Mergers and Acquisitions (M&A)

Question 1

Acquisition

Answer 1

A firm engages in an acquisition when it purchases a second firm.

Question 2

Friendly acquisitions

Answer 2

This occurs when the management of the target firm wants the firm to be acquired.

Question 3

Unfriendly acquisitions

Answer 3

This occurs when the management of the target firm does not want the firm to be acquired. These types of acquisitions are also known as hostile takeovers.

Question 4

Vertical merger

Answer 4

When a firm vertically integrates either forward or backward through acquisition efforts. Vertical mergers could include a firm purchasing critical suppliers or raw materials (backward vertical integration) or acquiring customer and distribution networks (forward vertical integration).

Question 5

Horizontal merger

Answer 5

A firm acquires a former competitor.

Question 6

Product extension merger

Answer 6

In a product extension merger, firms acquire complementary products through their merger and acquisition activities.

Question 7

Market extension merger

Answer 7

The primary objective is to gain access to new geographic markets.

Question 8

Conglomerate merger

Answer 8

This is a merger or acquisition when firms are not linked through vertical integration, horizontal integration, product extension, or market extension. There is no strategic relatedness between a bidding and target firm.

Question 9

Reasons for mergers and acquisitions

Answer 9

1. To ensure survival: when competitors have been able to improve their efficiency and effectiveness through a particular type of acquisition. The purpose of a merger of acquisition is in this case a way to gain competitive parity
2. Free cash flows: the amount of cash a firm has to invest after all positive net present-value investments in its ongoing businesses have been funded. Free cash flow is created when a firm’s ongoing business operations are very profitable but offer few opportunities for additional investment.
3. Agency problems: M&A help diversify their human capital investments in their firms and help quickly increase firm size, measured in sales or assets.
4. Managerial hubris: the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm’s current management. it suggests that the economic value of bidding firms will fall once they announce a merger or acquisition strategy.
5. The potential for above-normal profits: The fact that bidding firms, on average, do not earn profits on these strategies does not mean that all bidding firms will always fail to earn profits. In some situations, bidding firms may be able to gain competitive advantages from merger and acquisition activities.

Question 10

Greenmail

Answer 10

A maneuver in which target firm’s management purchases any of the target firm’s stock owned by a bidder.

Question 11

Standstill agreements

Answer 11

In conjunction with greenmail, a standstill agreement is a contract between a target and bidding firm wherein the bidding firm agrees no to attempt to take over the target for some period of time.

Question 12

Poison pills

Answer 12

Any of a variety of actions that target firm managers can take to make the acquisition of the target expensive.

Question 13

Shark repellents

Answer 13

A variety of relatively minor corporate governance changes that are supposed to make it somewhat more difficult to acquire a target firm

Question 14

Pac man defense

Answer 14

This tactic fend off acquisitions by taking over the firm or firms bidding for them.

Question 15

Crown jewel sale

Answer 15

A bidding firm is more interested in just a few of the businesses currently being operate by the target firm. The business they are interested in are the targets “crown jewels”.

Question 16

Search for white knights

Answer 16

Another bidding firm agrees to acquire a particular target in the place of the original bidding firm. Target firm managers may prefer the second bidding firm.

Question 17

Creation of bidding auctions

Answer 17

As the number of bidding increases, the competitiveness of the market for corporate control and the likelihood that the equity holders of the target firm will appropriate all the value created by an acquisition also increase.

Question 18

Golden parachutes

Answer 18

A compensation arrangement between a firm and its senior management team that promises these individuals a substantial cash payment if the firm is acquired and they lose their job in the process.