MERGERS AND ACQUISITIONS

Question 1

MERGER WAVES

Answer 1

Peaks of heavy activity (coincides with economic expansions) followed by quiet troughs of few transactions in the takeover market.

Question 2

HORIZONTAL MERGER

Answer 2

Target and acquirer are in the same industry.

Question 3

VERTICAL MERGER

Answer 3

Target’s industry buys from or sells to the acquirer’s industry.

Question 4

CONGLOMERATE MERGER

Answer 4

Target and acquirer operate in unrelated industries.

Question 5

STOCK SWAP

Answer 5

Target shareholders are swapping old stock for new stock in either the acquirer or a newly created merged firm.

Question 6

TERM SHEET

Answer 6

• Summary of price and method of payment.

- Consideration paid to target shareholders can be very complex.

Question 7

ACQUISITION PREMIUM

Answer 7

• Paid by an acquirer in a takeover, it is the percentage difference between the acquisition price and the pre-merger price of a target firm.
• Research has found, that acquirers pay an average premium of 43% over the pre-merger price of the target.

Question 8

What reasons are there to acquire?

Answer 8

Synergies: the most common justification

• Cost reduction: more common and easier.
• Revenue enhancements: harder to predict and achieve

1. Economies of scale and scope.
2. Vertical integration: better coordination
3. Expertise: to compete more efficiently
4. Monopoly gains: to reduce competition (weak evidence)
5. Efficiency Gains: to eliminate duplication (in the target firms).
6. Tax savings from operation losses.

Question 9

Why is diversification a reason to acquire?

Answer 9

• Risk reduction like an investment portfolio (homemade portfolio?)
• Debt capacity and borrowing costs
• Liquidity: more so for private targets

Question 10

Why is earnings growth a reason to acquire?

Answer 10

It is possible to combine two companies with the results that the EPS of the merged company exceeds the premerger EPS of either company, even for zero NPV merger.

Question 11

What are the managerial motives to merge?

Answer 11

• Conflicts of interest: higher pay and prestige

- Overconfidence: “hubris hypothesis”

Question 12

What are the stages in the take over process?

Answer 12

• Valuation
• The offer
• Board and shareholder approval
• Takeover defences
• Regulatory approval

Question 13

VALUATION

Answer 13

-Quantifying and discounting the value added as a result of a merger is a key issue in takeovers.
Any additional value created will be referred to as the takeover synergies (an estimate).

-The price paid for a target is equal to the target’s pre-bid market capitalisation plus the premium paid in the acquisition.

Question 14

What does it mean if the pre-bid market capitalisation is viewed as the stand alone value of the target?

Answer 14

Then, from the bidder’s perspective, the takeover is a positive-NPV project only if the premium it pays does not exceed the synergies created.

Question 15

THE OFFER

Answer 15

-Once the acquirer has completed the valuation process, it is in the position to make a tender offer.

Not all tender offers are successful. Often acquirers have to raise the price to consummate the deal.

Question 16

What two methods can a bidder use to pay for a target?

Answer 16

Can use either cash or stock.
-In a cash transaction, the bidder simply pays for the target, including any premium, in cash.

-In a stock-swap transaction, the bidder pays for the target by issuing new stock and giving it to the target shareholders. The bidder offers to swap target stock for acquirer stock.

Question 17

What is the price offered in an offer to a target determined by?

Answer 17

Determined by the exchange ratio, i.e. the number of bidder shares received in exchange for each target share, multiplied by the market price of the acquirer’s stock.

Question 18

When is a stock swap merger a positive NPV investment for acquiring shareholders??

Answer 18

If the share price of the merged firm exceeds the pre-merger price of the acquiring firm.

Question 19

BOARD AND SHAREHOLDER APPROVAL

Answer 19

For a merger to proceed, both the target and the acquired board of directors must approve the deal and put the question to a vote of the shareholders of the target.

Question 20

FRIENDLY TAKEOVER

Answer 20

When a target’s board of directors supports a merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.

Question 21

HOSTILE TAKEOVER

Answer 21

A situation in which an individual or organisation purchases a large fraction of a target corporation’s stock and in doing so gets enough votes to replace the target’s board of directors and CEO.

Question 22

CORPORATE RAIDER

Answer 22

The acquirer in a hostile takeover.

Question 23

PROXY FIGHT

Answer 23

The acquirer attempts to convince the target’s shareholders to unseat the target’s board by using their proxy votes to support the acquirers’ candidates for election to the target’s board.

Question 24

TAKEOVER DEFENSES

Answer 24

1. Poison pills
2. Staggered boards (classified board)
3. White Knights
4. Golden parachutes
5. Recapitalisation
6. Other strategies (e.g. supermajority voting)

Question 25

POISON PILL

Answer 25

• A rights offering that gives the target shareholders the right to buy shares in either the target or an acquirer at a deeply discounted price.
• The most effective strategy, but often value destroying due to managerial entrenchment.
• Increase the bargaining power of the target firm => higher premium.

Question 26

STAGGERED BOARDS

Answer 26

Or classified board.

A board whose three-year terms are staggered so that only one third of the directors are up for election each year.

Question 27

WHITE NIGHTS

Answer 27

-A target company looks for another, friendlier company to acquire it.

Question 28

GOLDEN PARACHUTES

Answer 28

• An extremely lucrative severance package guaranteed to a firm’s senior management in the event that the firm is taken over an managers are let go.
• Empirical evidence shows it actually creates value - less entrenchment.

Question 29

RECAPITALISATION

Answer 29

E.g. companies might choose to issue debt and then use the proceeds to pay a dividend or repurchase stock - reduced tax savings and efficiency gain.

Question 30

REGULATORY APPROVAL

Answer 30

All mergers must be approved by regulators.
-In the US, all mergers above a certain size (approx. $60 million) must be approved by the government before the proposed takeovers occur.

-The European Commission has a similar process.