Lesson 1 - Some second thoughts on our trade

Question 1

Q: What is the objective of the ‘wider perspective’ in M&A?

Answer 1

A: To inform on M&A performance, highlight the importance of theory, derive do’s and don’ts, and reflect on the current economic environment.

Question 2

Q: What is Phase 1 of the “Restructuring Carrousel”?

Answer 2

A: Booming economy, providing necessary means like cash and stock appreciations.

Question 3

Q: What triggers Phase 2 of the “Restructuring Carrousel”?

Answer 3

A: A random, eye-catching merger that ignites merger activity.

Question 4

Q: What is the minimax-regret rule in strategic decision-making?

Answer 4

A: If a move proves successful and others don’t imitate, they regret not acting. If they imitate a failed move, regret is smaller as blame is shared.

Question 5

Q: What typically happens during Phase 5 of the “Restructuring Carrousel”?

Answer 5

A: Anorexia management sets in, leading to sell-offs, divestitures, and layoffs.

Question 6

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Q: How does the long-term acquirer shareholder return look in M&A?

Answer 6

A: Returns decrease substantially over time, typically by -15 to -20% after 3 years.

Question 7

Q: What percentage of M&As fail to create economic value or market power?

Answer 7

A: 65-85% of M&As fail to create economic value or market power.

Question 8

Q: What do all five historical merger waves have in common?

Answer 8

A: They all ended in recession or worse, including the Great Financial Crisis in 2008.

Question 9

Q: What is the assumption in the Theory of Efficient Capital Markets (ECM)?

Answer 9

A: Investors are rational and price securities efficiently, with noise traders’ impact being random and canceling out.

Question 10

Q: What does the Theory of Market for Corporate Control (MCC) suggest about inefficient firms?

Answer 10

A: Poorly managed firms will see their stock prices reflect inefficiencies, prompting takeovers by more capable managers.

Question 11

Q: What is the key instrument in the market for corporate control?

Answer 11

A: Takeovers (mergers).

Question 12

Q: What are the two main techniques to shift control when management opposes a takeover?

Answer 12

A: Direct purchase of shares and proxy contests.

Question 13

Q: How do strategic games in M&A influence decision-making?

Answer 13

A: Firms often imitate competitors’ moves to avoid competitive disadvantage, following the minimax-regret rule.

Question 14

Q: What is a key lesson for businesses regarding M&A waves?

Answer 14

A: Anticipate the merger wave and act early.

Question 15

Q: What type of acquisitions should firms prefer in an M&A wave?

Answer 15

A: Similar, horizontal acquisitions over diversification.

Question 16

Q: Why should firms pay in cash rather than stock during acquisitions?

Answer 16

A: Cash offers more control and reduces integration complexities.

Question 17

Q: Why is the role of investment banks in M&A significant post-deregulation?

Answer 17

A: Investment banks, along with commercial banks, have fueled M&A waves by providing funding, even for uneconomic mergers.

Question 18

Q: What typically happens to firms that undertake M&A regarding profits and market share?

Answer 18

A: They often lag behind control groups in profits, revenue, and market share growth.

Question 19

Q: How do shareholder value studies typically measure the effect of M&A?

Answer 19

A: Through cumulative average residuals (CAR), reflecting stock price deviations from expected values.

Question 20

Q: What is the impact of M&A on R&D output per dollar invested?

Answer 20

A: Firms engaging in M&A typically underperform in R&D output compared to controls.

Question 21

Q: Why do M&As occur frequently despite failing economically?

Answer 21

A: Strategic positioning games among large interdependent players drive M&A activity, not just economic gains.

Question 22

Q: What is the main focus of “real value analysis” in M&A studies?

Answer 22

A: Assessing the effect of M&A on profits, productivity, and observable indicators like market share and patents.

Question 23

Q: What strategic uncertainty do firms face in concentrated markets?

Answer 23

A: Unpredictable effects of competitors’ moves, requiring strategic interdependence.

Question 24

Q: What triggers defensive routines in M&A?

Answer 24

A: Firms follow the minimax-regret rule, imitating others to avoid competitive disadvantage.

Question 25

Q: What should firms avoid when integrating acquisitions?

Answer 25

A: Avoid expending too many resources on integration, keeping entities semi-autonomous.

Question 26

Q: What does Phase 6 of the “Restructuring Carrousel” represent?

Answer 26

A: The pool with potential acquisition targets is refilled.

Question 27

Q: What is a proxy contest in the context of hostile takeovers?

Answer 27

A: A method to gain control by persuading shareholders to vote against existing management.

