Lucture 1: Introduction Flashcards
What is the legal definition of a merger?
When two companies combine with a different operating name afterwords
What is the legal definition of an acquisition?
When one company takes over another, sometimes friendly sometimes unfriendly
What are the motivations for mergers and acquisitions?
- Synergy
- Diversification
- Strategic realignment
- Ego/hubris
- Financial considerations
- Tax
- Market power
- Misvaluation of target
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What forms of synergy are there?
- Economies of scale
- Economies of scope
- Reduction in cost of capital
What is the average acquisition premium?
43% on pre merger price
What is the average reaction for target shares after acquisition announcement?
> 15%
Why do merger and acquisition waves occur?
- Neo classical hypothesis (tech, deregulation, escalating commodity prices)
- Behavioural hypothesis (overvaluation of acquirer share price relative to target)
- Ample liquidity, low cost of capital
What is the empirical evidence during merger and acquisition waves?
- Mergers and acquisition waves are highly correlated with high stock prices
- Correlation doesn’t equal causation
- It is when investor confidence is high
What were the mergers waves in order?
- Horizontal consolidation (1897-1904)
- Increasing concentration (1916-1929)
- The conglomerate (1965-1969)
- The retrenchment (1981-1989)
- Age of the mega-merger (1992-2000)
- Cross border and horizontal mega-mergers (2003-2007)
What occurred during the Horizontal Integration Era (1897-1904)
- drive for efficiency
- law enforcement
- technological change
- westward migration
- concentration in metals, transport and mining
- ended 1904 due to stock crash
What occurred during the Increasing Concentration Era (1914-1929)
- largely horizontal integration
- entry OF WWI
- post war boom
- passage of Clayton Act which defined monopolistic practices
- ended 1929 due to stock crash
What occurred during the Conglomerate Era (1965-1969)
- financial engineering
- buying of earning streams to increase share price
- overvalued firms bought undervalued high growth firms
- ended when no more undervalued firms where there to buy and increasing leverage
What occurred during the Retrenchment (1981-1989)?
- underperformance of conglomerates
- favourable accounting and regulatory practices
- hostile takeovers
- 2nd half of decade dominated by financial buyers financed by junk bonds
- ended with bankruptcy of large LBOs and Drexel Burnham
What occurred during the Strategic Mega-Merger Era (1992-2000)
- consolidation of industries
- tech innovation
What occurred during the Cross Border & Horizontal Mega-merger era (2003-2007)?
- concentration in banking, healthcare and commodities
- economies of scale and scope
- deregulation
- low interest rates
- ended with 2008 financial crisis
