Merger Flashcards
What is a horizontal merger?
- when two firms in the same line of business merge
What is a vertical merger?
- when firms at different stages of production merge
- I.e. supplier merged with company
What is a conglomerate merger?
- when firms in unrelated lines of business merge
What are sensible motives for mergers?
- Economies of scale
- larger firm has greater bargaining power reducing costs - Economies of vertical integration
- facilitates coordination and admin - Filling in missing ingredients
- Surplus funds
- mature firms tend to have excess cash which they deploy to mergers - Merging can eliminate inefficiencies in management
- Industry consolidation
- improve efficiency in industries with too many firms and too much capacity
What are dubious reasons for mergers?
- Diversification
- Management motives
- overconfident managers believe they can do better - Inc. EPS (Bootstrap Game)
- Lower borrowing costs
Describe Bootstrap Game
- firms pursue merger as they say it will increase. EPS
- although EPS may increase there are no economic gains to the merger
- because of merger P/E falls and long term growth prospects also fall
What is the gain from merger?
Gain = PV(AB) -(PV(A)+PV(B)
What is the cost of a merger if it is financed by cash?
Cost=cash paid - PV(B)
- assuming A acquires B
What is the NPV of a merger?
NPV = Gain - Cost
What is the cost when merger is financed by equity?
Cost = XPV(AB) - PV(B)
If B’a shareholders are given N shares of combined firm what is the cost:
Cost = (N X P(AB) ) - PV(B)
N= no. Of shares offered to B
P(AB) = stock price of merged firm
Describe the difference between stock and cash financing
Cash financing - cost of merger is unaffected my merger gains
Stock financing - cost depends on gains
What does it mean if merger is cash financed?
- managers of acquiring firm are optimistic about merger
What does it mean if merger is stock financed?
- acquiring firm more pessimistic
Investors know these signals and will mark down share price when firm uses stock financing
What are takeover defences?
- White knight
- Shark repellent
- Poison pill
Describe merger waves
- peaks or merger activity surrounded by troughs
- activity frequently increases during upswings
Who gains most in meters?
- Shareholders of target
- Lawyers and brokers
- Executives of acquiring firm (may be rewarded)
Deceive the effect of mergers on society?
- Existing bond holders
- lose if firm issues more debt to acquire firm (inc. risk) - Employees lose as large numbers are normally laid off
- Suppliers and customers lose as merged firm has greater bargaining power altering prices to benefit them
What does the evidence suggests about mergers?
- evidence suggests acquisitions destroy value
What are some forms of acquisition?
- Merge two companies
- need approval of 50% of stockholders of each firm - Buy sellers stock in exchange for cash
- buyer deals individuals with shareholders ( will seek approval but not required) - Buy some or all of the sellers assets
