Mergers And Aquisitions Flashcards
Majority of major mergers
With large finance companies merging or large pharmaceutical
Wave dates
1980/1990
Majority oil
More than half of us had takeover bids
Why are mergers volatile
Concentrated in specific industries- industry level shock e.g increase supply of oil
Merger example
Morrisons and Safeway (BBC,2004)
Morrisons takeover cost
£3bn
Morrisons competitors for bid
Big 3-Tesco, Sainsbury’s, Asda and Phillip green
Motives for Morrisons merger
Gain larger share of southern market
Cost savings-£25m
Economies of vertical integration
Improve control of production/ supplier
Complementary resources
Buying up a small firm with specialist knowledge, niche
Eliminating efficiencies and quote
Replacing inefficient management
Martin,1991- CEO 4x more likely to be replaced
Diversify- why bad
Cash rich silly firms invest in high growth companies- should focus on strengths
Who benefits in a merger in the short term?
Target benefits- scale difference
Unsuccessful bidders who still have shares can benefit by selling and profiting on shares
Why bidding companies don’t benefit as much as target- short term and quote
Jensen and Ruback, 1983
Following merger managers battle for the right to manage firms resources- timely-merger gains not gained in short term- lazy managers replaced
Fairy tale- toads
Buffet, 1981
Fairytale story where handsome prince trapped in toads body is released by a kiss from a beautiful princess- ‘investors can always buy toads at the going price for toads’ don’t expect miracles
Hubris def and supporter
Exaggerated self confidence- Roll, 1986 explanation for corporate takeovers
Test of hubris
Hayward, 1997
Causes- share performance, media praise for CEO, CEO self confidence, lack of board control
Contradiction to roll
Sheliefer, 2003- market is valuing companies- managers responding rationally
Types of merger
Horizontal- similar companies
Vertical- different stages of production same industry
Conglomerate- unrelated companies
Methods of payment
Stock offer- shares are overvalued- bad for bidding company shareholders- stock price will fall
Cash offer- shares undervalued
Boot strapping
Buy a low growth low p/e company
Takeover steps
- Identify target
- Bidder estimates a valuation using private data e.g values gains of repairing poor management
- If Value is more than current price will make a bid
Share price implications of bids by bidder hubris
When bid announced- share price drops- overvalued
If bid is successful- massive drop
If abandoned- price rise
