Mergers And Acquisitions Flashcards
What are three types of mergers
Horizontal (similar business)
Vertical (up/down supply chain)
Conglomerate (unrelated business)
What are three categories of mergers/acquisitions
Statutory merger (target gone) Subsidiary merger (target subsid) Consolidations (both gone, new company)
What are ten motivating factors behind M&A activity
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
What is bootstrapping
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)
What are five industry life cycle stages
Pioneer/development Rapid growth Mature growth Stabilization Decline
Pioneer/development characteristics, merger motivation, types of mergers
Characteristics - unsure product acceptance, ^funds, low profit margin
Motivation - access to capital, management talent
Types - conglomerate, horizontal
Rapid growth characteristics, merger motivation, types of mergers
Characteristics - high prof margin, ^sales/earnings, low competition
Motivation - access to capital, grow capacity
Types - conglomerate, horizontal
Mature growth characteristics, merger motivation, types of mergers
Characteristics - new competition, opp for growth
Motivation - op efficiency, economies of scale
Types - horizontal, vertical
Stabilization characteristics, merger motivation, types of mergers
Characteristics - reduced growth, capacity constraints
Motivation - economies of scale, cost reduction, management improvement
Types - horizontal
Decline characteristics, merger motivation, types of mergers
Characteristics - overcapacity, shrinking profit margin
Motivation - survival, op efficiency, new growth ops
Types - horizontal, vertical, conglomerate
What are two methods of transacting a merger / acquisition
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
What are differences in payment, approval, corp/sh/holder taxes, liabilities between stock and asset purchase
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
What are three types of payments in merger transaction
Cash
Stock
Combo of cash/stock
What is an exchange ratio in a stock offering
Determines number of acquirer’s shares that each target company shareholder will receive
What are three main factors to consider when acquirer negotiating with target
- Distribution between risk and reward for acquirer and target shareholders
- Relative valuations of companies (multiples, etc)
- Changes in cap structure
What’s the difference between a friendly and hostile merger
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
What is a tender offer
Acquirer offers to buy shares directly from target shareholders
Each shareholder accepts/rejects offer
What is proxy battle
Acquirer seeks control of target via shareholder approval of new “acquirer approved” board; solicitation approved by regulators and sent to targets s/h
What are 8 pre-offer defender mechanisms
Poison pills Poison puts Reincorporating in state w/restrictive takeover laws Staggered board elections Restricted voting rights Supermajority voting Fair price amendments Golden parachutes
What are 7 post offer defence mechanisms
Just say no defence Litigation/greenmail Share repurchases Leveraged recapitalization Crown jewel defence PAC man defence White knight/white squire
What is herfindahl-hirschman index (HHI) and how to assess
HHI = sum (MSi * 100)^2
not concentrated, no antitrust action
1000-1800 => moderately concentrated, possible challenge
>1800 => highly concentrated, certain antitrust challenge
How to value merger using Discounted Cash Flow
- Decide in FCF model
- Develop pro forma financial est
- Calc FCF w/data
- Discount FCF to present
- Determine/discount terminal value
- Add DCFs
Advantages and disadvantages of discounted cash flow model
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)
How to value merger using comparable company analysis
- Identify comparable firms
- Calc relative measures
- Calc descriptive statistics for relative value metrics
- Estimate takeover premium
- Calc estimated takeover price (est stock value based on comparable and takeover premium)
Advantages and disadvantages of comparable company analysis
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
How to calc comparable transaction analysis
- Identify recent takeovers
- Calc relative value measures
- Calc descriptive statistics and apply to firm
Advantages and disadvantages of comparable transaction method
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
Calc post-merger valuation for acquirer
Vat = Va + Vt + S - C
Calc gains accrued to target
Gain t = TP = Pt - Vt
Calc gains accrued to acquirer
Gain a = S - TP = S - (Pt - Vt)
Note: Pt = N * Pat for stock deal
Diff between cash and stock offer
Target firms shareholder profit is capped at takeover premium (amount > share price)
Stock offer => target firms gains partly from success of combined company
Key outcome from payment method in merger
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
List 5 types of restructuring
Cash divestitures Equity carve-outs Spin offs Split offs Liquidations
What is a cash divestiture
Direct sale of a division to outside party for cash
What is equity carve out
New independent company - give proportionate equity interest in a subsidiary to outside shareholders via public offering of stock
What is a spin off
New independent company - distribute shares to existing shareholders of parent company
What is split off
Allows shareholders to receive new shares of a division of parent in exchange for a portion of their parent company shares
What is a liquidation
Break up firm and sell assets piece by piece (bankruptcy)
Why would a company divest assets
Division no longer fitting mgt strategy
Poor division profitability
Reverse synergy
Cash infusion
