Introduction to M&A Flashcards
What is corporate restructuring?
Any action or series of actions that reconfigures a company in one of the following ways:
Change in internal structure, hierarchal structure and operational processes.
What are the reasons why a company would need to restructure?
Financial distress- Can help to reduce costs and negotiate debt to avoid bankruptcy.
M&A- After a merger or acquisition, restructuring may be necessary to integrate the acquired company’s operations, to eliminate redundancies and realise synergies.
Technological advancements- May restructure to adopt new technologies that improve efficiency or create new revenue streams, requiring changes in operations and employee skillset.
Explain the Launch phase of the business life cycle.
Initial phase
High attention
Slow, but increasing sales
Typically, unestablished brand
Often operating in loss with the need for investment to stay afloat.
Explain the growth phase in the business life cycle.
Rapid increase in revenue as company gains traction
Initial signs of profit/ break even
Universe of ‘potential’ markets open up
Explain the shake out phase in the business life cycle.
Sales keep increasing buy at slower rates
Saturation of potential markets
Company starts to accrue what is known as free cash flow.
Explain the maturity phase in the business life cycle.
Sales start dropping
There are usually lower margins and increased overheads
Free cash is often signifiant at this point- Generally meant to be paid to creditors or as dividends to shareholders.
Explain the decline phase of the business life cycle.
Usually marks the end
Sales decline- Change in market conditions, failure to adapt
Cash flows start declining
Inability to pay debts - leading to insolvency
Creates a need for restructuring
Explain what operational restructuring is.
Changes in the composition of a firms asset structure by acquiring new businesses, sale of existing businesses, or spinning off subsidiaries/ production lines.
All to improve efficiency
Explain what financial restructuring is.
Changes in a firms structure relating to debt and equity.
This may include, issuing new equity, renegotiating loans or filing for bankruptcy protection.
What is a merger?
Two separate entities combine to form a new entity.
What is an acquisition?
One firm buys and integrates another, usually smaller firm incorporates their business into their portfolio.
Why do M&A occur?
Because of synergies- The incremental benefit a firm expects to materialise when emerging with or acquiring another firm, in excess of both firms operating independently.
Synergies can be broken down into:
Financial synergies
Operational synergies
Describe what a financial synergy is.
Improvement in financing activities as a result of undertaking mergers and acquisitions, to a level greater than if both companies operated separately.
Can make financing cheaper
Reduced cost of capital (minimum required return for profitability)
tax benefits- Tax shields using net loss of target
Tax inversion- lower effective corporate tax rates
Increase debt capacity
Diversification of business streams- lower cost of equity
Describe what an operational synergy is.
Incremental gains from merging that enhance revenue generation/ streamline expenses to a level greater than if both companies operated separately.
What are the different types of synergies?
Growth opportunities
Economies of scale
Economies of scope
Expertise gains
Efficiency gains
Monopolistic gains
Diversification/ consolidation
Financial/ tax related
Explain the synergy: Growth opportunities for M&As.
New opportunities gained through the combination of reduced operating costs, new revenue streams.
New competencies acquired to access new customers
New territories and markets: cross boarder M&A makes use of established infrastructure and knowledge of local marketplace overseas.
Explain the synergy: Economies of scale for M&A
Savings larger companies enjoy from producing at much higher volumes.
Bulk order-pricing on sourcing materials
Enhanced relationships with suppliers
lower per-unit/ per-worker cost on overheads
Explain the synergy: Economies of scope for M&A
Savings large companies can realise that come from marketing and distribution of different types of related products.
Cost associated with taking products to market can be streamlined.
Resources ca be pooled to deliver wider ranges of products.
Explain the synergy: Expertise gains for M&A
Buying expertise through an M&A
Rather than invest time and capital in-house to develop competencies, acquire a company that already has.
Explain the synergy: Efficiency gains for M&A
Acquires will argue that they can run a target better, blaming inefficient incumbent target manager.
Claims they can make better/ optimal use of targets resources (usually paying a premium for it).
Elimination of duplication- e.g. GSK merger unified 2 competing research divisions into one.
Explain the synergy: monopolistic gains for M&A
The more companies merged or acquired, the more of the total market they can capture (market share).
More command over the market imports some degree of monopoly power or price setting power. Which would improve revenue generation.
Government oversight and policy exists to prevent this from going too far.
Explain the synergy: Diversification/ consolidation in M&A
When deals occur between firms in different industries:
Can expand range of services, products and competencies
Reduced revenue exposure to one specific industry.
Conglomerate building- Mega corporations, that engage in many industries e.g. Amazon, Samsung
