M&A (W11) Flashcards
Merger
One firm acquired by another, acquiring firm retains name and acquired firm ceases to exist.
Advantage/Disadvantage Merger
Adv - Legally simple
Disadv - Must be approved by stockholders of both firms
Consolidation
Entirely new firm created from combination of existing firms
Acquisition
Involve one company purchasing another by acquiring a controlling interest in its voting shares.
Acquisition should represent
NPV positive investment, may have financing and capital structure effects
Acquisitions involve major changes in ownership and control of valuable assets resulting in… (2)
Major form of growth, expansion, and industry consolidation for firms
Major source of wealth creation for shareholders
Positive relationship between acquisition activity and…
The behaviour of the stock market and movement in share price
Types of Acquisitions (3)
Horizontal
Vertical
Conglomerate
Horizontal Acquisition
Target company operating in the same industry and production stage as the acquiring company.
Vertical Acquisition
Target company either a supplier of goods or services or a consumer of goods and services provided by the acquiring company –> extending the product line.
Conglomerate Acquisition
Target company in a unrelated type of business
Main motive for acquisitons
Synergy creation or economic gains
Sources of synergy (4)
Revenue Enhancement
Cost Reduction
Tax Gain
Reduced Capital Requirements
Revenue Enhancement (4)
Increasing revenue while maintaining same cost base
Market/monopoly power
Accessing new distribution networks and improve product offerings
Strategic benefits
Cost Reduction
Reducing costs while maintaining same revenue base
Economies of scale
Economies of scope
Technology transfers/expertise
Elimination of inefficient management and reduction in agency costs
Tax Gain
Net tax losses to reduce company tax payable
Accessing unused or new debt capacity
Reduced Capital Requirements
Identification and disposal of duplicate fixed and working capital
Financial Side Effects of Acquisitions (2)
Earnings Growth
Diversification –> risk reduction benefits in any acquisition, access to private companies with low liquidity
Types of Acquisitions (3)
Off-Market/Formal Offer
On-Market Offer
Time-Delayed Purchase/Slow Burn Takeover
Off-Market/Formal Offer
Offer made directly to all shareholders of target company to acquire part or all of their shares
Typically remains open for a minimum of 1 month
Bidder required to issue a bidder statement outlining terms of the offer.
Target management required to respond to response statement.
On-Market Offer (3)
Requires bidder to stand in the market and acquire, all shares offered on the exchange at a specified cash-only price.
Offer can be revised and extended for up to 12 months without approval.
Faster to start but higher risk
Time-Delayed Purchase –> Slow Burn Takeover for On Market Offer (2)
Allows for acquisition of no more than 3% of the target’s shares every 6 months, provided that threshold ownership level of 19% has been maintained for at least 6 months.
No announcements or offer documents required.
Defensive Tactics in Acquisitions (4)
Use of arrangements are common in US such as
- Poison pills –> illegal in some countries
- Anti-takeover amendments
- Golden Parachutes
- White Knights
Less Controversial Defensive Tactics (5)
Target management opposition offsets
Private transactions
Expert valuations
Litigation
Advertising and Media Reporting
Evaluations of Acquisitions (2)
EPS
NPV
EPS Evaluation
Effect of the acquisition on the EPS, P/E ratio and share price
Steps of EPS Evaluation (4)
- Determine the share exchange ratio
- Determine the number of shares issued to target company B
- Determine new EPS and share price for merged firm
- Calculate gain/no gain
Cash Flow (NPV) Evaluation
Determine whether the acquisition represents a positive NPV investment decision from the bidding firm
EPS vs. Cash Flow
EPS focuses on short run effects
Immediate effect of the acquisition on EPS
Biased against long-term value creating acquistions
Cash flow focuses on long run benefits
Whether incremental cash flow exceeds cost
Better incorporates the long-term benefits
Quite often acquisitions are a combination of
Cash and shares’
Bidding firm pays C dollars of cash and w shares of a firm each share of firm B
Shareholders of target firms experience…
Excess returns are primarily due to large bid premiums required to be offered. Bidders’ firms shareholders on average do not earn or lose a large amount (overestimate expected synergies, confident behaviour, integration problems post-acquisition)
Divestitures
Sale of a division, business unit, segment or set of assets to another company or group of shareholders, creating value for shareholders.
Spin Offs
Company creates a new company out of subsidiary and distributes the shares of the new company to the parent company’s stockholders.
Equity Carve Outs
Company creates new company out of subsidiary and then sells a minority interest to the public through an IPO.
