Mergers And Aquisitions

Question 1

Majority of major mergers

Answer 1

With large finance companies merging or large pharmaceutical

Question 2

Wave dates

Answer 2

1980/1990
Majority oil
More than half of us had takeover bids

Question 3

Why are mergers volatile

Answer 3

Concentrated in specific industries- industry level shock e.g increase supply of oil

Question 4

Merger example

Answer 4

Morrisons and Safeway (BBC,2004)

Question 5

Morrisons takeover cost

Answer 5

£3bn

Question 6

Morrisons competitors for bid

Answer 6

Big 3-Tesco, Sainsbury’s, Asda and Phillip green

Question 7

Motives for Morrisons merger

Answer 7

Gain larger share of southern market

Cost savings-£25m

Question 8

Economies of vertical integration

Answer 8

Improve control of production/ supplier

Question 9

Complementary resources

Answer 9

Buying up a small firm with specialist knowledge, niche

Question 10

Eliminating efficiencies and quote

Answer 10

Replacing inefficient management

Martin,1991- CEO 4x more likely to be replaced

Question 11

Diversify- why bad

Answer 11

Cash rich silly firms invest in high growth companies- should focus on strengths

Question 12

Who benefits in a merger in the short term?

Answer 12

Target benefits- scale difference

Unsuccessful bidders who still have shares can benefit by selling and profiting on shares

Question 13

Why bidding companies don’t benefit as much as target- short term and quote

Answer 13

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

Question 14

Fairy tale- toads

Answer 14

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

Question 15

Hubris def and supporter

Answer 15

Exaggerated self confidence- Roll, 1986 explanation for corporate takeovers

Question 16

Test of hubris

Answer 16

Hayward, 1997

Causes- share performance, media praise for CEO, CEO self confidence, lack of board control

Question 17

Contradiction to roll

Answer 17

Sheliefer, 2003- market is valuing companies- managers responding rationally

Question 18

Types of merger

Answer 18

Horizontal- similar companies
Vertical- different stages of production same industry
Conglomerate- unrelated companies

Question 19

Methods of payment

Answer 19

Stock offer- shares are overvalued- bad for bidding company shareholders- stock price will fall
Cash offer- shares undervalued

Question 20

Boot strapping

Answer 20

Buy a low growth low p/e company

Question 21

Takeover steps

Answer 21

1. Identify target
2. Bidder estimates a valuation using private data e.g values gains of repairing poor management
3. If Value is more than current price will make a bid

Question 22

Share price implications of bids by bidder hubris

Answer 22

When bid announced- share price drops- overvalued
If bid is successful- massive drop
If abandoned- price rise