The Economic Effect of Significant Transactions Flashcards
Business combinations
an entity can expand its operations by entering into a business combination; the 4 primary types of combinations include: horizontal, vertical, diagonal, and circular; transactions include: mergers, acquisitions, consolidations, tender offers, purchases of assets, and management acquisitions
What is a horizontal combination?
it occurs when companies in the same industry that produce the same goods or provide the same services join together under single management/leadership; both horizontal and vertical combinations offer benefits, such as reduced competition, economies of scale leading to reduced costs, expertise at various levels of production, minimized overproduction, and maximized profits
What is a vertical combination?
it involves the combination of companies at different stages of the production process; the companies can be from the same industry or multiple industries; it can assure the supply of raw materials (backward integration) or provide a stable market for products sold (forward integration)
What is a diagonal combination?
it occurs when a company that engages in an activity integrates with another company that provides ancillary support for that primary activity; the purpose is to ensure that the ancillary support is delivered in a timely and effective manner, which is crucial to the mission of the primary activity and business
What is a circular combination?
it occurs when different business units with relatively remote connections come together under single management; the relationship could come from using similar distribution or advertising channels, or requiring similar production processes; having one management group over the combined units reduces overall administrative and other operational costs
What is a merger?
two or more entities combine to form a single new corporation, with the stocks of all merging companies surrendered and replaced with new stock in the name of the new company; they often involve the combination of like-sized companies
What is an acquisition?
the acquisition of one company by another involves no new company; only the acquirer remains after the acquisition; the acquired firm, which is generally smaller than the acquiring firm, may retain its legal structure and name, or it may be subsumed by the acquirer and cease to exist
What is a tender offer?
a company makes an offer directly to shareholders to buy the outstanding shares of another company at a specified price; the offer may be in the form of cash or securities of the acquiring corporation (stocks, warrants, debt issuances); shareholders of the target company have the option of accepting or rejecting the offer
What is a purchase of assets?
this transaction occurs when a portion (or all) of the selling company’s assets are purchased by the acquiring company, which may result in the dissolution of the selling company; as with a tender offer, shareholder approval must be obtained
Divestiture
it involves the partial or full disposal of a component or business unit of a company; divestiture transactions include: sell-offs, spin-offs, and equity carve-outs
What is a sell-off?
it is an outright sale of a subsidiary because the subsidiary’s core competencies do not align with the overall company’s or because there is a lack of synergy between the company and its subsidiary; legal action stemming from anticompetitive or antitrust practices may also require a sell-off
What is a spin-off?
it crates a new, independent company by separating a subsidiary business from a parent company; a spin-off can be completed by distributing stock in the new entity as a stock dividend to existing shareholders or by offering shareholders stock in the new company in exchange for their stock in the parent company; spin-offs typically occur when a unit is less profitable and/or unrelated to the core parent business; the assumption is that the operations of the unit after a spin-off are expected to have more value than they did as part of the larger operation
What is an equity carve-out?
this occurs when a subsidiary is made public through an initial public offering (IPO), thereby creating a new publicly listed company; unlike a spin-off, in which no cash comes to the parent company, the sale of shares in the new company generates cash for the parent company as well as providing the parent with a controlling interest in the subsidiary; the hope is this strategy will unlock the independent value of the subsidiary previously contained within the merged entity
