Module 6 Flashcards

1
Q

Business combinations made up of

A

Mergers and takeovers

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2
Q

Types of combinations (3)

A
  • Horizontal
  • Vertical
  • Conglomerate
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3
Q

Horizontal combinations

A

Between firms in the same industry, producing similar and possibly competitive products for the same markets

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4
Q

Vertical combinations

A

Integrate stages of the supply chain (buying up supply chain)

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5
Q

Conglomerate combations

A

Between firms in different industries with little or no common acitivities

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6
Q

Conditions which favour mergers (3)

A
  • Stock market boom
  • Deregulation and globalisation of the world’s economy
  • New technology
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7
Q

Reasons for business combinations (6)

A
  • Diversification
  • Economies of scale
  • Cost reductions
  • Growth
  • Access to customer lists
  • Utilisation of cash
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8
Q

UK listed company business combinations are governed by (4)

A
  • Stock Exchange regulations
  • Takeover panel and city code
  • The competition and markets authority (CMA)
  • The European Commission (SEC if US)
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9
Q

City code applies to offers for following types of companies (4)

A
  • Listed companies if the UK is their registered office
  • Unlisted public companies if they have registered offices in the UK
  • Private companies based in UK if their shares have been previously listed on LSE
  • Companies in other European Economic Area countries
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10
Q

Purpose of city code (3)

A
  • Fair treatment of shareholders
  • Provides orderly framework within which takeovers are conducted
  • Ensures that information is adequately disclosed to shareholders
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11
Q

Six general principles in city code

A
  • Equivalent treatment
  • Sufficient time and information
  • Offeree company must act in interests of the whole company
  • False markets banned
  • Genuine announcements
  • Reasonable hindrance only
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12
Q

City code rules to govern conduct of parties (5)

A
  • How to approach target company
  • Timing of share purchases
  • Announcement of takeover bid
  • Obligation of board of target company
  • Conduct during the offer
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13
Q

CMA aims to

A

Promote competition both within and outside UK for the benefit of consumers

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14
Q

CMA Phase 1

A

If revenue of target > £70m or >25% combined market share

Detailed review

40 days

Determine if serious lessening of competition expected if no - no further action. If yes > phase 2

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15
Q

CMA Phase 2

A

In depth investigation

24 weeks

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16
Q

CMA final step

A

Would merger adversely affect the public interest?

Yes > make recommendations to mitigate public threat/ ban

No > merger can go ahead

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17
Q

European Commission - mergers

A

Must approve very large mergers where companies concerned each have European wide revenues in excess of very high thresholds

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18
Q

Board must seek (when receive bid)

A

Competent financial advice eg merchant bank

19
Q

City Code for fighting a takeover

A
  • Defending circulars must be prepared under good standard of care
  • Bases and assumptions on which directors have prepared profit forecasts must be stated
  • If revaluation of assets given in connection with offer supported by independent valuer
20
Q

Sophisticated board of directors

A

Should be able to detect another company is interested in their company before any formal announcement

21
Q

Well managed defence campaign will include

A

Aggressive publicity on behalf of company

22
Q

Defence of takeover bid tactics (7)

A
  • White Knight
  • Poison Pills
  • Crown Jewels
  • Golden Parachutes
  • Pac-Man Strategy
  • Referral to CMA
  • Producing revised profit forecast
23
Q

White Knight =

A

Offering company to more friendly outside interest > permitted by City Code

24
Q

Poison Pills =

A

Steps taken to make the company less attractive > not permitted by City Code

25
Crown Jewels =
Selling off highly valued company assets > once an offer is imminent this is not feasible
26
Golden Parachutes =
Introduce attractive termination packages for senior executives (makes acq more expensive + less painful for executives) > details must be sent to shareholders including any amendments in past six months
27
Pac-Man Strategy =
Target company tries to take over bidding company > No City Code implications
28
Referral to CMA =
Buys the company more time > No City Code implications
29
Producing a revised profit forecast =
Indicates a better future than market had been expecting - share price will rise and offer looks less attractive > No City Code implications
30
Methods of financing (3)
- Cash - Debt - Equity
31
Cash acquisitions > advantages to seller (2)
- Amount known with certainty | - No restrictions on use of proceeds
32
Cash acquisitions > disadvantages to seller
Immediate capital gains liability
33
Cash acquisitions > advantages for buyer (2)
- Doesn't affect control | - Straightforward, may combat resistance
34
Cash acquisitions > disadvantage for buyer
May reduce dividends
35
Debt acquisitions > advantages (2)
- Tax benefits of debt > cheap | - Usually in conjunction with equity
36
Debt acquisitions > disadvantages (2)
- Often carries warrants | - Banks will want own duediligence
37
Equity acquisitions > advantage
Defers capital gains tax for seller
38
Equity acquisitions > disadvantage
Not suitable for hostile takeovers
39
Three valuation methods for target company
- Asset valuation - Earnings valuation - Discounted cash flow
40
Merger =
Combination of two companies of similar size
41
Share exchange scheme > Step 1
Decide which of the companies is to be the holding company
42
Share exchange scheme > Step 2
Valuation of the companies
43
Share exchange scheme > Step 3
Devise the future capital structure
44
Share exchange scheme > Step 4
Assess the effect on the shareholders of both companies