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FINC206 > M&A > Flashcards

M&A Flashcards

1
Q

acquisition

A

firm purchases another firm by acquiring controlling interest in its voting shares
or by acquiring its assets

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2
Q

an acquisition can be both

A

friendly or hostile

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3
Q

acquisition is what type of decision?

A

investment

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4
Q

should only acquire if

A

NPV +

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5
Q

acquisition could have effects on

A

capital structure/financing

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6
Q

acquisition is change of control or

A

ownership of assets

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7
Q

acquisition is a gei___

A

growth
expansion
industry
consolidation

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8
Q

consolidation

A

combine financial items of 2 or more entities into one

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9
Q

acquisition is a source of wealth for

A

shareholders

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10
Q

acquisition tends to cycle

A

with economy and occur in waves

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11
Q

positive relationship between acquisition activity and

A

stock market and movement in SP

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12
Q

non organic vs organic growth

A

no:
- buy something else to gain growth
o:
- growth by increased output and increased sales internally

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13
Q

3 types of takeovers

A

acquisition
proxy contest
going private (LBO)

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14
Q

3 categories of acquisitions

A

merger or consolidation
acq of assets
acq of stocks

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15
Q

merger

A

firm acquired by another firm but one ceases to exist

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16
Q

acquisition vs merger

A

merger combines, acquisition one takes over another

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17
Q

what condition must occur for a merger to happen?

A

shareholders of both firms must approve

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18
Q

why is merger good?

A

legally simple

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19
Q

consolidation

A

new firm created from combo usually with new name

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20
Q

3 types of acquisitions

A

horizontal
vertical
conglomerate

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21
Q

horizontal acquisition

A

target firm is in same line of business

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22
Q

vertical acquisition

A

target firm is supplier or consumer of g/s

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23
Q

conglomerate

A

target is in unrelated type off business

24
Q

main motives for acquisition

A

synergy creation or economic gains

25
4 other motives for acquisition
revenue enhancement cost reduction tax gains decreased capital requirements
26
synergy
idea that 2+2=5 the value between A + B and AB is the PV of incremental cash flows created by new AB
27
2 types of synergy
financial and operating
28
revenue enhancement and acq
increasing revs maintaining same cost market monopoly power
29
decreased costs and acq
decreases costs maintaining same rev eco of scale vs scope scale: spreading FC over more units scope: benefits from enhancing breadth of products/services
30
tax gains and acq
take on tax losses from other firm decreases tax payable
31
decreased cap requirements and acq
disposal of duplicate fixed capital and working capital
32
2 financial side effects of acq
earnings growth diversification
33
earnings growth
increased EPS without creating any synergy target firm with low P/S ratio than bidding means increased EPS without any change in merged earnings
34
diversification
more obvious with conglomerate but portfolio effect could decrease risk access private firms or firms with low liquidity
35
how can investors created 'homemade merger'?
buying both firms shares
36
3 acquisition offer forms
off-market(formal offer) on-market offer time delayed purchase (creeping)
37
off market offer
formal most common lowest risk to bidder offer made directly to shareholders of target firm to acquire part or all of their shares cash or shares statement must remain open min 1 month and can change, target must respond
38
on market offer
bidder stands in market and acquires all shares offered on exchange at a specific price cash only offer can be revised and extended for upto 12 months fastest to get started but risky if don't get subs full you're left with little control
39
time delayed creeping
acq max 3% of shares every 6 months provided a 19% threshold maintained for at least 6 months no announcements/offer documents gradual
40
defensive tactics controversial and less controversial
poison pills anti-takeover amendments white knight golden parachute less: target management to offers priv transactions experts valutation litigation advertising/media
41
2 ways to value an acquisition
EPS valuation CF NPV approach
42
EPS valuation
measures effect on EPS, P/E ratio, SP
43
EPS valuation steps
1) determine share exchange ratio 2) number shares issued to target B 3) new EPS 4) new SP for AB
44
For EPS if we don't know P/E ratio?
if remains at pre-merger level for A S{ increase for AB if no value created P/E is average of A and B, lower ave = lower SP for AB
45
CF NPV approach
evaluates gains/costs of acq using CF analysis
46
through CF NPV approach the gain is
shared between both firm shareholders
47
through CF NPV approach all costs are borne
to bidding firm
48
2 types of acquisition payments and what they signal
cash- sign of strength shares exchange- management's uncertainty regarding synergies from merger
49
shares exchange payment is acq firm shares ...
in exchange for targets shares
50
the naive premium is usually... and only correct ...
smaller than true premium (undervalues premium) and is only correct when Pab=Pa
51
EPS vs CF approaches
EPS - focuses on short term approach - immediate effect of acq on EPS biased against long term value creation aces CF - focuses on long term benefits - whether or not incremental CFs>costs - better incorporates long term benefits
52
can you have acquisition offer via shares and cash?
yes
53
does acquisition create value?
shareholder of target firm often get excess returns due to large bid premiums offered on ave not gain/lose due to bidders overestimating synergy hubris behaviour integration problems post acq
54
divestitures
sale of division, business unit, segment or set of assets to another gaits or group of shareholders shown to create value for shareholders
55
2 other corporate restructuring types
spin-off equity carve-out
56
spin-off
firm creates new firm out of subsidiary and distributes shares of new firm to parent firm shareholders
57
equity carve out
firm creates new firm out of subsidiary and then sells minority interest to public via IPO

FINC206 (4 decks)

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