Practice Questions: Lecture 1 Flashcards
What are cost and revenue synergies? Why are revenue synergies given less weight?
Cost and revenue synergies are the incremental increases in revenue that arise from an M&A transaction:
- Cost synergies: receive more attention given they are more easy to capture and measure, and require less assumptions than revenue synergies
What is a greenfield analysis?
What is a standalone v merger analysis?
Greenfield analysis: Involves comparing the costs, risks and benefits of an acquisition or merger with their organic opportunity
Stand-alone versus Merger: Is it better to build a brand, geographic coverage, distribution network, relationships, or better to acquire them
What is the control premium?
What is the purchase price premium?
What is the typical purchase price premium?
Control premium = % difference in price difference to purchase control of the company, compared to the price for owning a minority position
Purchase price premium: Control premium + synergies
Typical = 30%
What is a break-up fee? What % of the target company’s equity is it? What does it prevent?
- Fee that is paid by the target is they back out of deal after merger agreement or stock purchase agreement signed
- Purpose: Discourage other companies making a bid for the target company (they will end up paying the fee)
- Amount: Typically 2-4% of the target company’s equity
What are the advantages and disadvantages of
- Cash
- Debt
- Equity
Cash:
- Directly from the balance sheet of the acquirer, can be useful if excess cash reserves. Maintain existing control
- However, forfeits interest on cash and creates tax implications for shareholders of target company
Debt:
- While can make use of debt capacity,
- Can deteriorate credit ratings if a high debt/ equity ratio arises, maintain existing control
Equity:
- Tax benefit (deferred capital gains until sold), synergies between shareholders, less reliance on external financing/ underwriting
- Can dilute interests of existing shareholders and dilute EPS
When will a transaction be accreative or dillutive? What relationship does this have to the P:E ratio of the target?
Accreative: When the EPS increases - where the target has a LOWER P:E ratio (stronger acqusition currency)
Dilutive: When EPS decreases: where the target has a HIGHER P:E ratio (less strong acquisition currency)
What is a fairness opinion?
When do conflicts arise in relation to fairness opinions?
Examines whether the transaction is reasonable from a valuation perspective (not business rationale or a legal opinion)
> Conflict arises where: firm executes M&A and uses same firm to issue a fairness opinion: advisory fees will only be paid if transaction is deemed to be fair
What are the difference between financial and strategic buyers?
Strategic buyers: Usually competition or in the same supply chain - therefore they will benefit from synergies
Financial buyers: interest in a company’s ROE, investments, capital structure, and cash flow. No synergies
When are financial buyers about to outbid strategic buyers?
- Aggressive cash flow assumptions
- Favourable financing terms
- Exit strategies
What does an M&A league table show and why is it so important?
Ranks investment banks in the dollar value and number of M&A deals they have done.
What are the two ways a stock based acquisition can be classified?
How do these impact the outcome of the acquisition during times of significant fluctuations
> Fixed exchange ratio: Fixed number of shares> can significantly vary the economic value of deal
Floating exchange ratio: Variable number of shares to meet acquisition amount> may lead heaps more shares and thereby diluting existing shareholders
What is the HHI Market Concentration formula?
HHI= Sum of (output of firm/ output of market x 100)^2
What does the HHI measure? When will ACCC have an issue with it?
Measures concentration and used by regulators to evaluate the effects or a merger.
Less likely to identify issues when
- Post merger HHI <2000
- Post merger HHI >2000, but change is <100
What are the two natures of merges?
What can the acquiring company do in a hostile takeover?
Friendly: Both side accept
Hostile: Deal is opposed to by target company.
Acquiring company can make
- Tender offer: buy shares at a substantial premium to market
- Proxy fight: Take control of board and establish a favourable board via a proxy vote
What are the six hostile defences?
- Poison pills: Allow shareholder to buy company shares at substantial discount: dilution of ownership:
- Poison puts: Allows bondholders to sell their bonds back: increase the debt of the target firm
- Golden parachutes: CEO packages
- Staggered BOD: Long term board members
- White knight: Friendly investor
- Greenmail: pay the acquirer to go away
