Mergers and Acquisitions Flashcards
What are merger benefits of synergy? 6
- The two firms together are worth more than the value of firms apart.
- Market power
- Economies of scale
- Internalisation of transactions
- Entry to new markets and industries
- Tax advantages
- Risk diversification
Benefits of bargain buying? 3
- Target can be purchased at a price below the present value of the target’s future cash flow when in the hands of new management.
- Elimination of inefficient and misguided management
- Under-valued shares: strong form or semi-strong form of stock market inefficiency.
what are the managerial motives? 7
- Empire building
- Status
- Power
- Remuneration
- Hubris
- Survival: speedy growth strategy to reduce probability of being takeover target
- Free cash flow: management prefer to use free cash flow in acquisitions rather than to return it to shareholders
What are the third party motives? 2
- Advisors
2. At the insistence of customers or suppliers
What are the rationals for divestment? 10
- Division or subsidiary may be underperforming
- Division may not be well positioned within the industry
- Change in strategic focus
- Negative synergy
- Too diversified
- Needs cash
- May have been acquired as part of a company and is unwanted
- Valued higher by the stock market
- Better strategic fit with another company
- Defence against hostile takeover
What are the 5 forms of divestment?
- Corporate sell off
- Spin off or demerger
- Equity carve out
- MBO (management buy out)
- MBI (management buy in)
What are the managerial motivations for an MBO? 6
- Opportunity to control own business
- Long term faith in the company
- Better financial rewards
- No head office constraints
- Fear of redundancy
- Fear of new owner
What is a horizontal takeover?
The combination of two companies operating in the same industry and at a similar stage of production
What is a vertical takeover?
The combination of two companies at different stages of production within the same industry. A vertical takeover can involve a move forward in the production process to secure a distribution outlet, or a move backwards in the production process to secure the supply of raw materials
What is a conglomerate takeover?
The combination of two companies operating in different areas of business
What is financial synergy?
When the company’s cost of capital decreases a s a direct result of an acquisition. - Conglomerate takeover, where the lack of correlation between the cash flows of the different companies will reduce cash flow volatility.
