Mergers, Corporate governance and control Flashcards
What is a merger?
Two firms that combine to make a single firm.
takeover
One firm buys a sufficient number of shares to gain control of another company
buyout
A publicly traded firm or division of a firm is bought and then taken private.
Horizontal mergers
mergers between firms in the same industry
vertical merger
the combination of two or more firms involved in different stages of producing the same good or service
What is a conglomerate merger?
conglomerate merger
the joining of firms in completely unrelated industries
What is the difference between friendly and hostile takeover?
A friendly takeover is a corporate acquisition approved by the management and board of the target company. In a hostile takeover, the acquiring company proceeds without the consent or cooperation of the target company’s management or board.
How does a target company shareholders receive payment from acquirer?
does payment matter in MM WORLD?
the shareholders of the target company receive payment for their shares. This payment can be in the form of cash, shares from the acquiring company, or a combination of both.
Does payment method matter?
Not in M&M world (i.e. w/o frictions)
Yes, in reality.
What are some of the Motives behind a M&A
1) Restructuring
If restructuring through mergers is cost effective, then it will add value.
e. g. Obsolete product, Increased foreign competition (e.g. textiles) Deregulation (e.g. banking, airlines)
2) Increased market power
If you cannot undercut competitors, buying them could be an alternative. Fewer participants allows monopoly pricing. Stock price increase incorporates higher profits
Good for the companies. Bad for society.
3) Synergies and strategic benefits / Economies of scale/ Economies of scope (Vertical/Horizontal Integration)
(higher cash flows, i.e. increase revenue, lower costs)
Transfer technology. Allows small firms to gain access to distribution and advertising. Easier to enter a new market.
4) Corporate tax economies
Interest tax shields (advantage of debt, not merger) Reorganise into a trust or partnership
Other tax tricks
What is the gain of merger, cost and NPV?
If the merger is financed by acquirer’s stock, and sellers receive N shares in the merged company, then cost depends on the value of the shares in the new company:
Cost = (N × PAT) − VT
If we pay a premium for a company, what happens to parents stock
The stock price will rise. We need to calculate the new stock price and solve simultaneously
What happens when we find a merger using a share offer: 1 for 3 shares for example
There will be a share dilution. We will make more shares so the price of each share changes.
Calculation is N (new shares) x New share price
