MERGERS & AQUISITION Flashcards
The combination of two firms to form a single firm
Merger
have stimulated a number of mergers
Tax Considerations
The condition wherein the whole is greater than the sum of its parts; in a synergistic merger, the postmerger value exceeds the sum of the separate companies’ premerger values
Synergy
Personal considerations deter as well as motivate mergers.
After most takeovers, some managers of the acquired companies lose their jobs, or at least their autonomy.
Managers’ Personal Incentives
Firms can be valued by book value, economic value, or replacement value.
Breakup Value
Managers often cite diversification as a reason for mergers. They contend that diversification helps stabilize a firm’s earnings and thus benefits its owners
Diversification
A combination of two firms that produce the same type of good or service.
Horizontal Merger
Types of Mergers
A merger between a firm and one of its suppliers or customers.
Vertical Merger-
Types of Mergers
A merger of firms in the same general industry, but for which no customer or supplier relationship exists
Congeneric Merger
Types of Mergers
A merger of companies in totally different industries.
Conglomerate Merger
Types of Mergers
Consodolations occured in the oil, steel, tobacco and other basic industries
1800
Five Major “Merger Waves” in USA
Stock Market boom helped financial promoters consolidate firms in
a number of industries, including utilities, communications and autos.
1920’s
Five Major “Merger Waves” in USA
Conglomerate mergers were the rage.
1960’s
Five Major “Merger Waves” in USA
LBO firms and others began using junk bonds to finance all manner of acquisition.
1980’s
Five Major “Merger Waves” in USA
Involves strategic alliances designed to enable firms to compete better in the global economy.
Today
Five Major “Merger Waves” in USA
A company that seeks to acquire another firm
Acquiring Company
A firm that another company seeks to acquire
Target Company
A merger whose terms are approved by the
managements of both companies
Friendly Merger
A merger whose terms are approved by the
managements of both companies
Hostile Merger
The offer of one firm to buy stock of another by going directly to the stockholders, frequently (but not always) over the opposition of the target company’s management
Tender Offer
An attempt to gain control of a firm by soliciting stockholders to vote for a new management team.
Merger Regulation
Obtaining accurate post-merger cash flow forecasts is by far the most important task in the DCF approach
Pro Forma Cash Flow
Statements
approach to valuing a business involves the application of capital budgeting procedures to an entire firm rather than to a single projects.
discounted cash flow (DCF)
A merger in which the firms involved will not be operated as a single unit and from which no operating economies are expected.
Financial Merger
A merger in which operations of the firms involved are integrated in hope of achieving synergistic benefits.
Operating Merger
A method used to value a target firm using net cash flows that are a residual and belong solely to the acquiring firm’s shareholders.
Equity Residual Method
A method of valuing a target company that applies a market determined multiple to net income, earnings per share, sales, book value, and so forth.
Market Multiple Analysis
A method of accounting for a merger as a purchase. In this method, the acquiring firm is assumed to have “bought” the acquired company in much the same way it would buy any capital asset.
Purchase Accounting
Refers to the excess paid for a firm above the appraised value of the physical and intangible assets purchased
Goodwill
Occurs when the assets of a division are sold off piecemeal, rather than as an operating entity
Liquidation
A minority interest in a corporate subsidiary is sold to new shareholders, so the parent gains new equity financing yet retains control
Carve-Out
A divestiture in which the stock of a subsidiary is given to the parent company’s stockholders.
Spin-Off
The sale of some of a company’s operating assets.
Divestiture
A small group of investors, which usually includes current management, acquires a firm in a transaction financed largely by debt.
Leverage Buyouts
A corporate alliance in which two or more independent companies combine their resources to achieve a specific, limited objective
Joint Venture
CORPORATE ALLIANCES
An action that will seriously hurt a company if it is acquired by another
Poison Pill
A cooperative deal that
stops short of a merger.
Corporate, or Strategic, Alliance
CORPORATE ALLIANCES
Large payments made to the managers of a target firm if it is acquired.
Golden
Parachutes
Generally means simultaneously buying and selling the same commodity or security in two different markets at different prices, and pocketing a risk-free return
Arbitrage
Members of these groups identify firms with excess cash that might
want to buy other firms, companies that might be willing to be bought,
and firms that might, for a number of reasons, be attractive to others
Arranging Mergers
A merger can have a significant effect on reported profits. If asset values are increased, as they often are under a purchase, this must be reflected in higher depreciation charges.
Income Statement Effects
