M&A

Question 1

what are the reasons for M&A

Answer 1

synergies, economies of scale/scope, vertical integration, gains (monopoly efficiency, tax savings), diversification (less risk, more debt and lower cost of capital, more liquidity for private shareholders), expertise, earnings growth

Question 2

earnings growth and the implications for PE ratio

Answer 2

when the PE ratio paid is bigger than the PE ratio of the acquiror than the EPS will decrease

Question 3

what is merger arbitrage

Answer 3

when a tender offer is announced, the volatility of the stock prices increases and this can lead to an arbitrage opportunity.

Question 4

what are the consideration of stock vs cash merger

Answer 4

availability of cash –> implications of leverage
control considerations
uncertainty about the value of target, acquirer and synergy value

Question 5

explain the defense mechanisms against hostile takeover

Answer 5

poison pills 
white knight 
gray knight 
white squire 
golden parachute
recapitalization

Question 6

motives for a LBO

Answer 6

better corp governance and incentive structure because of increases pressure

operating efficiency and employee lay off

tax advantages
wealth transfer