Mergers And Acquisitions

Question 1

Acquisitions

What is an acquisition?

What does an acquirer have to offer in exchange for what?

What can these that are offered be?

Answer 1

Absorption of a target firm into a new parent

Acquirer has to offer capital in exchange for equity

Cash, shares or stock

Question 2

Mergers

What is a merger?

What does it involve?

Answer 2

A pooling of interests into a new enterprise

Friendly restructuring of the assets and capital of 2 companies into a new organisation

Question 3

Who do financial managers act in the interests of?

How do they do this?

Answer 3

Shareholders wealth maximisation

Seeking out vulnerable opportunities to exploit

Question 4

What are the 2 sources of enhanced value?

Answer 4

Value release

Value creation

Question 5

What is value release?

What is value creation?

Answer 5

Acquiring target for less than its true value

Expanded firm worth more than 2 separate entities

Question 6

What are the motives for mergers and acquisitions?(5)

Answer 6

Lower cost per unit 
Corporation tax advantages 
Enhance risk diversification 
Replace inefficient management 
Target has undervalued shares

Question 7

Why is lower cost per unit of output beneficial?

Answer 7

Company benefits from economies of scale

Larger company-lower costs-lower prices

Question 8

How do they give corporation tax advantages?

Examples?(3)

Answer 8

Can operate in countries with low corp tax

Apple, google and amazon

Question 9

How can it enhance risk diversification?

Answer 9

Broadens product portfolio

Companies with less/one product higher risk

Question 10

Why should it replace inefficient management?

Answer 10

If company is undergoing m or a then it is not reaching its potential under current management

Question 11

Why is the target having undervalued shares beneficial?

Answer 11

In an m+a the acquisitions just has to buy majority shares and they will be temporarily low