M&A Flashcards
1
Q
Horizontal merger
A
Two companies in the same industry e.g. tesco and asda
2
Q
Reasons for Horizontal Merger
A
- stronger market power
- economies of scale
3
Q
What is a merger?
A
A merger is a transaction in which two or more businesses combine into a single entity
4
Q
Vertical merger
A
Two companies at different stages of production e.g. oil companies
5
Q
Upstream vertical merger
A
Manufacturer acquires raw materials producer
6
Q
Downstream vertical merger
A
Manufacturer acquires distributor
7
Q
Reasons for vertical merger
A
- secure provider for raw materials or a secure sales outlet
- streamlined operations and reduced costs
- increase in market power
8
Q
Conglomerate
A
Two unrelated companies e.g. virgin group
9
Q
Reason for conglomerate merger
A
- diversify risk
10
Q
Financing with cash
A
- bidding shareholders control is not diluted
- price is clear to see
- target shareholders have more options
- target shareholders subject to capital gains tax
11
Q
Regulatory bodies related to mergers in the UK
A
- UK listing authority
- takeoverpanel (city code/blue book)
- competition and markets authority
- European commission
12
Q
What drives merger waves?
A
- may be linked to booms/recessions
- more efficient to grow artificially than organically
- economic disturbance theory
- surplus cash
- industry deregulation and consolidation
- e.g. covid may lead to increased merger due to the volatility and number of companies in financial distress
13
Q
Economic disturbance theory
A
Shareholders are more likely to overvalue the company due to overconfidence in synergies
14
Q
Reasons for cross border mergers
A
- UK companies are attractive due to less regulation and red tape
- UK trade unions are pragmatic
- UK underproductivity compared to European counterparts, foreign companies see they could potentially increase profitability
- UK culture is less supportive of national sovereignty
15
Q
Problems with cross border mergers
A
- cultural differences and language barriers
- time barriers?
- UK R&D suffers when a foreign company acquires them
16
Q
Reasons for mergers
A
- synergies
- Increased market power
- new market entry
- complementary resources
- valuable assets
- using surplus cash
- boost growth rates
- managerial motives
- hubris hypothesis
17
Q
Synergies (reason for merger)
A
The PVxy is equal to PVx + PVy + synergistic gain
where synergistic gain could come from economies of scale for example
18
Q
Increased market power (reason for mergers)
A
- impacts competition
- can increase prices if they have enough market power
19
Q
New market entry (reason for mergers)
A
- can help break into a new industry, sector or location
- artificial growth > organic growth
20
Q
Complementary resources (reason for mergers)
A
- large companies acquire smaller firms who have e.g. better R&D prospects or a unique product.
- small company gains due to increased access to capital, experience and expertise
21
Q
Valuable assets (reason for mergers)
A
- Desire to get hold of tangible e.g. M&S locations example and intangible assets e.g. patents, licenses, brand names
22
Q
Boost growth rates (reason for mergers)
A
- mature company acquires a company in the takeoff stage, used as a quick fix to boost EPS
23
Q
Managerial motives (reason for mergers)
A
- Management tend to benefit from merger activity as they end up controlling a larger empire
- and as such receive higher pay and therefore pension. Also, higher status and prestige
24
Q
Hubris Hypotheseis (reason for mergers)
A
- Richard Roll (1986)
- managers become overconfident and overquantify the benefits of the merger
- Roll argues that even if there are no synergistic benefits, overconfidence of the manager will result in them overpaying for the company
- assumes market efficiency
- does not imply managers deliberately act against shareholder interest
- suggests, due to the rarity of mergers, managers will get excited and overquantiy the accrued benefits
- empirical evidence supports this
25
Q
Mechanics of a merger
A
- Identify target
- appraise target
- negotiation
- the offer
26
Q
Appraise target (4 types of due diligence)
A
- financial: examination of e.g. outstanding debt, tax, profit forecasts, management accounts, accounting systems and policies
- legal: any litigation outstanding? examine contracts, share capital, memorandum and articles of association
- employee: pension commitments, bonus or share ownership schemes, termination clauses
- commercial: market information, competitor research, R&D, marketing, customer research, product research
27
Q
Negotiation
A
- How much?
- When?
- Who will be on the new board?
