R18: Mergers and Acquisitions

Question 1

Bootstrapping earnings

Answer 1

when a company’s earnings increase simply due to the m&a transaction, and not synergies or scaling effects

Question 2

Causes of bootstrap effect

Answer 2

-when shares of the acquirer trade at higher P/E than the target AND the acquirer’s P/E does not decline post-merger

Question 3

New Acquirer P/E in efficient markets

Answer 3

• if the market is efficient, the post-merger P/E should adjust to the weighted average of A & T earnings
• the market usually recognizes the bootstrapping effect and adjust the P/E accordingly
• should not be a motivation for M&A

Question 4

Asset aquisition

Answer 4

• A pays for the assets of T
• payment made to T
• no interest in brand or name
• shareholder approval may not be needed
• A may avoid assuming liabilities of T (unless challenged in court when A buys large amount of T)
• Assets enter BS at price paid (and depreciate at that price), no goodwill
• seller may need to pay tax on sales

Question 5

Stock purchase

Answer 5

• T’s shareholders access the cash or shares- they assume tax implications
• SH approval required
• A SH gets CG on sale
• A gets all assets and liabilities, including any tax loss carryforward
• Excess paid is goodwill

Question 6

Cash offering

Answer 6

-existing cash or new debt

Question 7

Securities offering

Answer 7

T shareholders receive shares of A stock

Question 8

Mixed offering

Answer 8

-mix of cash or stock deal