Mergers and acquisitions Flashcards
What is a merger?
A merger refers to the absorption of one firm by another after the merger, they acquired firm ceases to exist as a separate business entity
What is a consolidation?
A consolidation is the same as a merger, except that an entering new firm is created, and a consolidation, both the acquiring firm, and acquired firm, terminate their previous legal existence, and become part of the new firm
What are the two ways an acquisition could be carried out?
- Acquisition of shares
- Aqcuisition of assets
How does the acquisition of shares work?
Purchase the firms voting shares with an exchange of cash shares of equity or other securities
How does the acquisition of assets work?
Acquiring a firm by buying most, or all of its assets
What is a horizontal acquisition?
The acquirer and the acquired are in the same industry
What is a vertical acquisition?
A vertical acquisition involves firms at different steps of the production process
What is a conglomerate acquisition?
The acquiring firm, and they acquired firm and not related to each other
What is an economy of scale?
The average cost of production fools as the level of production increases
What are economies of vertical integration?
Operating economies can be gained from vertical combinations, as well as horizontal combinations
What are complementary resources?
Some firms acquire others to improve usage of existing resources
What is elimination of inefficient management?
Management can often increase firm value
What are net operating losses?
A firm with a profitable division and an nonprofitable one will have a low tax bill, because the loss in one division offsets the income in the other
What is debt capacity?
Is the target has two little that they acquire can infuse the target with missing debt if both the target and the acquirer have optimal debt levels a merger could lead to risk reduction generating greater debt capacity and a larger tax shield
What are bad reasons for acquisitions?
EPS growth and diversification
