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Corporate Finance > Mergers And Acquisitions > Flashcards

Mergers And Acquisitions Flashcards

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0
Q

What are three types of mergers

A

Horizontal (similar business)
Vertical (up/down supply chain)
Conglomerate (unrelated business)

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1
Q

What are three categories of mergers/acquisitions

A 
Statutory merger (target gone)
Subsidiary merger (target subsid)
Consolidations (both gone, new company)
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2
Q

What are ten motivating factors behind M&A activity

A 
Achieve synergies
Grow rapidly 
Increase market power
Access unique capabilities 
Diversify 
Personal benefits (for managers)
Tax benefits 
Unlock hidden value for struggling company
International goals 
Bootstrap earnings
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3
Q

What is bootstrapping

A

High P/E firm acquires low P/E firm in a stock exchange; total combined earnings same, shares outstanding are less (higher earnings per share)

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4
Q

What are five industry life cycle stages

A 
Pioneer/development 
Rapid growth 
Mature growth 
Stabilization 
Decline
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5
Q

Pioneer/development characteristics, merger motivation, types of mergers

A

Characteristics - unsure product acceptance, ^funds, low profit margin
Motivation - access to capital, management talent
Types - conglomerate, horizontal

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6
Q

Rapid growth characteristics, merger motivation, types of mergers

A

Characteristics - high prof margin, ^sales/earnings, low competition
Motivation - access to capital, grow capacity
Types - conglomerate, horizontal

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7
Q

Mature growth characteristics, merger motivation, types of mergers

A

Characteristics - new competition, opp for growth
Motivation - op efficiency, economies of scale
Types - horizontal, vertical

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8
Q

Stabilization characteristics, merger motivation, types of mergers

A

Characteristics - reduced growth, capacity constraints
Motivation - economies of scale, cost reduction, management improvement
Types - horizontal

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9
Q

Decline characteristics, merger motivation, types of mergers

A

Characteristics - overcapacity, shrinking profit margin
Motivation - survival, op efficiency, new growth ops
Types - horizontal, vertical, conglomerate

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10
Q

What are two methods of transacting a merger / acquisition

A

Stock purchase - targets shareholders receive cash or shares of acquiring company’s stock in exchange for shares of target

Asset purchase - payment made directly to target for specific asset

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11
Q

What are differences in payment, approval, corp/sh/holder taxes, liabilities between stock and asset purchase

A

Pmt - S: direct to target s/h vs. A: direct to target company
Approval - S: majority shareholder vs. A: no shareholder (unless major)
Corp tax - S: none vs. A: target pays cap gains
S/H tax - S: s/h pay cap gains vs. A: none
Liabilities - S: acquirer assumes vs. A: acquirer avoids assuming

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12
Q

What are three types of payments in merger transaction

A

Cash
Stock
Combo of cash/stock

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13
Q

What is an exchange ratio in a stock offering

A

Determines number of acquirer’s shares that each target company shareholder will receive

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14
Q

What are three main factors to consider when acquirer negotiating with target

A
  1. Distribution between risk and reward for acquirer and target shareholders
  2. Relative valuations of companies (multiples, etc)
  3. Changes in cap structure
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15
Q

What’s the difference between a friendly and hostile merger

A

Friendly - acquirer/target work together on due diligence, merger agreement, submit to s/h

Hostile - avoid target’s mgt via tender offer or proxy battle - can submit merger proposal to board of directors via bear hug

16
Q

What is a tender offer

A

Acquirer offers to buy shares directly from target shareholders

Each shareholder accepts/rejects offer

17
Q

What is proxy battle

A

Acquirer seeks control of target via shareholder approval of new “acquirer approved” board; solicitation approved by regulators and sent to targets s/h

18
Q

What are 8 pre-offer defender mechanisms

A 
Poison pills
Poison puts
Reincorporating in state w/restrictive takeover laws
Staggered board elections
Restricted voting rights 
Supermajority voting
Fair price amendments
Golden parachutes
19
Q

What are 7 post offer defence mechanisms

A 
Just say no defence
Litigation/greenmail
Share repurchases
Leveraged recapitalization 
Crown jewel defence
PAC man defence 
White knight/white squire
20
Q

What is herfindahl-hirschman index (HHI) and how to assess

A

HHI = sum (MSi * 100)^2

not concentrated, no antitrust action
1000-1800 => moderately concentrated, possible challenge
>1800 => highly concentrated, certain antitrust challenge

21
Q

How to value merger using Discounted Cash Flow

A
  1. Decide in FCF model
  2. Develop pro forma financial est
  3. Calc FCF w/data
  4. Discount FCF to present
  5. Determine/discount terminal value
  6. Add DCFs
22
Q

Advantages and disadvantages of discounted cash flow model

A

Ad: easy to model post merger changes, based on forecasts, customizable
Dis: tough to use when neg CFs, estimates subject to error, discount rates change, estimation error (due to growth/discount rates)

23
Q

How to value merger using comparable company analysis

A
  1. Identify comparable firms
  2. Calc relative measures
  3. Calc descriptive statistics for relative value metrics
  4. Estimate takeover premium
  5. Calc estimated takeover price (est stock value based on comparable and takeover premium)
24
Q

Advantages and disadvantages of comparable company analysis

A

Ad: easy access data, fundamentally sound valuation method, derive value from market

Dis: implicitly assumes market value is accurate, provides fair stock price (vs. takeover price), tough to add merger synergies, uses historic data

25
Q

How to calc comparable transaction analysis

A
  1. Identify recent takeovers
  2. Calc relative value measures
  3. Calc descriptive statistics and apply to firm
26
Q

Advantages and disadvantages of comparable transaction method

A

Ad: takeover prem included, estimate derived from recent deals, decreases risk of lawsuit

Dis: assumes M&A market valued transactions accurately, possibly few comparables, tough to incorporate merger synergies

27
Q

Calc post-merger valuation for acquirer

A

Vat = Va + Vt + S - C

28
Q

Calc gains accrued to target

A

Gain t = TP = Pt - Vt

29
Q

Calc gains accrued to acquirer

A

Gain a = S - TP = S - (Pt - Vt)

Note: Pt = N * Pat for stock deal

30
Q

Diff between cash and stock offer

A

Target firms shareholder profit is capped at takeover premium (amount > share price)

Stock offer => target firms gains partly from success of combined company

31
Q

Key outcome from payment method in merger

A

Acquirer wants to pay lowest possible price

Target wants highest possible price

If confident in synergies, acquirer will prefer cash and target will prefer stock

32
Q

List 5 types of restructuring

A 
Cash divestitures
Equity carve-outs
Spin offs 
Split offs
Liquidations
33
Q

What is a cash divestiture

A

Direct sale of a division to outside party for cash

34
Q

What is equity carve out

A

New independent company - give proportionate equity interest in a subsidiary to outside shareholders via public offering of stock

35
Q

What is a spin off

A

New independent company - distribute shares to existing shareholders of parent company

36
Q

What is split off

A

Allows shareholders to receive new shares of a division of parent in exchange for a portion of their parent company shares

37
Q

What is a liquidation

A

Break up firm and sell assets piece by piece (bankruptcy)

38
Q

Why would a company divest assets

A

Division no longer fitting mgt strategy
Poor division profitability
Reverse synergy
Cash infusion

Corporate Finance (5 decks)

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