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Executive Master Mergers & Acquisitions and Valuation > Lesson 1 - Creating value from Mergers and Acquisitions. > Flashcards

Lesson 1 - Creating value from Mergers and Acquisitions. Flashcards

1
Q

How do PEST factors affect merger activities?

A

political, economic, social, and technical activities are dimensions to explain merger activities and suggest that different industries may be affected differently by forces generating disturbances.

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2
Q

Five-Stage M&A Process

What are the five stages of the M&A process

Chapter 1 of *Creating Value from Mergers and Acquisitions

A

The five stages are corporate strategy development, organizing for acquisitions, deal structuring and negotiation, post-acquisition integration, and post-acquisition audit and organizational learning.

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3
Q

Merger Waves

What is a merger wave, and why does it occur?

Chapter 1 of *Creating Value from Mergers and Acquisitions

A

A merger wave refers to periods of intense merger and acquisition activity followed by relative inactivity. These waves are triggered by economic, technological, and market changes

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4
Q

Economic and Behavioral Models of Merger Waves

What are the two main types of models explaining merger waves?

**C1

A

The economic model explains mergers as a response to changes in technology or market conditions. The behavioral model attributes mergers to managerial motivations, such as hubris or overconfidence.

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5
Q

Conglomerate Diversification and Value Creation

Why does conglomerate diversification often fail to create value?

**C1

A

Conglomerate diversification can destroy shareholder value due to overestimating market opportunities and underestimating risks like technological evolution.

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6
Q

Agency Theory in M&A

How does agency theory apply to mergers and acquisitions?

**C1

A

Agency theory suggests that managers may pursue mergers for personal gain rather than shareholder value, especially in cases where ownership is separated from control.

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7
Q

Market Power and Mergers

How can mergers affect market power?

**C1

A

Mergers can increase market power, leading to potential anti-competitive practices like price hikes, reduced output, and lower consumer welfare, especially in horizontal mergers.

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8
Q

Antitrust Regulation

What is the primary goal of antitrust regulation in mergers?

**C1

A

The goal of antitrust regulation is to prevent mergers that harm competition and consumer welfare by increasing market power.

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9
Q

Post-Acquisition Integration

Why is post-acquisition integration critical in M&A success?

**C1

A

Post-acquisition integration determines how well the acquiring and acquired companies can combine resources, systems, and cultures to achieve the strategic goals of the merger.

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10
Q

Organizational Learning in M&A

How does organizational learning impact future acquisitions?

**C1

A

Effective organizational learning from past acquisitions can improve performance in future deals by codifying lessons and refining acquisition strategies.

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11
Q

Horizontal vs. Vertical Mergers

What is the difference between horizontal and vertical mergers?

**C1

A

Horizontal mergers occur between companies in the same industry, often leading to increased market power. Vertical mergers occur between firms in different stages of the value chain, potentially improving efficiency but also risking foreclosure of competitors.

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12
Q

Merger Waves

What triggers merger waves, and how are they identified?

**C2

A

Merger waves are triggered by economic and technological changes, leading to periods of intense M&A activity. They are identified through patterns of bursts of mergers followed by inactivity

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13
Q

Industry Clustering in Mergers

Why do mergers often occur in industry clusters?

**C2

A

Industry clustering happens when mergers are concentrated within specific sectors due to technological innovations, regulatory changes, or competitive pressures.

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14
Q

Rational Economic Models of Merger Waves

What do rational economic models suggest about merger waves?

**C2

A

Rational economic models suggest that mergers occur due to economic disturbances, where firms acquire others to reallocate assets to more efficient uses during periods of economic growth.

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15
Q

Behavioral Models of Merger Waves

What do behavioral models explain about merger waves?

**C2

A

Behavioral models attribute merger waves to managerial opportunism, where overconfident managers exploit stock market overvaluation to pursue acquisitions.

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16
Q

Q Theory of Merger Waves

What does the Q Theory of mergers propose?

**C2

A

The Q Theory posits that mergers are driven by valuation differences, where high-Q firms acquire low-Q firms to redeploy assets more efficiently, fueling merger waves.

