Mergers Flashcards
What are the types of mergers?
Horizontal Merger: When two companies in the same industry and at the same stage of the production process merge.
Vertical Merger: When two companies at different stages of the production process merge.
Conglomerate Merger: When companies in unrelated industries merge.
Mergers are typically largest investment decisions.
What are the reasons for mergers?
Synergy: Achieving greater efficiency or cost savings by combining operations. Larger economies of scale. Especially for vertical merger.
Market Expansion: Entering new markets or increasing market share.
Diversification: Reducing risk by operating in multiple industries.
Access to Resources: Gaining access to new technologies, talent, or capital.
Change poor management/ corporate control.
What are the stages of a merger?
Pre-Merger: Planning, due diligence, and negotiation.
Merger Announcement: Public disclosure of the merger agreement.
Integration: Combining operations, systems, and cultures.
Post-Merger Evaluation: Assessing the success of the merger and addressing any challenges.
What are the challenges of mergers?
Cultural Differences: Integration of different organisational cultures.
Regulatory Approval: Obtaining clearance from antitrust authorities.
Integration Risks: Operational disruptions and employee resistance.
Financial Performance: Achieving the expected synergies and financial targets.
What is the key determinant for mergers success?
Management’s ability to handle the complexity of integrating two firms with different production processes, accounting methods and corporate cultures.
What questions do financial managers need to take into account when considering a merger?
Is there an overall economic gain to the merger?
Do the terms of the merger make the company and its shareholders better off?
i.e., is PV (AB) > PV (A) + PV (B)
What is a stock-financed merger?
A stock-financed merger occurs when the acquiring company offers its own shares as payment for the target company, instead of using cash.
What is the main difference between cash and stock financing mergers?
If cash: cost of merger is unaffected by merger gains.
If stock: cost depends on gains because calculation uses price per share after mergers announced (xPV (AB)).
How is tax affected by different methods of merger financing?
The cash portion received is immediately taxable as a capital gain.
Payment in shares is tax free as shareholders viewed as if exchanging old shares for similar new shares so no capital loss/gain recognised.
