M&A

Question 1

Why do firms merge?

Answer 1

Cost synergies
revenue diversification
Increasing influence under five forces

Harder to realize Revenue synergies (like cross selling businesses)

Question 2

Main reasons for 1 firm to acquire another

Answer 2

Synergies, strategic rationale and business reasons

Synergies
Realize higher revenues
Lower expenses then if operated separately
Lower cost of capital

Strategic
Positioning in market
acquire human capital
Broader market access

Business reasons
Diversification 
Short term growth
Undervalued target
Bargain purchase - might be cheaper to just. It might be cheaper to buy than develop internally

Question 3

What is a control premium

Answer 3

It’s how much the buyers going to pay above current market price to acquire that company

Question 4

How much is the typical control premium

Answer 4

Depends on economic environment industry but usually 20 to 30% above stock price of target firm

Question 5

What are the typical characteristics of merger of equals

Answer 5

Stocks swap assuming no cash consideration

Shared control of board and management

Ownership close to equal split

Low to low premium

Question 6

What is the control premium

Answer 6

How much do the acquirer pays above the lcurrent market price of a public company

It’s to compensate existing shareholders to give up control

Question 7

What does it mean if a deal is accretive?

Answer 7

Acquirer’s EPS goes up

For all stock Acquirer PE is less than target PE

Question 8

What is Due diligence?

Answer 8

Uncover any MATERIAL risk issues and opportunities associated with the deal

Examine official statements like financial projections the board