Mergers & Acquisitions

Question 1

Acquisition

Answer 1

purchase of some portion of one company by another

Question 2

Statutory Merger

Answer 2

Purchase of all assets and liabilities of one company by another - one firm remains and the other ceases to exist as a separate entity

Question 3

Subsidiary Merger

Answer 3

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

Question 4

Consolidation

Answer 4

both companies terminate their previous legal existence and become part of a newly formed company - common if both companies are of a similar size

Question 5

Target Copany

Answer 5

refers to the company being acquired

Question 6

Acquiring Company

Answer 6

refers to the company acquiring the target

Question 7

Horizontal Merger

Answer 7

merging companies are in the same kind of business - usually competitors

Question 8

Horizontal Mergers help achieve

Answer 8

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

Question 9

Vertical Merger

Answer 9

Acquirer buys another company in the same production chain - creates cost savings and gives greater control over the production process

Question 10

Backward Integration

Answer 10

acquirer purchases a target that is up the value chain (e.g. a supplier)

Question 11

Forward Integration

Answer 11

acquirer purchases a target that is down the value chain (e.g. a supplier)

Question 12

Conglomerate Merger

Answer 12

acquirer purchases a company unrelated to its core business

Question 13

Motives for Mergers - Synergy

Answer 13

combined company will be worth more than the sum of its parts - merger synergies either decrease costs (economies of sale) or increase revenues

Question 14

Motives for Mergers - External Growth

Answer 14

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

Question 15

Motives for Mergers - Increasing Market Power

Answer 15

horizontal integration in industries with concentrated market share or few competitors can increase market power - more ability to influence market share

Question 16

Other Motives for Mergers (4)

Answer 16

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

Question 17

Motives for Mergers - Diversification

Answer 17

if conglomerate invests in companies from a variety of industries the variability in cash flows decreases as the industries are not correlated

Question 18

Motives for Mergers - Managerial Personal Incentives

Answer 18

executive compensation highly correlated with company size, motivation to engage in mergers to maximise size rather than shareholder value

Question 19

Motives for Mergers - Bootstrapping Earnings

Answer 19

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

Question 20

Industry Life Cycle (5)

Answer 20

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

Question 21

Stock Purchase Acquisition

Answer 21

acquirer gives the target company’s shareholders some combination of cash and securities in exchange for shares in the target company’s stock

Question 22

Asset Purchase Acquisition

Answer 22

Acquirer purchases the target company’s assets and payment is made directly to the company

Question 23

Method of Payment for Mergers (3)

Answer 23

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

Question 24

Friendly Merger

Answer 24

approach target management directly, due dilligence done

Question 25

Definitive Merger Agreement

Answer 25

contract written by both companies agreeing to the transaction

Question 26

Hostile Merger

Answer 26

opposed by target company’s management

Question 27

Bear Hug

Answer 27

merger proposal directly submitted to target company board of directors

Question 28

Tender Offer

Answer 28

target shareholders’ invited to submit their shares in return for proposed payment

Question 29

Proxy Fight

Answer 29

company or individual seeks to take control of a company through shareholder vote

Question 30

Poison Pill - SR

Answer 30

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

Question 31

Poison Puts - SR

Answer 31

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

Question 32

Staggered Board of Directors - SR

Answer 32

Board seats due for election at different times

Question 33

Restricted Voting Rights - SR

Answer 33

Target company restricts stockholders who have recently acquired large blocks of stock

Question 34

Supermajority Voting Provisions - SR

Answer 34

require higher percentage approval by shareholders for mergers than normal

Question 35

Golden Parachutes - SR

Answer 35

Employment contracts allow executives to receive lucrative payouts, if they leave target following change in corporate control

Question 36

Shark Repellents

Answer 36

Pre-offer takeover defence mechanisms

Question 37

Post Offer Defence Mechanisms (6)

Answer 37

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

Question 38

Crown Jewel Defence - POTD

Answer 38

sell off a subsidiary - if part of motivations may abandon takeover

Question 39

Pac-Man Defence - POTD

Answer 39

target can defend itself by making a counteroffer to acquire hostile bidder

Question 40

White Knight Defence - POTD

Answer 40

seek third party to purchase company in lieu of the hostile bidder

Question 41

White Squire Defence - POTD

Answer 41

Target seeks friendly party to buy a substantial minority stake in target, enough to block hostile takeover without selling entire company

Question 42

Post Merger Value =

Answer 42

two companies’ pre merger values + merger synergies - cash paid to the target shareholder