Mergers and Acquisitions Flashcards
How are M&As financed?
- cash
- stock of the bidding company
- debt
What does bidding with your own shares for an acquisition signal?
That your own shares are overpriced
Reasons for takeovers (7)
1) Diversification
2) Companies are taken over when they are managed inefficiently
3) The acquirer is simply overinvesting
4) Targets are considered undervalued
5) Tax benefits
(when the target has loss carryforwards -> results in paying lower taxes)
6) Synergies
7) Increase EPS
What are synergies?
Synergy: the situation in which the value of the combined company exceeds the values of the previously separated components
Types of synergies (2)
1) complementary assets
2) increasing market power
What is the Herfindahl index?
the sum of squares of the market shares of the 50 largest firms in an industry
What value of the Herfindahl index represents a competitive industry?
below 0.1
What value of the Herfindahl index represents a concentrated industry?
above 0.18
Why is increasing EPS a bad reason for takeovers?
Because EPS might increase, while earnings stay the same
This in turn does not create any economic benefit, no additional value
Types of takeovers (3)
1) horizontal
2) vertical
3) conglomerate
Why do M&As come in waves? (2 explanations)
1) Behavioural explanation
Managerial timing of market overvaluation
2) Industry shock explanation
Shocks that lead to industry reorganization
Why does the increase in the target’s value appears to me maintained even when the bid is unsuccessful? (3)
- The bid might have prompted a change in the company’s strategy, which is expected to improve performance
- Information released during the bid caused the market to reevaluate the shares
- The market may expect a higher bid for the target
