M&A Flashcards
acquisition
firm purchases another firm by acquiring controlling interest in its voting shares
or by acquiring its assets
an acquisition can be both
friendly or hostile
acquisition is what type of decision?
investment
should only acquire if
NPV +
acquisition could have effects on
capital structure/financing
acquisition is change of control or
ownership of assets
acquisition is a gei___
growth
expansion
industry
consolidation
consolidation
combine financial items of 2 or more entities into one
acquisition is a source of wealth for
shareholders
acquisition tends to cycle
with economy and occur in waves
positive relationship between acquisition activity and
stock market and movement in SP
non organic vs organic growth
no:
- buy something else to gain growth
o:
- growth by increased output and increased sales internally
3 types of takeovers
acquisition
proxy contest
going private (LBO)
3 categories of acquisitions
merger or consolidation
acq of assets
acq of stocks
merger
firm acquired by another firm but one ceases to exist
acquisition vs merger
merger combines, acquisition one takes over another
what condition must occur for a merger to happen?
shareholders of both firms must approve
why is merger good?
legally simple
consolidation
new firm created from combo usually with new name
3 types of acquisitions
horizontal
vertical
conglomerate
horizontal acquisition
target firm is in same line of business
vertical acquisition
target firm is supplier or consumer of g/s
conglomerate
target is in unrelated type off business
main motives for acquisition
synergy creation or economic gains
4 other motives for acquisition
revenue enhancement
cost reduction
tax gains
decreased capital requirements
synergy
idea that 2+2=5
the value between A + B and AB is the PV of incremental cash flows created by new AB
2 types of synergy
financial and operating
revenue enhancement and acq
increasing revs maintaining same cost
market monopoly power
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
tax gains and acq
take on tax losses from other firm decreases tax payable
decreased cap requirements and acq
disposal of duplicate fixed capital and working capital
2 financial side effects of acq
earnings growth
diversification
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
diversification
more obvious with conglomerate but portfolio effect could decrease risk
access private firms or firms with low liquidity
how can investors created ‘homemade merger’?
buying both firms shares
3 acquisition offer forms
off-market(formal offer)
on-market offer
time delayed purchase (creeping)
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
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
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
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
2 ways to value an acquisition
EPS valuation
CF NPV approach
EPS valuation
measures effect on EPS, P/E ratio, SP
EPS valuation steps
1) determine share exchange ratio
2) number shares issued to target B
3) new EPS
4) new SP for AB
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
CF NPV approach
evaluates gains/costs of acq using CF analysis
through CF NPV approach the gain is
shared between both firm shareholders
through CF NPV approach all costs are borne
to bidding firm
2 types of acquisition payments and what they signal
cash- sign of strength
shares exchange- management’s uncertainty regarding synergies from merger
shares exchange payment is acq firm shares …
in exchange for targets shares
the naive premium is usually… and only correct …
smaller than true premium (undervalues premium) and is only correct when Pab=Pa
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
can you have acquisition offer via shares and cash?
yes
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
divestitures
sale of division, business unit, segment or set of assets to another gaits or group of shareholders
shown to create value for shareholders
2 other corporate restructuring types
spin-off
equity carve-out
spin-off
firm creates new firm out of subsidiary and distributes shares of new firm to parent firm shareholders
equity carve out
firm creates new firm out of subsidiary and then sells minority interest to public via IPO
