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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
Q

4 other motives for acquisition

A

revenue enhancement
cost reduction
tax gains
decreased capital requirements

26
Q

synergy

A

idea that 2+2=5
the value between A + B and AB is the PV of incremental cash flows created by new AB

27
Q

2 types of synergy

A

financial and operating

28
Q

revenue enhancement and acq

A

increasing revs maintaining same cost
market monopoly power

29
Q

decreased costs and acq

A

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
Q

tax gains and acq

A

take on tax losses from other firm decreases tax payable

31
Q

decreased cap requirements and acq

A

disposal of duplicate fixed capital and working capital

32
Q

2 financial side effects of acq

A

earnings growth
diversification

33
Q

earnings growth

A

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
Q

diversification

A

more obvious with conglomerate but portfolio effect could decrease risk
access private firms or firms with low liquidity

35
Q

how can investors created ‘homemade merger’?

A

buying both firms shares

36
Q

3 acquisition offer forms

A

off-market(formal offer)
on-market offer
time delayed purchase (creeping)

37
Q

off market offer

A

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
Q

on market offer

A

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
Q

time delayed creeping

A

acq max 3% of shares every 6 months
provided a 19% threshold maintained for at least 6 months
no announcements/offer documents
gradual

40
Q

defensive tactics controversial and less controversial

A

poison pills
anti-takeover amendments
white knight
golden parachute
less:
target management to offers
priv transactions
experts valutation
litigation
advertising/media

41
Q

2 ways to value an acquisition

A

EPS valuation
CF NPV approach

42
Q

EPS valuation

A

measures effect on EPS, P/E ratio, SP

43
Q

EPS valuation steps

A

1) determine share exchange ratio
2) number shares issued to target B
3) new EPS
4) new SP for AB

44
Q

For EPS if we don’t know P/E ratio?

A

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
Q

CF NPV approach

A

evaluates gains/costs of acq using CF analysis

46
Q

through CF NPV approach the gain is

A

shared between both firm shareholders

47
Q

through CF NPV approach all costs are borne

A

to bidding firm

48
Q

2 types of acquisition payments and what they signal

A

cash- sign of strength
shares exchange- management’s uncertainty regarding synergies from merger

49
Q

shares exchange payment is acq firm shares …

A

in exchange for targets shares

50
Q

the naive premium is usually… and only correct …

A

smaller than true premium (undervalues premium) and is only correct when Pab=Pa

51
Q

EPS vs CF approaches

A

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
Q

can you have acquisition offer via shares and cash?

A

yes

53
Q

does acquisition create value?

A

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
Q

divestitures

A

sale of division, business unit, segment or set of assets to another gaits or group of shareholders
shown to create value for shareholders

55
Q

2 other corporate restructuring types

A

spin-off
equity carve-out

56
Q

spin-off

A

firm creates new firm out of subsidiary and distributes shares of new firm to parent firm shareholders

57
Q

equity carve out

A

firm creates new firm out of subsidiary and then sells minority interest to public via IPO

FINC206 (4 decks)

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