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CFA Level II Corporate Finance > Reading 29 - Mergers and Acquisitions > Flashcards

Reading 29 - Mergers and Acquisitions Flashcards

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1
Q

What are the 3 categories M&A can be categorized into?

A
  1. Statutory Merger - The target ceases to exist and all assets and liabilities transfer to the acquirer
  2. Subsidiary Merger - The target company becomes a subsidiary of the company
  3. Consolidations - Both companies cease to exist in their prior form and come together in a new company
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2
Q

What are the 3 types of mergers?

A
  1. Horizontal - firms in similar lines of business combine
  2. Vertical - combine firms either further up or further down the supply chain
  3. Conglomerate - combine firms in unrelated businesses
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3
Q

What are some common motivations behind M&A activity?

A
  1. Achieving synergies
  2. Growing more rapidly
  3. Increases market power
  4. Gaining access to unique capabilities
  5. Diversifying
  6. Gaining personal benefits for managers
  7. Taking advantage of tax benefits
  8. Unlocking hidden value for a struggling company
  9. Achieving international business goals
  10. Bootstrapping earnings
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4
Q

What are some of the factors driving international M&A ?

A
  1. Taking advantage of market inefficiencies
  2. Working around disadvantageous government policies
  3. Use technology in new market
  4. Product differentiation
  5. Provide support to existing multinational clients
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5
Q

Explain what bootstrapping of EPS is……

A

Is a way of packaging the combined earnings from two companies after a merger so that the merger generates an increase in the earnings per share of the acquirer, even when no real economic gains have been achieved

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6
Q

What are the stages in the industry life cycle?

A
  1. Pioneer/developement
  2. Rapid growth phase
  3. Mature growth phase
  4. Stabilization phase
  5. Decline Phase
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7
Q

What types of mergers occur during the Pioneer/Development phase?

A

Conglomorate and Horizontal

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8
Q

What types of mergers occur during the Rapid Growth phase?

A

Conglomerate and Horizontal

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9
Q

What types of mergers occur during the Mature growth phase?

A

Horizontal & Vertical

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10
Q

What types of mergers occur during the Stabilization phase?

A

Horizontal

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11
Q

What types of mergers occur during the Decline phase?

A

Horizontal

Vertical

Congolmerate

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12
Q

What are the two basic forms of acquisitions?

A
  1. Stock purchase
  2. Asset purchase
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13
Q

What are some important issues regarding all stock purchases?

A
  1. Shareholders must approve the transaction with a majority shareholder vote
  2. Shareholders will bear any tax consequences associated with the tranaction
  3. Purchases involve purchasing the entire company and not just a portion of it
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14
Q

What are some important issues relating to asset purchases?

A
  • shareholder approval is generally not required
  • there are no tax consequences for the shareholder
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15
Q

What are the 3 main factors that should be considered when an acquirer is negotiaing with a target over the method of payment?

A
  1. Distribution between risk and reward for the acquirer and target shareholders
  2. Relative valuations of companies involved
  3. Changes in capital structure
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16
Q

What is a bear hug?

A

A hostile merger offer

If the target’s company’s management does not support he deal, the acquirer submits a merger proposal directly to the target’s board of directors

17
Q

What are some pre-offer takeover defense mechanisms?

A
  1. Poison Pill - gives current shareholders the right to purchase additional shares at extremely attractive prices
  2. Poison Put - gives bondholders the option to demand immediate repayment of their bonds if there is a hostile takeover
  3. Restrictive takeover laws
  4. Staggered board
  5. Restricted voting rights
  6. Supermajority voting provision for mergers
  7. Fair price amendment
  8. Golden parachutes
18
Q

What are some post-offer takeover defense mechanisms?

A
  1. “Just say no defense”
  2. Litigation
  3. Greenmail - a payoff to the potential acquirer to go away
  4. Share repurchase
  5. Leveraged capitalization
  6. Crown jewel defense - target may decide to sell a subsidiary or major asset to a neutral third party
  7. Pac-man defense
  8. White knight defense
  9. White squire defense - a friendly 3rd party that buys a minority stake
19
Q

How do you calculate the Herfindahl-Hirshman Index (HHI) ?

