PT2 SU8.1 M&A Flashcards
Corporate restructuring, Int'l Trade, & Exchange Rates
What is a merger?
A merger is a business transaction in which an acquiring firm absorbs a second firm, and the acquiring firm remains in business as a combination of the two merged firms.
What is a consolidation?
A consolidation is similar to a merger, but a new entity is formed and neither of the merging entities survives.
What is a horizontal merger?
A horizontal merger occurs when two firms in the same line of business combine.
What is a vertical merger?
A vertical merger (vertical integration) combines a firm with one of its suppliers or customers.
What is a conglomerate merger?
A conglomerate merger involves two unrelated firms in different industries.
How is a merger typically arranged?
A merger is usually a negotiated arrangement between a single bidder and the acquired firm.
What is the most common form of payment in a merger?
Payment is most frequently in stock.
What is the typical profile of the bidder in a merger?
The bidder is often a cash-rich firm in a mature industry and is seeking growth possibilities.
What is the typical profile of the acquired firm?
The acquired firm is usually growing and in need of cash.
What is an acquisition?
An acquisition is the purchase of all of another firm�_Ts assets or a controlling interest in its stock.
What does control mean in an acquisition context?
Control is the ability to determine the direction of management and policies of the investee, typically by acquiring more than 50% of the voting interest.
What is a tender offer?
A tender offer is a general invitation by an individual or a corporation to all shareholders of another corporation to tender their shares for a specified price.
What valuation method is used for acquisitions on the CMA exam?
Acquisitions are valued using the discounted cash flow method.
When is a takeover considered friendly?
A takeover is friendly when the target is a successful firm in a growth industry, and management usually has a high percentage of ownership.
When is a takeover considered hostile?
A takeover is hostile when the target is in a mature, underperforming industry, often with low management ownership.
What is synergy in mergers and acquisitions?
Synergy exists if the value of the combined firm exceeds the sum of the values of the separate firms.
What is operational synergy?
Operational synergy arises when the combined firm operates more efficiently, reducing costs and potentially increasing revenues.
What are economies of scale?
Economies of scale occur when the average cost of production falls as a result of increased production levels.
What is financial synergy?
Financial synergy may reduce the cost of capital and increase access to internal capital due to greater size.
What is greenmail?
Greenmail is a defensive tactic where a company buys back its own shares from a hostile bidder at a premium to avoid a takeover.
What is managerial motivation in M&As?
It refers to managers pursuing mergers for personal benefits like increased salary, power, and prestige, rather than shareholder value.
How can fear of negative consequences affect M&A decisions?
Managers may resist favorable mergers if they fear being fired or replaced, possibly choosing alternatives that secure their positions.
What is diversification in the context of M&As?
Diversification stabilizes earnings and reduces risks for employees and creditors.
What is market power in M&As?
Market power increases through reduced competition, but is limited by antitrust laws and globalization.
When might a firm be an acquisition target based on its breakup value?
A firm may be acquired if its breakup value exceeds the cost of acquisition, allowing profit through asset sales.
How is synergy value determined in a merger?
By discounting the incremental cash flows of the new entity using a risk-adjusted discount rate.
What are some financial benefits of a merger?
Lower capital costs, better access to debt, internal capital availability, and improved capital structure.
What are greenmail and standstill agreements?
Greenmail is buying back shares from a hostile bidder at a premium. A standstill agreement stops the bidder from acquiring more shares.
What is a staggered board of directors?
It delays new shareholders from placing directors, helping defend against takeovers.
What are golden parachutes?
Provisions for large payments to executives if they are fired during a takeover.
What are fair price provisions?
These provisions let shareholders buy stock cheaply during a takeover to ensure fair treatment.
What are voting-rights plans?
Plans that limit voting rights for shareholders with large ownership, defending against takeovers.
What is leveraged recapitalization?
Raising large debt to pay dividends, increasing leverage and deterring takeovers.
What is a leveraged buyout (LBO)?
A firm is bought using mostly debt, often by management, making it private and increasing leverage.
What are the risks of a leveraged buyout?
High debt means high interest costs and limited cash for expansion.
What does ‘going private’ mean?
Public stock is bought by a private group, often via an LBO, delisting the company.
What is a poison pill?
Provisions in a corporation’s structure that make it less attractive to hostile bidders.
What are flip-over rights?
Allow shareholders to buy more shares of the acquiring company at a discount.
What are flip-in rights?
Allow existing shareholders (except the acquirer) to buy more shares at a discount when a threshold is crossed.
How can issuing stock defend against takeovers?
Increasing outstanding shares dilutes ownership, making takeovers more difficult.
What is a reverse tender?
The target company makes a counter-tender offer to acquire the original bidder.
What is an employee stock ownership plan (ESOP)?
A plan that gives shares to employees, whose trustees usually support existing management.
What is a white knight merger?
A friendly acquirer is brought in by management to block a hostile takeover.
What is a crown jewel transfer?
A target sells valuable assets to make itself less attractive to a hostile bidder.
How can legal action defend against a takeover?
Challenging the takeover in court can delay or block the bid, increasing costs.
What is a divestiture?
The sale of a business unit to a third party.
What is a spin-off?
A new independent entity is created and shares are distributed to existing shareholders.
Why might a company spin off a unit?
Reasons include antitrust actions, refocusing, or raising capital.
What is an equity carve-out?
A portion of a firm is sold through a public offering while control is retained.
What is a split-up?
An entity divides into two or more, and shareholders receive shares in the new entities.
What is tracking stock?
Stock that tracks performance of a division, with no claims on its assets.