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17
Q

Impact of Economic Growth on M&A

How does being a first-mover in a merger wave impact firms?

**C2

A

First-movers can gain competitive advantages through early consolidation, but following firms may also benefit by learning from their mistakes.

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18
Q

First Mover Advantage in Industry Clusters

How does being a first-mover in a merger wave impact firms?

**C2

A

First-movers can gain competitive advantages through early consolidation, but following firms may also benefit by learning from their mistakes.

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19
Q

Globalization of Merger Waves

How has globalization affected merger waves?

**C2

A

Merger waves are no longer confined to the US and Europe. Emerging markets like BRIC countries have seen increased M&A activity in recent years.

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20
Q

PEST Analysis and Merger Waves

How do PEST factors influence merger waves?

**C2

A

Political, Economic, Social, and Technological (PEST) factors create the external environment that can trigger merger waves by altering competitive dynamics in industries .

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21
Q

Divestiture Activity during Merger Waves

Why does divestiture activity often increase during merger waves?

**C2

A

High levels of divestitures during merger waves indicate that many acquisitions do not create long-term value, leading companies to sell off parts of their businesses.

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22
Q

Economic Perspective on M&A

What is the economic perspective on mergers and acquisitions?

**C3

A

The economic perspective views mergers as a response to external factors like market structure and competition, focusing on monopoly power, economies of scale, and vertical integration

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23
Q

Strategic Perspective on M&A

What does the strategic perspective emphasize in M&A?

**C3

A

The strategic perspective highlights mergers as a means to achieve competitive advantage through resource acquisition, exploiting synergies, and enhancing market position

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24
Q

Finance Theory Perspective on M&A

What is the focus of the finance theory perspective in M&A?

**C3

A

The finance theory perspective focuses on internal firm issues, such as conflicts of interest between shareholders, managers, and creditors, emphasizing shareholder wealth maximization

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25
Q

Managerial Perspective on M&A

How does the managerial perspective view mergers and acquisitions?

**C3

A

The managerial perspective examines the motives and decision-making processes of managers, suggesting that managers may pursue M&A to enhance their own utility rather than shareholder value

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26
Q

Organizational Perspective on M&A

What is the role of agency theory in M&A?

|,

**C3

A

Agency theory explains that managers, acting as agents for shareholders.

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27
Q

Agency Theory and M&A

What is the role of agency theory in M&A?

**C3

A

Agency theory explains that managers, acting as agents for shareholders, may engage in M&A for personal benefit, creating agency costs that may reduce shareholder value

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28
Q

Game Theory in M&A

How is game theory relevant to mergers and acquisitions?

**C3

A

Game theory helps analyze competitive moves and countermoves in M&A, as firms anticipate rivals’ reactions and adjust their strategies accordingly

29
Q

Porter’s Five Forces and M&A

How do mergers affect industry structure according to Porter’s Five Forces model?

**C3

A

Mergers can alter industry structure by changing competitive forces, such as reducing rivalry, increasing entry barriers, and enhancing bargaining power

30
Q

Vertical Integration in M&A

What is vertical integration in the context of mergers?

**C3

A

Vertical integration involves a firm merging with a company at a different stage of the value chain, aiming to secure supply chains or distribution networks, though it may present risks like scale inefficiencies

31
Q

Organizational Learning in M&A

Why is organizational learning critical in the M&A process?

**C3

A

Organizational learning is essential for leveraging resources and capabilities across merging firms, helping to integrate and create value post-merger

32
Q

Measuring M&A Success

How is the success of mergers and acquisitions assessed?

**C4

A

Success is measured using various perspectives, primarily through shareholder value creation, as well as by considering broader stakeholder impacts

33
Q

Shareholder Value Creation

What is the primary method to assess value creation in M&A?

**C4

A

The primary method is to evaluate the stock performance of the acquiring and target companies, typically through event studies

34
Q

Event Study Methodology

What is the event study methodology used for in M&A research?

**C4

A

It measures the stock price reaction to merger announcements to assess if there are abnormal returns that reflect value creation

35
Q

Short- vs. Long-Horizon Studies

What is the difference between short- and long-horizon studies in M&A?

