Mergers and Acquisition Flashcards
First merger movement 1895-1904 characteristics:
Surge in economy and stock market
Changes in infrastructure
Merged for economies of scale and monopolies
Second merger movement 1922-1929 characteristics:
Surge in economy
Heightened regulation against horizontal mergers
Product-extension, market-extension and vertical-mergers
Conglomerate mergers of the 1960s characteristics:
Surge in economy
Decline in Importance of vertical and horizontal mergers
Defensive diversification to avoid profit instability
E.g. Aerospace industry and its changing market demand
The deal decade (1981-89)’s characteristics:
Surge in economy
Impact of international competition + new industries due to technology
Mostly hostile, paid in cash and financed with debt
Strategic mergers (1992-2000) characteristics:
Surge in economy + globalisation and deregulation of industries
Mosty friendly takeovers, paid with stock
The permacrisis (20th century) characteristics:
Mergers have taken place a lot during this period, apart from dips during financial crisis and covid
What are the common key drivers of merger movements?
- Government (De)regulations
- Technical/financial innovations
- Rising stock prices
- Favourable economic setting - low interest rates, favourable term structures etc
Why do mergers occur?
- Size and returns to scale (economies of scale)
- Transaction costs
Turning points of the first merger movement?
1901 - downturn because some combinations failed to make money
1903 - economy went into recession
1904 - supreme court ruled that mergers can be attacked by Sherman Act
What was a turning point of the 1920 merger movement?
1929 - stock market crash
What was a turning point of the 1960s merger movement?
1968 - Antitrust laws - congress began to move against conglomerate firms
- Declining stock prices
What were the turning points of the 1981-89 merger movement?
- Government actions - passing FIRREA in 89
- Implementation of takeover defences
- Economic recession associated with Gulf War
What was a turning point of the 1992-2000 mergers movement?
Dot.com bubble
What are some of value reducing theories? (3 things)
FCF - firms with FCF are those where internal funds exceed investment required for positive NPV projects
Managerial entrenchment - managers hesistant to distribute cash to shareholders
Value neutral theory - bids result from managerial overconfidence: winner’s curse
What are some valuation increasing effects? (3 things)
Synergy and scale
Transaction costs optimisation
Disciplinary (replacing poor management)
What is the value neutral principle? (valuation effect)
Over-confident
Winner of takeover is the firm that most overvalues
What are the different ways of measuring whether an M&A has been successful?
Weak form: if the stock price after M&A announcement is larger than stock price before
Semi-strong form: if the announcement-period stock return for acquiring firm is higher than the announcement-period stock return on a benchmark
Strong form: if announcement-period for the acquiring firm is higher than the return of the same firm would have been without M&A announcement
What are the 4 methodologies to test M&A performance?
Survey analysis - asking managers directly (good because insights, bad because different focuses)
Clinical study - analyse a transaction in great depth (good because in-depth analysis, bad because results not generalisable)
Accounting study - examine financial results before and after M&A (good because credibile, bad because backward-looking and data may not be comparable)
Event study - examine stock price responses to financial decisions = from similar firms and their similar announcements (good because direct measure of shareholder wealth impact, bad because relies on strong assumptions about the stock market **semi-strong form efficient)
How to carry out an event study:
- Identify event (stock split, dividend initations, stock repurchases)
- Calculate normal stocks returns using a benchmark model
- Calculate and analyse the abnormal returns around the event date
What is the target’s stock price reactions?
- Almost always experiences gain in wealth (from merger effects not from revaluation)
- Cash deals bring about more wealth
- Target share prices have a positive run-up in period prior to takeover announcement
What is the bidder’s stock price reactions?
- Neutral to negative (more negative in cash than stock)
- Lower in deals with multiple bidders
What is the asset sales method of restructuring?
Sale of division or other assets to another firm, usually for cash
- Quaker sold Snapple in 1997
What is an equity carve-out as a method of restructuring?
Public offering of full or partial interest in subsidiary creating a new firm with atl least some autonomy
What is a spin-off as a form of corporate restructuring?
Proportionate distribution of subsidiary shares to the existing shareholders of the parent firm, creating an independent firm