Mergers & Acquisitions Flashcards
Acquisition
purchase of some portion of one company by another
Statutory Merger
Purchase of all assets and liabilities of one company by another - one firm remains and the other ceases to exist as a separate entity
Subsidiary Merger
company being purchased becomes a subsidiary of the purchaser - common if the acquirer wants to retain the strong brand or good image of the acquired firm
Consolidation
both companies terminate their previous legal existence and become part of a newly formed company - common if both companies are of a similar size
Target Copany
refers to the company being acquired
Acquiring Company
refers to the company acquiring the target
Horizontal Merger
merging companies are in the same kind of business - usually competitors
Horizontal Mergers help achieve
economies of scale - savings through consolidation of operations and elimination of duplicate resources, gain market power due to decrease in competition and increase in size of acquiring firm
Vertical Merger
Acquirer buys another company in the same production chain - creates cost savings and gives greater control over the production process
Backward Integration
acquirer purchases a target that is up the value chain (e.g. a supplier)
Forward Integration
acquirer purchases a target that is down the value chain (e.g. a supplier)
Conglomerate Merger
acquirer purchases a company unrelated to its core business
Motives for Mergers - Synergy
combined company will be worth more than the sum of its parts - merger synergies either decrease costs (economies of sale) or increase revenues
Motives for Mergers - External Growth
Buy resources externally - common for mature industries, risk mitigation since can merge with an existing company rather than entering unfamiliar market and establishing resources internally
Motives for Mergers - Increasing Market Power
horizontal integration in industries with concentrated market share or few competitors can increase market power - more ability to influence market share
Other Motives for Mergers (4)
acquiring unique capabilities and resources
unlock hidden value - may purchase target for less than its break up value
Tax consideration - buy target with accumulated tax losses
Cross Border Motivations
Motives for Mergers - Diversification
if conglomerate invests in companies from a variety of industries the variability in cash flows decreases as the industries are not correlated
Motives for Mergers - Managerial Personal Incentives
executive compensation highly correlated with company size, motivation to engage in mergers to maximise size rather than shareholder value
Motives for Mergers - Bootstrapping Earnings
When a companies earnings increase as a consequence of the merger itself rather than the resulting economic benefits of the combination, P/E acquirer > P/E target and acquirer - P/E does not decline after the merger
Industry Life Cycle (5)
Embryonic - smaller, younger companies may sell themselves to larger companies in mature or declining industries
Growth - may cause large capital requirements to expand
Shakeout - drop in entry of new competitors, horizontal and vertical mergers likely to achieve economies of scale, savings and operational efficiency
Market Maturity - increasing competition and capacity constraints, mergers may be undertaken to achieve economies of sale in research, production to match low cost and price performance
Decline - industry faces overcapacity - horizontal mergers may be undertaken to ensure survival, vertical to increase efficiency and profit margins, may acquire young companoes
Stock Purchase Acquisition
acquirer gives the target company’s shareholders some combination of cash and securities in exchange for shares in the target company’s stock
Asset Purchase Acquisition
Acquirer purchases the target company’s assets and payment is made directly to the company
Method of Payment for Mergers (3)
Cash - from the acquiring company’s exisiting assets or debt issue
Securities Offering
Exchange Ratio - number of shares that stockholders in the target company receive in exchange for each of their shares in the target company
Friendly Merger
approach target management directly, due dilligence done
Definitive Merger Agreement
contract written by both companies agreeing to the transaction
Hostile Merger
opposed by target company’s management
Bear Hug
merger proposal directly submitted to target company board of directors
Tender Offer
target shareholders’ invited to submit their shares in return for proposed payment
Proxy Fight
company or individual seeks to take control of a company through shareholder vote
Poison Pill - SR
costly for an acquirer to take control of a target without approval of the targets board of directors - creating rights that allow for issuance of shares at substantial discount
Poison Puts - SR
gives rights to target’s bondholders - bondholders have right to sell their bonds back to target above redemption in the case of a hostile takeover, requires refinancing of debt immediately
Staggered Board of Directors - SR
Board seats due for election at different times
Restricted Voting Rights - SR
Target company restricts stockholders who have recently acquired large blocks of stock
Supermajority Voting Provisions - SR
require higher percentage approval by shareholders for mergers than normal
Golden Parachutes - SR
Employment contracts allow executives to receive lucrative payouts, if they leave target following change in corporate control
Shark Repellents
Pre-offer takeover defence mechanisms
Post Offer Defence Mechanisms (6)
Just say no - decline offer
Litigation - file lawsuit based on alleged violations
Greenmail - terminates hostile takeover through payoff to acquirer
Share Repurchase - acquire shares from any shareholder, increases cost of the purchase for acquirer
Leveraged Buyout (LBO) - target buys all of its shares then converts to privately held compaby
Leveraged Recapitalisation - large amount of debt is then used to finance share repurchases with some remaining publicly held
Crown Jewel Defence - POTD
sell off a subsidiary - if part of motivations may abandon takeover
Pac-Man Defence - POTD
target can defend itself by making a counteroffer to acquire hostile bidder
White Knight Defence - POTD
seek third party to purchase company in lieu of the hostile bidder
White Squire Defence - POTD
Target seeks friendly party to buy a substantial minority stake in target, enough to block hostile takeover without selling entire company
Post Merger Value =
two companies’ pre merger values + merger synergies - cash paid to the target shareholder
