Session 7: Mergers & Acquisitions Flashcards
Why do companies engage in M&A activity? (Reasons 1-6)
- Asset Stripping: Break up and sell assets at a profit.
- Market Share: Improve competitive position.
- Cost Synergy: Achieve economies of scale.
- Sales Synergy: Increase cross-selling opportunities.
- Diversification: Reduce earnings volatility.
- Value Gap: Acquire assets at a bargain price.
Why do companies engage in M&A activity? (Reasons 7-12)
- Improve Quality of Earnings: Stabilize cash flows.
- Reverse Takeover: Acquire a listed company to gain stock exchange listing (back door listing).
- Growth: Older companies target newer companies for expansion.
- Defensive Merger: Become larger and less vulnerable to takeover.
- Market Development: Expand into new markets (e.g., CRH expanding into Spain, Denmark, USA).
- Increase Purchasing Leverage: Strengthen supply chain negotiations.
Why do companies engage in M&A activity? (Reasons 13-17)
- Broader Product Portfolio: Offer a wider range of products to customers.
- Taxation: Acquire Irish companies to benefit from the 12.5% corporate tax rate.
- Optimize Gearing: Alter debt/equity ratio to minimize WACC (Weighted Average Cost of Capital).
- Obtaining Intellectual Capital/Knowhow: Gain access to valuable intellectual property and expertise.
- Combining Complementary Resources: Merge R&D capabilities with production capacity for better resource utilization.
What are the general defensive tactics for a hostile takeover? (5 general tactics)
- Go Private: Delist the company from the stock market to make it less accessible to hostile bidders.
- Efficient Management: Improve the company’s performance and maximize shareholder value to make selling less attractive to shareholders.
- Employee Share Option Scheme: Implement schemes that give employees a stake in the company, making them likely to resist a takeover due to potential job loss or restructuring.
- Golden Parachutes: Offer expensive termination packages to executives, increasing the financial burden on the bidder if they proceed with the takeover.
- Poison Pill: Issue a new class of securities that can be redeemed at a substantial premium, diluting the bidder’s stake and making the takeover more costly and less attractive.
What are other defensive tactics for a hostile takeover?
- Shark Repellent: Implement a super majority requirement (e.g., 75%) for shareholder approval to proceed with a takeover.
- Pac-Man Defense: Make a counteroffer to acquire the bidding company, scaring off the predator.
- White Knight: Find a friendly company to acquire control and protect the target company.
- White Squire: Engage a friendly company to acquire a minority interest, preventing the hostile bidder from gaining full control.
- Circulate Defense Documents: Distribute documents attacking the predator’s motives and plans to shareholders.
- Crown Jewels: Dispose of or offload the company’s most attractive assets to make the company less appealing to the bidder.
- Refer to Regulatory Authority: Seek intervention from regulatory bodies to block or delay the takeover.
- Management Buyout: The current management team buys the company to retain control and prevent the hostile takeover.
What are the considerations for using CASH in M&A transactions?
- No Dilution of Control: The acquiring company’s control is not diluted since no new shares are issued.
- Seller Benefit of Certainty: Sellers receive a definite amount, providing certainty.
- Capital Gains Liability: Selling shareholders may incur capital gains tax liability.
- Funding: The acquiring company must have or secure sufficient funds to complete the purchase.
What are the considerations for using EQUITY in M&A transactions?
- Dilution of Control: Issuing new shares can dilute the existing shareholders’ control over the company.
- Share Price Uncertainty: The value of the equity offer depends on the fluctuating share price, creating uncertainty.
- Defer Capital Gains Tax (CGT) Liability: Selling shareholders may defer CGT liability by accepting shares instead of cash.
- No Immediate Funding Needed: The acquiring company does not need to secure additional funds, as payment is made in the form of shares.
What is bootstrapping in an M&A context?
In an M&A context, bootstrapping refers to applying the acquiring firm’s price-to-earnings (PE) ratio to the combined earnings following an acquisition.
This approach makes sense if the target company is in the same industry as the acquiring firm.
Can potentially make the acquisition appear more attractive by reflecting a higher combined valuation.
Example: If the acquiring firm has a PE ratio of 20 and the combined earnings of both companies post-acquisition is $10 million, the combined valuation would be $200 million (20 * $10 million).
How does company law regulate M&A activity in Ireland?
Company Law: Ensures that M&A activity does not harm the public interest in Ireland.
Regulatory authorities have the power to block mergers and acquisitions that are deemed to negatively impact the economy, competition, or other public interest considerations.
How does EU law regulate M&A activity?
EU Law: Ensures that M&A activity is not contrary to the European public interest.
The European Commission can investigate and block mergers and acquisitions that threaten to significantly impede effective competition within the EU market, protect consumers, and maintain fair competition across member states.
What is the role of the Takeover Panel in regulating M&A activity?
Takeover Panel: Provides a code of conduct to ensure fair and transparent practices during takeovers.
The panel oversees the conduct of all parties involved, ensuring that shareholders are treated fairly, provided with adequate information, and that the market is not misled during the process of a takeover.
What are the legal aspects of due diligence when examining a target company?
DD = Examining the Target Company
- Review the company’s constitution and existing contracts to ensure compliance with laws and regulations
- Identify any legal liabilities or risks.
What are the accounting aspects of due diligence when examining a target company?
DD = Examining the Target Company
Verify the financial statements and records to confirm the accuracy and completeness of the financial information, ensuring there are no hidden financial issues.
What are the commercial aspects of due diligence when examining a target company?
DD = Examining the Target Company
Evaluate the company’s processes, functions, and systems to understand the operational efficiency and effectiveness, as well as any potential synergies or integration challenges.
What is the key to avoiding failure in post-merger assimilation?
Inadequate Integration: Leads to failure.
Post Acquisition Plan: Essential for successful integration.