Question 28

Q: What is the risk of over-commitment in M&A?

Answer 28

A: It can lead to poor decisions, so responsibilities should be spread, and partner selection carefully managed.

Question 29

Q: What is an event study in shareholder value analysis?

Answer 29

A: Analyzing stock price movements in response to M&A events, controlling for expected movements.

Question 30

Q: Why are large M&As often seen as strategic phenomena rather than economic?

Answer 30

A: They are often driven by competitive positioning rather than wealth creation.

Question 31

Q: What happens when the MCC is not allowed to function unhindered?

Answer 31

A: Governments may intervene to regulate and lubricate the market for corporate control.

Question 32

Q: What is the typical short-term shareholder return for acquirers post-M&A?

Answer 32

A: +2% in the short term, followed by long-term decreases.

Question 33

Q: What does horizontal acquisition mean in M&A strategy?

Answer 33

A: Acquiring firms within the same industry to enhance market position.

Question 34

Q: Why is media attention in M&A sometimes minimized?

Answer 34

A: To avoid over-commitment and pressure on management decisions.

Question 35

Q: What do investment banks do during a wave of M&A activity?

Answer 35

A: They seek potential targets, fueling the wave by arranging financing.

Question 36

Q: What role does the CAPM model play in event studies?

Answer 36

A: It helps control for expected stock price movements when analyzing the impact of M&A events.

Question 37

Q: What is the empirical problem in the theory of market for corporate control (MCC)?

Answer 37

A: Despite expectations, many M&As do not maximize profits.

Question 38

Q: What does the term “anorexia management” refer to in M&A?

Answer 38

A: A phase of sell-offs, divestitures, and layoffs following a merger explosion.

Question 39

Q: What should be done if M&A waves don’t produce expected results?

Answer 39

A: Firms might need to divest acquisitions through MBOs, trade sales, or IPOs.

Question 40

Q: How does the boom in the economy affect M&A activity?

Answer 40

A: It provides the necessary cash and borrowing capacity for mergers.

Question 41

Q: What is a random, eye-catching merger’s role in M&A waves?

Answer 41

A: It can serve as a catalyst, igniting further merger activity.

Question 42

Q: What is minimax-regret in the context of defensive M&A moves?

Answer 42

A: A strategy where firms imitate others to avoid being at a disadvantage.

Question 43

Q: How do oligopoly markets affect M&A strategies?

Answer 43

A: They allow strategic interdependence, where the moves of one firm affect others.

Question 44

Q: What does the phrase “the pool with targets is refilled” suggest in M&A cycles?

Answer 44

A: New acquisition opportunities arise after a period of divestitures and sell-offs.

Question 45

Q: What is the impact of regulatory takeover policies?

Answer 45

A: They aim to minimize firms’ ability to block efficiency-improving takeovers.

Question 46

Q: What are cumulative average residuals (CAR)?

Answer 46

A: A measure used in event studies to gauge stock price deviations due to M&A events.

Question 47

Q: How does strategic positioning influence M&A?

Answer 47

A: Firms engage in M&A to maintain or improve their competitive standing, not just for profit.

Question 48

Q: What are the 6 core assumptions of economics

Answer 48

1. **Completeness **- rational actors are able to compare alternatives and decide which one(s) they prefer.
2. Transitivity - If A > B, and B > C, then A > C
3. Non-satiation - more is preferred to less
4. Maximizing Expected Utility **
   5. Methodological Individualism** - choice not dependent on other actors
5. **Consistent Efficiency Equilibria **- actions of different individuals are consistent

CompTnon Max Meth Con

Question 49

Q: What is the UR-model

Answer 49

Describes a rational, fully informed agent, who evaluates alternatives and consistently chooses the option that maximizes their utility.

Question 50

Q: What is the efficient market hypothesis

Answer 50

EMH asserts that financial markets are fully efficient, meaning all available information is reflected in asset prices, preventing consistent outperformane through trading strategies.

Question 51

Q: What is the Theory of Market Control?

Answer 51

Poorly managed companies are subject to takeover by more efficient management, as the market accurately reflects inefficiencies in their stock prices, leading to shifts in control.

Most common instrument is takeover (merger)

Question 52

Q: What are the 6 phases of the Restructurings Carrousel

Answer 52

Phase 1: booming economy
Phase 2: eye-catching merger can ignite the game
Phase 3: minimax-regret and defensive routines set in lead to bursts of M&A activity
Phase 4: merger explosion levels off as a result of negative effects on players
Phase 5: anorexia management sets in (sell-offs)
Phase 6: Pool with targets is refilled.