Mergers And Acquistions

Question 1

Motives for m&a

Answer 1

1. Lower cost per unit of output- where economies of scale are achieved by the holding company (increasing profitability and therefore dividends)
2. Corporation tax advantages- whereby a post m&a holding company can achieve operations in low tax regimes, reducing corporation tax liability
3. Enhanced risk diversification- where the post holding m&a company reduces its risk by taking on more products or services
4. Replace inefficient management- where target directors have under performed in pervious years
5. Target has undervalued shares- if recent past in decline of company has resulted in a fall in share price

Question 2

Cash for shares advantages

Answer 2

1. Easy to understand
2. Cannot fall in value
3. Shareholders retain the same level of control over their company and therefore no dilution of holding company post m&a
4. Simplicity and preciseness give a greater chance of success
5. Allows the recipients to spread their investments

Question 3

Cash for shares disadvantages

Answer 3

1. May trigger capital gains tax liability
2. May lead to excessive gearing if bidder borrows (whereby the acquisition company does not have sufficient cash to make the purchase)

Question 4

Shares for shares characteristics

Answer 4

1. Capital gains tax can be postponed
2. They maintain an interest in the combined entity whereby if they were content shareholders prior to m&a they now should receive a higher post m&a
3. No immediate outflow of cash therefore no requirement of the bidder to increase its gearing

Question 5

Soft acquisition defences

Answer 5

1. Attack logic of the bid (where target firm is very different from bidder)
2. Improve the image of the firm (highlight financial success)
3. Attack the value creating record of the bidder where previous m&a may not have been successful
4. Try to get an office for fair trading block to prevent m&a from taking place
5. Encourage unions, positions, customers and suppliers to lobby

Question 6

Hard acquisition defences

Answer 6

1. Management buy out- where directors of target firm borrow in order to buy shares of target firm
2. Share repurchase- target company buys the shares of the target firm market
3. White knight- where the directors of target firm seek a better company to buy them out
4. Poison pills- directors of target firm write contracts that will make them less attractive to the bid
5. PAC-man defences- where the target directors seek to buy the bidding company (attack)
6. Golden parachutes- target directors write contracts that are in their own interest