M&A Part II

Question 1

Reasons for M&A

Answer 1

Value creation
Growth
Resource acquisition
Diversification
Industry Change
Competition
Discourage takeover
Taxes

Question 2

Value creation

Answer 2

Synergies
Better Management
Realizing asset value

Question 3

Growth

Answer 3

Assets
Sales
Profits

Question 4

Resource Acquisition

Answer 4

PPE

Patents

Cash

Expertise

Technology

Question 5

Diversification

Answer 5

Good for investors and managers

Question 6

Change in industries

Answer 6

Acquire assets to transition from a low growth industry to a high growth industry

Question 7

Competition

Answer 7

Merging w a competitor eliminates them as a threat

Question 8

Desirable Characteristics of Takeover Candidate

Answer 8

Synergy potentials

Target plays in a desirable industry

Financial characteristics

Easy turnaround

Room to substitute debt for equity

Competitive threat

Target cannot defend against acquisition

Unconcentrated ownership

Question 9

Williams Act of 1968

Answer 9

Protects the target and its shareholders through setting strict guidelines on tender offers, SEC filings, and share purchase

Question 10

Hart Scott-Rodino Anti-Trust

Answer 10

Must notify FTC if merging firms are of a certain size, raiders must wait 15-30 days before making a tender / continuing merger

Target firm must give tender offer notice at least 10 days in advance for stockholder

Question 11

Stock for stock deal

Answer 11

Acquirer gets all of targets earnings and equity value, and a fraction of its shares outstanding

Question 12

P:E Influences

Answer 12

expected growth

risk on future earnings

Question 13

Growth of merged firm

Answer 13

should be between pre-acquisition growth of each firm, but will be closer to the growth of the larger firm.

Question 14

Post-merger EPS

Answer 14

if earnings increase by larger % than SOS, EPS should be higher

Question 15

Acquisition analysis

Answer 15

If acquirer’s stock price falls post merger, they loose and target wins

Question 16

Tax implications of mergers for shareholders

Answer 16

In a stock for stock deal the shareholders of the target company can defer taxes until they sell their stock, because they defer capital gain

Question 17

Pre-2001 Accounting for M&A

Answer 17

purchase or pooling method

purchase - goodwill is anything over book value and cannot exceed 40 years

pooling - combine balance sheets.

Question 18

Post 2001 M&A Accounting

Answer 18

FASB allows you to avoid goodwill amortization if assets loose value

Question 19

goodwill

Answer 19

a non-cash expense that reduces retained earnings