Lecture 11 Flashcards
Reasons why mergers are good for wealth
Benefits of scale Eliminating weak management Protecting suppliers Providing expertise Eliminating competition
Other motives for mergers
Diversification - risk reduction
Undervalued shares
Managements interests - increases their power
Payment methods in takeover
Shares
Loan capital
Cash
Pros and cons of cash takeover
Pros Certainty of amount Clearly understood No dilution of shareholder control Cons Raising cash can be demanding Deferred payments are unattractive to business shareholders
Pros and cons of loan capital takeover
Pros Avoids strain on cash No dilution of shareholder control Provides investors with a fixed rate of return Cons Increases gearing Increases risk
Pros and cons of shares takeover
Pros
Attractive to target business shareholders
Does not result in a liability for capital gains tax
Continues ownership of business
Cons
Dilution of control
Lower EPS
Share prices may fall during consolidation
Effects on shareholders
Target shareholders are the main beneficiaries - premium on share price
Bidders shareholders - significant decrease in shareholder value in the long term (especially conglomerate)
Effects on managers
Managers of bidding business will gain, larger company and income.
Managers of target company tend to suffer
Effects on advisors
Mergers can be very rewarding for advisors and lawyers employed by each business
Defensive tactics against a hostile merger
Increase gearing Conversion to private company status Share repurchase Increase dividend payouts Finding a white squire
Ingredients for succesful mergers
Early planning Rapid integration Incentivising managers Awareness of cultural issues Retaining talented employees Ensuring sales force fully engaged throughout
Reasons for divestment
Financial problems
Poor performance
Strategic focus
