Mergers and Acquisitions

Question 1

What is an acquisition?

Answer 1

• You buy 100% of shares
• Both acquire and targets keep their legal entity

Question 2

What is a merger?

Answer 2

A legal absorption of the target entity (A+T =A)
Or eventually the creation of a new company (A+T = New)

Question 3

Pros of Acquisition

Answer 3

Retain limited liability of subsidiaries

Question 4

Pros of Mergers

Answer 4

Tax Gains if losses and gains offset

Question 5

Friendly Bid

Answer 5

Acquirer and target management teams are on the same page

Question 6

Hostile Bid Methods

Answer 6

1. Buy a controlling stake (hard to refuse offer)
2. Proxy Fight (nominate possible directors at the board of directors)

Question 7

Toehold

Answer 7

Purchase an initial stake in the open stock market

(you buy 5 or 10% as a first step)

Question 8

Anti-take overs methods

Answer 8

1. Poison Pill : If a hostile acquirer reaches 20% of shares, the other shareholders get options to buy new shares at a big discount) - the acquirer is diluted
2. Staggered Board: A fraction of the board is renewed each years, so take multiple years to gain control of the board

Question 9

Price Premium

Answer 9

% above recent stock price

Question 10

Rational for M&A 1 : “Good Deal”

Answer 10

Underpriced target

Question 11

Rational for M&A 2 : “Value Creation”

Answer 11

• Cost reduction (overlapping assets, buyer power…)
• Revenue Growth (Complementary assets…)

Question 12

Methods to evaluate M&As : Transaction Multiples

Answer 12

Look at similar deals in recent years

For each deal, compute its target enterprise value (What the acquirer paid for the target entity + target’s Debt - Cash at the time of acquisition)

For each deal, look at its target EV/EBITDA

Question 13

Methods to evaluate M&As : Public Takeover Premium

Answer 13

Select recent acquisitions of publicly traded companies so you can observe the target stock price before acquisition

Question 14

What percent of mergers fail?

Answer 14

66.6%