**C4

A

Short-horizon studies focus on the immediate stock price reaction, while long-horizon studies assess performance over a longer period (3-5 years), capturing the full impact of mergers

36
Q

. Abnormal Returns

How are abnormal returns calculated in the context of mergers?

**C4

A

Abnormal returns are measured against a benchmark model like the Capital Asset Pricing Model (CAPM), to assess whether the stock performance deviates from expected returns

37
Q

Challenges in Measuring Success

What are the key challenges in evaluating the success of mergers?

**C4

A

One challenge is the inconsistency in methodologies used for long-term studies, as well as differing benchmarks that affect the interpretation of abnormal returns

38
Q

Sources of Value Destruction

What are the key challenges in evaluating the success of mergers?

**C4

A

One challenge is the inconsistency in methodologies used for long-term studies, as well as differing benchmarks that affect the interpretation of abnormal returns

39
Q

Failure Rates of Mergers

Why is there a perception that many mergers fail?

**C4

A

The perception is based on evidence that a majority of mergers fail to deliver the expected shareholder value, particularly in the long run

40
Q

. Stakeholder Perspectives on Success

How does the definition of success in M&A vary by stakeholder?

**C4

A

Shareholders focus on financial returns, while other stakeholders like employees and communities may assess success based on job retention, corporate culture integration, or other qualitative factors

41
Q

Behavioral Theories of M&A Failure

How do behavioral theories explain M&A failures?

**C4

A

Behavioral theories suggest that failures often result from managerial biases such as overconfidence, which can lead to overestimating the benefits of a deal

42
Q

Conglomerate Diversification

Why does conglomerate diversification often destroy shareholder value?

**C5

A

Conglomerate diversification destroys value due to overestimated market opportunities and underestimated technological risks, especially in unrelated acquisitions

43
Q

Vertical Integration Challenges

What are the limits of vertical integration in mergers?

**C5

A

Vertical integration can limit value creation due to challenges like overcapacity and inefficiencies in the integrated supply chain, leading to divestitures

44
Q

Behavioural Biases in M&A

What are the limits of vertical integration in mergers?

**C5

A

Vertical integration can limit value creation due to challenges like overcapacity and inefficiencies in the integrated supply chain, leading to divestitures

45
Q

Behavioural Biases in M&A

How do behavioural biases affect mergers?

**C5

A

Managerial biases like hubris and overconfidence can lead to poor acquisition decisions, causing firms to overpay and destroy value

46
Q

Divestiture Activity

Why do firms often divest after acquisitions?

**C5

A

High levels of divestiture post-acquisition indicate that many mergers fail to create value, leading to firms selling off acquired businesses

47
Q

Post-Acquisition Integration

Why is post-acquisition integration critical for value creation?

**C5

A

Successful post-acquisition integration is key to achieving the strategic aims of the merger, involving organizational changes, cultural adaptation, and the blending of resources

48
Q

Industry Blurring and M&A

How can mergers blur industry lines?

**C5

A

Industry-blurring vertical integration, especially in multimedia or tech sectors, can lead to overestimation of opportunities and underestimation of risks

49
Q

Shareholder Reaction to Divestitures

How do shareholders typically react to divestitures post-merger?

**C5

A

Shareholders often respond positively to divestitures, viewing them as a correction of earlier overexpansion or failed mergers

50
Q

Acquisition Competence

What is acquisition competence, and why is it important?

**C5

A

Acquisition competence refers to a firm’s ability to integrate acquisitions effectively, requiring sound strategy, organizational structure, and capital allocation processes

51
Q

Managerial Biases and Divestiture Delays

How do managerial biases influence divestiture timing?

**C5

A

Managerial biases such as reluctance to admit mistakes or overconfidence can delay necessary divestitures, prolonging value destruction

52
Q

Vertical Mergers

What are the potential benefits of vertical mergers?

**C6

A

Vertical mergers can reduce costs through better coordination of the supply chain, eliminate transaction costs, and improve market control by integrating production and distribution

53
Q

Transaction Cost Economics (TCE)

How does Transaction Cost Economics (TCE) relate to vertical mergers?

