Mergers Flashcards
Horizontal Merger
One that takes place between two firms in the same line of business
Vertical Merger
Involves companies at different stages of production
Conglomerate merger
Involves companies in unrelated lines of business
Sensible reasons for mergers
Economics of Scale:
- A larger firm may be able to reduce its per-unit cost by using excess capacity or spreading fixed costs across more units
Economies of Vertical Integration
- Facilitates coordination and synergy
- Control over suppliers “may” reduce costs
Complementary Resources
- Merging may result in each firm filling in the ‘missing pieces’ of its firm with pieces from the other firm
Sensible Motives for Mergers
Surplus Funds
- If your firm is in a mature industry with few, if any, positive-NPV projects available, acquisition may be the best use of your funds
Eliminating Inefficiencies
- Poor management may waste money, make poor decisions, conduct improper risk/return investments, and harm the value of the company
Industry Consolidation
- The biggest opportunities to improve efficiency seem to come in industries with too many firms and too much capacity
- These conditions often trigger a wave of mergers and acquisitions, which then force companies to cut capacity and employment and release capital for reinvestment elsewhere in the economy
Distinction between cash and stock financing
If cash: the cost of the merger is unaffected by the merger gains
If stock: the cost depends on the gains because the gains show up in the post merger share price
Distinction between cash and stock financing - Tax considerations
Cash payment
- selling shareholders taxed as if they sold shares and tax must be paid on capital gains
- Merged Firm - Selling firm assets re-valued and tax status calculated whether gain or loss in value
Payment in shares
- tax-free as shareholders viewed as if exchanging old shares for similar new shares; no capital gain or loss recognised
- Merged Firm - taxed as if the two firms were always a single entity
