Introduction

Question 1

Why are mergers and acquisitions positively correlated with the S&P 500?

Answer 1

Stock price is high we get more bang for our buck; we spend when our currency (stock) is especially valuable
Liquidity [cheap borrowing costs] ex. private equity 2000s
Industry specific wave - Technological change - late 1990s
(De)-regulation

Question 2

Name and describe the 9 main motives for Mergers and Acquisitions

Answer 2

Synergies
Diversification
Strategic
Hubris
Price
Mismanagement
Managerialism
Tax Considerations
Market Power

Question 3

Describe the main players of a M&A.

Answer 3

Investment banking perspective
Proxy Solicitor: asks you to vote - help to line up votes for one side or the other
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lawyers
accountants
institutional investors
hedge & private equity funds
M&A arbitrageurs

Question 4

Who wins/loses in an M&A deal?

Answer 4

It is hard to tell, very local.
Target shareholders tend to win – premiums
Buying a private/smaller firm is better - paying with cash is better early in the cycle.

(paying with stock says stock is overvalued)

Question 5

Around transaction announcement date, what do abnormal returns average?

Answer 5

20% for target shareholders in “friendly” transactions; 30-35% in hostile transactions

Bidders’ shareholders on average earn zero to slightly negative returns

Question 6

What do situational positive abnormal returns to bidders often include?

Answer 6

Private target firm [or subsidiary]
Acquirer is small
Target is small relative to acquirer
Cash rather than equity is used to finance the transaction
Transaction occurs early in the M&A cycle

Question 7

Is there any evidence that alternative strategies to M&As are likely to be more successful?

Answer 7

NO