Mergers and Acquisitions (Week 11)

Question 1

What is a merger?

Answer 1

Two firms amalgamate to form a single firm

Question 2

What is a buyout?

Answer 2

A buyout occurs when a firm (or a division of a firm) is bought and then taken private

Question 3

What is a horizontal merger?

Answer 3

Firms that are in the same industry and the same stage of the production process

Question 4

What are vertical mergers?

Answer 4

Firms that are in the same industry but at different stages of the production process

Question 5

What are conglomerate mergers?

Answer 5

Firms that are in different industries

Question 6

What are friendly takeovers?

Answer 6

The board of directors of two firms agree to combine and seek shareholders’ apprival for the combination

Question 7

What is a hostile takeover?

Answer 7

Raider makes offer directly to shareholders (Tender offer)

Question 8

What is the market reaction to a takeover?

Answer 8

In most takeovers the acquiring firms pay premium over current market prices to acquire a firm.

Hence, the announcement of takeover increases the stock prices

Question 9

Examples of sources of M&A value

Answer 9

Large synergies (cost reductions, revenue enhancements) are the most common justification that bidders give for the premium they pay for a target.

1. Economies of scale and scope
2. Vertical integration
3. Expertise
4. Greater market power
5. Efficiency gains (e.g. remove existing management)
6. Increase leverage and interest tax shield.

Question 10

What is the procedure for valuing synergy?

Answer 10

1. The firms involved in the merger are valued independently using the DCF method.
2. The value of the combined firm, with no synergy, is obtained adding the values obtained for each firm in the first step.
3. The effects of synergy are built into expected growth rates and cash flows, and the combined firm is re-valued with synergy.

Value of synergy = value of combined firm with synergy - value of the combined firm without synergy