Merger

Question 1

Merger

Answer 1

Complete absorption (assets and liabilities) of one firm by another

Question 2

Properties of merger

Answer 2

Acquiring firm retains its identity
The acquired (target) firm ceases to exit
In a consolidation both firms cease to exist and a new firm is created after the acquisition

Question 3

Takeover

Answer 3

Purchase of a firms common stock or assets by another firm

Question 4

Acquisition

Answer 4

If takeover is agreed on friendly terms

Question 5

Hostile takeover

Answer 5

Takeover cannot be agreed on friendly terms

Question 6

Hostile takeover can be undertaken through…

Answer 6

A proxy fight or tender offer

Question 7

Types of transactions

Answer 7

Horizontal - firms acquired firm in same industry
Vertical - firm acquires firm in a different Stage of production process
Conglomerate merger - combination of two firms in unrelated industries

Question 8

Synergy

Answer 8

Interaction of 2 or more organisations substances or others to produce a combined effect greater than the sum of their separate efforts

Question 9

Economies of scale

Answer 9

Derive reduced cost efficiencies larger operations

Question 10

Economies of vertical integration

Answer 10

Derive effectiveness by controlling raw material supplies and final customer contact

Benefits in area are often questionable since over integration can cause opposite effect
Vertical integration has fallen out of fashion lately with companies preferring to outsource activities

Question 11

Complementary resources

Answer 11

Derive efficiencies by combining complementary resources

Question 12

Example of complementary resources

Answer 12

Each firm in merger has valuable assets which complement the other so the total becomes more efficient or better serves the customer

Question 13

Other motives for M&A’s

Answer 13

Mergers as a use of surplus funds
Replacing existing management
Industry consolidation

Question 14

Bad motives for M&As

Answer 14

Avoiding bankruptcy 
The hubris hypothesis 
Empire building 
Diversification 
Bootstrap game

Question 15

Antitrust Law

Answer 15

Gov may forbid a merger or require the parties to divest some assets before the merger is completed in order to lessen market power in a particular sector

Clayton act 1914 in us
Completion act 1998 in uk

Question 16

Gains from m&a’s

Answer 16

An economic gain from a merger occurs only if the two firms are worth more together than apart/
PV(AB) > PV(A) + PV(B)

Shared between the selling shareholders and is the purchasing shareholders
Estimating and evaluation the economic gain is the central focus of merger analysis in