**C6

A

TCE suggests that firms engage in vertical mergers to internalize transactions, reducing the costs associated with contracting and dependence on external suppliers

54
Q

Bargaining Power in Vertical Mergers

How does vertical integration impact bargaining power with suppliers or distributors?

**C6

A

Vertical mergers increase the firm’s bargaining power by eliminating reliance on external suppliers or distributors, which can lead to cost savings and improved margins

55
Q

. Asset Specificity

Why is asset specificity important in the context of vertical mergers?

**C6

A

Asset specificity refers to the degree to which investments made for a particular transaction cannot be redeployed for other purposes. Vertical mergers can help protect such investments from opportunistic behavior by external parties

56
Q

Impact on Competition

What is foreclosure in the context of vertical mergers, and why is it a risk?

**C6

A

Foreclosure occurs when a vertically integrated firm restricts competitors’ access to essential inputs or distribution channels, which can lead to monopolistic practices and reduced market competition

57
Q

Foreclosure Risks in Vertical Mergers

What is foreclosure in the context of vertical mergers, and why is it a risk?

**C6

A

Foreclosure occurs when a vertically integrated firm restricts competitors’ access to essential inputs or distribution channels, which can lead to monopolistic practices and reduced market competition

58
Q

Long-Term Contracts vs. Vertical Integration

Why might firms prefer vertical integration over long-term contracts?

**C6

A

Vertical integration provides more control and flexibility than long-term contracts, especially when dealing with asset-specific investments or uncertain market conditions

59
Q

Empirical Evidence on Vertical Mergers

What does empirical evidence suggest about the success of vertical mergers?

**C6

A

Empirical studies show mixed results for vertical mergers. While some achieve cost savings and efficiency gains, others fail to create value due to integration difficulties and unforeseen market dynamics

60
Q

Organizational Challenges in Vertical Mergers

What are the primary organizational challenges in vertical mergers?

**C6

A

The main challenges include managing cultural differences, aligning operational processes, and achieving coordination across different parts of the value chain

61
Q

Conglomerate Mergers

What is a conglomerate merger?

**C7

A

A conglomerate merger is a union between companies that operate in unrelated business activities, potentially increasing market power through cross-selling or bundling

62
Q

Portfolio Effects in Conglomerate Mergers

What is the portfolio effect in conglomerate mergers?

**C7

A

Portfolio effects occur when a conglomerate offers a broader range of products than competitors, allowing them to leverage cross-selling opportunities

63
Q

Coordinated Effects in Conglomerate Mergers

What are coordinated effects in conglomerate mergers?

**C7

A

Coordinated effects arise when conglomerates tacitly avoid competition with each other, allowing them to maintain higher prices or reduced output

64
Q

Bundling in Conglomerate Mergers

How can bundling impact market power in conglomerate mergers?

**C7

A

Bundling allows a firm to use its dominance in one market to promote another product, potentially increasing market power across multiple markets

65
Q

Forbearance in Conglomerate Mergers

What does forbearance mean in the context of conglomerate mergers?

**C7

A

Forbearance refers to conglomerates mutually avoiding aggressive competition, leading to coordinated market behavior and reduced competition

66
Q

Customer Foreclosure in Vertical Integration

How does vertical integration lead to customer foreclosure?

**C7

A

Vertical integration may result in customer foreclosure if the merged firm restricts access to distribution channels, raising costs for competitors

67
Q

Unilateral Effects in Mergers

What are unilateral effects in mergers?

**C7

A

Unilateral effects occur when the merged firm can independently raise prices or reduce output, harming competition and consumer welfare

68
Q

Market Power Accretion in Mergers

How does a merger increase market power?

**C7

A

A merger increases market power by consolidating competitors, enabling the firm to exert more control over pricing, output, and market entry

69
Q

Conglomerate Mergers and Antitrust Concerns

Why are conglomerate mergers scrutinized by antitrust regulators?

**C7

A

Antitrust regulators are concerned that conglomerate mergers can reduce market competition by creating dominant firms that cross-leverage products and restrict market entry

Executive Master Mergers & Acquisitions and Valuation (3 decks)

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