The Economic Effect of Significant Transactions_M5

Question 1

What are divestitures?

3 Divestitures

Answer 1

The types of divestitures can result in either a full or partial divestiture of a business segment.

1. Equity carve-out
2. Sell-off
3. Spin-off

Question 2

What is a Equity Carve-Out?

1 of 3 Divestitures

Answer 2

• Partial disposal.
• A new public company is formed.
• Shares are sold to the public through an IPO.
• Helps parent company to generate cash.
• Used when the Parent company wants to maintains a controlling interest.

Question 3

What is a Sell-Off?

2 of 3 Divestitures

Answer 3

• Outright full sale of a company usually associated with a non-core business.
• A sell-off would allow a firm to raise cash while separating itself from the other entity, so it could focus on its core business.

Question 4

What is a Spin-Off?

3 of 3 Divestitures

Answer 4

• Creates a new company and results in full separation from parent.
• Existing shareholders receive stock in the new company in exchange for their shares in the parent company.

Question 5

What are business combinations?

8 Business Combinations

Answer 5

1. Vertical Combination
2. Diagonal Combination
3. Circular Combination
4. Horizontal Combination
5. Acquisitions
6. Mergers
   6a Horizontal Merger
   b. Vertical Merger
7. Asset Purchase
8. Tender offer

Question 6

What is a Vertical Combination?

1 of 8 Business Combinations

Answer 6

• Combine with companies at different stages of the production.
• Provides a stable production process.
• Will eliminate ongoing price concessions or dealings.
• Stabilize profit margins.
• Company X supplies company Y with raw materials.
  ex. company merges with one of its suppliers.

Question 7

What is a Diaganol Combination?

2 of 8 Business Combinations

Answer 7

• Involves integrating another company that provides ancillary services, secondary or support roles.
• Company X is a textile manufacturer, whereas Company Y operates as a wholesaler for Company X.

Question 8

What is a Circular Combination?

3 of 8 Business Combinations

Answer 8

• Remote connections join under one mgmt.
• Reduces administrative and operational cost ex. law firm and CPA firm share office and receptionist, etc.
• The two companies appear to be in relatively unrelated industries.
• Company X operates in the financial services industry, whereas Company Y operates in the scientific research and development industry.
• Improving sales and locations.
• managing restaurant locations could be more effectively centralized.

Question 9

What is a Horizontal Combination?

4 of 8 Business Combinations

Answer 9

• Is combining with another company in the same industry under one mgmt. reduces competition.
• Companies X and Y are competitors in the same industry.
• Achieving economies of scale.

ex. merging with a competitor.

Question 10

What is a Aquisions?

5 of 8 Business Combinations

Answer 10

• Acquire one company by another company requires no new company.
• Only the acquirer remains after the acquisition. (A+B=A).

Question 11

What is a Mergers?

6 of 8 Business Combinations

Answer 11

• 2 or more companies join together to make one new company. A+B=C.
• Usually both companies are around the same size.
• Achieve economies of scale.
• Equal size co. to grow market share.
• No desire to remain in control.

Question 12

What is a Asset Purchase?

7 of 8 Business Combinations

Answer 12

• Some or all of one company’s assets are purchased by another company.
• The company who’s assets were purchased could result in a dissolution.

Question 13

What is a Tender Offer?

8 of 8 Business Combinations

Answer 13

• A company makes an offer to the shareholders of another company it is attempting to acquire.