown to other bidders

Question 9

Implications for bidding firm managers

Answer 9

• Search for valuable and rare economies of scope
• Keep information away from other bidders
• Keep information away from targets
• Avoid winning bidding wars (always overpay)
• Close the deal quickly
• Operate in ‘thinly traded’ acquisition markets (small number of buyers and sellers, information is not widely known, and other interests than maximizing value are important)

Question 10

Implications for target managers

Answer 10

• Seek information from bidders
• Invite other bidders to join the bidding competition
• Delay but do not stop the acquisition

Question 11

Organizing M&A

Answer 11

Coordination and integration between the bidding and target firms after an acquisition