- Depends on friendly or hostile
28
Q
Friendly negotiation
A
- target board advises shareholders to accept the bid
29
Q
Hostile takeover
A
- target board does not recommend that shareholders accept the bid
- bidding company will continue with a hostile bid
30
Q
Hostile bid
A
- the predatory company embarks on a dawn raid
31
Q
Dawn raid
A
- bidding company targets key shareholders and attempts to buy all of the shares on the open market
32
Q
Rules relating to takeover bids
A
- 3% rule
- 30% rule
- 90% rule
33
Q
3% rule
A
- once the bidding company has 3% of the company’s shares they must inform the target, regardless of a takeover bid
34
Q
30% rule
A
- the takeover panel usually oblige the bidding company to make a cash bid for all of the target company shares
- In the case of a hostile takeover, the target has 14 days to convince shareholders not to sell
- There will be counter deals and offers
- Max period of bid is 60 days and if unsuccessful, another bid cannot be submitted for 12 months
35
Q
90% rule
A
- to avoid the frustrations of having a small group of shareholders unwilling to sell
- once the bidder has convinced over 90% of the remaining shareholders to sell, they can force the final 10% to sell
36
Q
Financing the merger
A
- cash
- equity
- debt
- earnouts
In practice, usually a combination of debt, equity and cash. It is also very common to use a rights issue
37
Q
Equity financing
A
- share for share exchange
- shareholders in both companies are combined into one group
- CGT is postponed for target shareholders and can participate in merger gains. However, no immediate cash flow gain
- Bidder shareholders benefit from no immediate cash outflow
- disadvantages for bidder: equity financing is expensive, bidding shareholders control is diluted as they are now sharing control
38
Q
Debt Financing
A
- using debentures, loan stocks, convertibles or preference shares for example
39
Q
Earn-outs
A
- Part paid at time of merger
- rest paid at end of earnout period
- earnout period is pre-defined, usually 2 to 5 years
- amount paid based on profits earned since the acquisition
- key advantage is former owners and managers can be locked into the deal
- many problems can arise:
- how is performance defined?
- the speed of integration: may be no synergistic gains in the period
40
Q
Regulatory bodies related to M&A
A
- UK Listing Authority
- Takeover panel (City Code (Blue Book))
- Competition and Markets Authority
- European Commission
41
Q
UKLA
A
- their rules apply when the bidding company is on the LSE
42
Q
City Code
A
- Applies to bidding and target companies
- Code of best practice with no legal backing
- Enforced by the takeover panel
- Aims to ensure all shareholders are treated fairly and that managers act in shareholder interests
43
Q
Takeover panel
A
- they will name and shame any company who doesn’t adhere to the city code
- companies who are named and shamed face the risk of being shunned by the financial sector
44
Q
CMA
A
- ensure there is no lessening of competition
- will block a merger if they believe it will harm competition
45
Q
European Commission
A
- will block any mergers that they don’t think are in the interest of the European Common Market
46
Q
Defence Strategies
A
- Press coverage
- Revise profit forecasts/revaluation of assets
- ‘White Knight’
- Poison pill
- Share buyback
- Employee share ownership plan
- Golden parachutes
47
Q
Press coverage
A
- Directors try to build up shareholder loyalty by highlighting company strengths in the media
- e.g. hint at increased dividend, appointment of new director
48
Q
Revise profit forecasts/revaluation of assets
A
- try to boost the value of balance sheet to increase the share price, making the target more expensive
- Revised figures must be credible
49
Q
‘White Knight’
A
- Defensive merger
- target finds a company they would rather be taken over by
- target shareholders should be wary of managers acting in their own interests e.g. safer jobs
50
Q
Poison pill
A
- issue rights to acquire new shares in the target to increase the cost of acquisition
- target could issue convertible bonds which are exercisable only in the case of a takeover, making the cost of a takeover prohibitive
51
Q
Share buyback
A
- target company buys back shares, removing shares from the open market and driving the share price up
- making it more expensive to acquire
52
Q
Employee share ownership plan
A
- Shares placed into the hands of employees rather than predators, with the hope being that employees wont sell to any bidding companies
53
Q
Golden parachutes
A
- target companies give directors huge termination packages which would make it too expensive for the bidding company to get rid of them
54
Q
Financial institutions gain/loss from merger
A
- biggest winners due to fees charged and lots of paperwork
- must consider risks such as litigation for a failed bid
55
Q
Consumers gain/loss from merger
A
- Synergistic cost savings could lower prices for consumers
- Alternatively, abuse of monopoly power can raise prices
56
Q
Shareholders gain/loss from merger
A
- target: seem to gain due to premium paid by predator
- predator: at best, effect is neutral (conflicting evidence whether there is a gain or loss)
57
Q
Employees gain/loss from merger
A
- may suffer from redundancies
- alternatively, combined group could mean a stronger group and more employees are needed
58
Q
Directors gain/loss from merger
A
- target: tend to lose due to loss of power, may be made redundant. However, may enjoy golden parachutes or big payoffs
- predator: bigger empire therefore higher remuneration
59
Q
Reasons for merger failure
A
- acquiring them for the wrong reasons e.g. a conglomerate losing focus by diversifying into several different fields
- Over/underestimating merger gains/costs, linked to hubris hypothesis
- Poorly planned integration: might look good on paper but doesn’t work in practice. e.g. cultural differences, integration plan, are employees/senior management supportive?