A
20
Q

If post-merger the HHI is < 1,000 is an antitrust action likely?

A

No, this is not a concentrated industry

21
Q

If post-merger the HHI is > 1,000 but < 1,800 is an antitrust action likely?

A

A antitrust challenge is possible because this is a moderately concentrated industry

22
Q

If post-merger the HHI is > 1,800 is an antitrust action likely?

A

An antitrust challenge is virtually certain

23
Q

What are the steps in comparable company analysis?

A
  1. Identify the set of comparable firms
  2. Calculate various relative value measures based on the current market prices of companies in the sample
  3. Calculate the descriptive statistics for the relative value metrics and apply those measures to the target firm
  4. Estimate the takeover premium
  5. Calculate the estimated takover price for the target as the sum of estimated stock value vased on comparables and the takeover premium
24
Q

What are some of the advantages and disadvantages of using Discounted cash flow analysis to value a target company?

A

Adv:

  • It is relatively easy to model
  • Easy to customize
  • estimate of value if based on forecasts of fundamental conditions

Dis:

  • Difficult to apply when FCF is negative
  • estimates of cash flows are highly subject to error
  • discount rates change over time
25
Q

What is the Post-merger value of an acquirer ?

A
26
Q

What is Comparative Transaction Analysis?

A

Uses details from completed M&A deals for companies similar to the target being analyzed to calculate an estimated value for the target.

27
Q

What are some of the advantages and disadvantages of using Comparative Transaction Analysis ?

A

Adv:

  • Since approach uses data from actual transactions, there is no need to estimate a seperate takeover premium
  • Estimates of value are derived directly from recent prices for actual deals completed in the marketplace
  • Using prices from recent transactions reduces the risk that the target’s shareholders could file a lawsuit against management for mispricing the deal

Dis:

  • Approach assumes previous deals were priced correctly
  • May not be enough deals to calculate the estimated target value. Then may try to use deals from other industries that are not similar
28
Q

How do you calculate the Gains Accrued to the Target?

A

****Also know as the takeover premium

GainT = TP = PT - VT

GainT = gains accrued to target shareholders

TP = Takeover premium

PT = price paid for target

VT = pre-merger value of target

29
Q

How do you calculate the Gains Accrued to the Acquirer?

A

** Is equal to the synergies from the deal - the takeover premium

GainA = S - TP = S - (PT - VT)

30
Q

What is winner’s curse?

A

the competitive bidding process is won by the firm that overpays the most.

31
Q

What is managerial hubris?

A

When managers overestimate the synergies and expected benefits of a merger

32
Q

What are some characterstics of mergers that actually enhance value for the acquirer?

A
  1. Strong Buyer - Acquirers that have exhibited strong performance in the prior 3 years
  2. Low Premium - the acquirer pays a low takeover premium
  3. Few Bidders - The lower number of bidders, the greater the acquirer’s future returns
  4. Favorable Market Reaction - positive market reaction to the acquirer’s stock
33
Q

What are some common reasons for companies to restructure?

A
  1. Division no longer fits into management’s long term strategy
  2. Lack of profitability
  3. Individual parts are worth more than the whole
  4. Infusion of cash
34
Q

The HHI index is calculated before or after the merger would occur?

A

After

35
Q

Desribe what a White Knight Defense & White Squire Defense are?

A

***Both are Post-Offer degense mechanisms

White Knight: The target company seeks out a good strategic partner to buy the company who can justify a higher takeover price than the hostile offer can

White Squire: The target company seeks a friendly 3rd party to buya minority stake large enough to prevent the hostile offer from succeeding

36
Q

How do you calculate Unlevered Net Income?

A

= Net Income + Net Interest After Tax

Net Interest After Tax = (Interest Expense-Interest Income)*(1-tax rate)

37
Q

How do you calculate NOPLAT?

A

= Unlevered Net Income +/- Δ deferred taxes

CFA Level II Corporate Finance (6 decks)

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