Unit 6: Corporate Restructuring and International Finance Flashcards
1
Q
Mergers (Definition, types, and singularity)
A
- Mergers:
- As opposed to consolidation, one firm remains in business. Consolidation a new entity is formed.
- Three types of mergers
- Horizontal merger: same line of business
- Vertical merger: combines a firm with one of its suppliers or customers
- A conglomerate merger: involves two unrelated firms in different industries.
- A merger is usually a negotiated arrangement between a single bider an the acquired firm
MERGER GENERALLY REQUIRES A FORMAL VOTE OF SHAREHOLDERS OF EACH OF THE MERGING FIRMS (ACQUISITION ONLY IF DONE VIA ACQUISITION OF FIRM’S ASSETS)
- Payment is most frequently in stock
- Bidder is often a cash-rich firm in a mature industry seeking growth opportunities
- The acquired firm is usually growing and in need of cash.
2
Q
Acquisition
(Definition, Types of Acquisition by Stock Purchase or Acquisition of firm’s assets)
A
- Is the purchase of all of another’s firms assets or controlling interest in its stock.
- Control the direct or indirect ability to determine direction of mgmt and policies of the investee. Requires >50% of voting interests (shares of common stock).
- An acquisition of all of a firms’ assets require a vote of that firm’s shareholders. It also entails the costly transfer of legal title, but avoids the minority interest that may arise if the acquisition is by purchase of stock.
- An acquisition by stock purchase (TENDER OFFER INVOLVED) is advantageous because it can be effected when management and the board of directors are hostile to the combination, and it does not require a formal vote of the firm’s shareholder.
- If the offer is rejected, a tender may be made directly to the acquiree’s shareholders to obtain a controlling interest.
- A tender offer is a general invitation by an individual or corporation to all shareholders of another corporation to tender their shares for a specified price.
Minority shareholders are not required to tender their shares,
3
Q
Takeover: Friendly vs Hostile
A
- Friendly: the target is usually a successful firm in a growth industry, payment may be in cash or stock, and mgmt. of the target offer has a high percentage of ownership.
- Hostile: usually in a mature industry and is underperforming, more than one bidder may emerge, management ownership is likely low, and payment is more likely to be in cash and the initial bidder is probably a corporate raider.
4
Q
Motivation for M&As
A
- Benefits as a whole
- Diversification stabilizes earnings.
- Creates a strategic position that allows for competitive advantage.
- Greater market power (however, watch out for anti-trust regulations)
- A disbranched business might be worth more than entirety, and acquirer can sell pieces at higher prices.
-
Synergies (AB > a + b)
- If the avg cost of production falls as a result of production level increases, then there are economies of scale.
- Cost of capital might be reduced because cost of issuing debt and equity is lower for bigger firms.
- Synergy can be determined using the risk adjusted discounted rate to discount the incremental cash flows of the newly formed entity.
- Inefficient mgmt. by be replaced.
- Possibility of more debt financing, translates in greater tax savings (tax shield).
5
Q
Defenses Against Takeovers
(Greenmail
Staggered Elections
Golden Parachutes
Fair price provisions
Leveraged Capitalizations)
A
- Greenmail: acquiree offers to buy acquired take over shares at a higher market value. There can also be an agreement where bidder agrees not to buy additional shares.
- Staggered election of directors: new acquirers has to wait several years before being able to put their own people on the board. A linked strategy is to require supermajorities (>80%) for approval of a combination.
-
Golden parachutes
- Large payments to key executives are required for their dismissal.
-
Fair price provisions
- Assures that single minimum fair price is set for all shareholders willing to sell stock price. Also looks to protect minority interests.
-
Voting rights plan
- Voting-rights plans contain provisions that prevent shareholders who hold a certain ownership (usually low) from voting on takeover issues.
-
Leveraged recapitalization
- Company purposely obtains more debt to a level that it becomes less attractive to acquirer.
6
Q
LBO (also strategy against takeover)
A
-
LBO and going private
-
LBOs is a financing technique by which a company is purchased using very little equity. The cash-offer price is financed with large amounts of debt from the acquired company. An LBO is often used when a company is sold to mgmt. or some other group of employees but is also useful in hostile takeovers (management or group of key investors does so in order to avoid takeover from external bidders)
- The company’s assets serve as a collateral for a loan to finance the purchase.
- In addition, to greater financial leverage, the firm may benefit due to required lower saving and administrative costs from no longer being publicly traded ( also more flexibility for managers ).
- The high degree of risk in LBOs results from the fixed charges for interest on the loan and the lack of cash for expansion.
- Going private entails the purchase of the of the publicly owned stock by small group of private investors (including senior mgmt.). The stock is then delisted.
-
LBOs is a financing technique by which a company is purchased using very little equity. The cash-offer price is financed with large amounts of debt from the acquired company. An LBO is often used when a company is sold to mgmt. or some other group of employees but is also useful in hostile takeovers (management or group of key investors does so in order to avoid takeover from external bidders)
7
Q
Other Defense Against Takeovers
(Poison Pill - Flip in And Flip Over)
Issuing Stock
Reverse Tender
ESOP - IFRS2
White night merger
Crown Jewel Transfer
Legal Action)
A
-
Poison pill
-
Range of provisions that reduce the value of the target to potential tender offers. Two types:
- Flip over rights: the charter of a target corporation may provide for its shareholders to acquire in exchange for their stock (in target) a relatively greater interest (twice the shares of stocks of equivalent value) in an acquiring entity. Flip over the acquisition to YOUUU BABE. You buy one of mine, I get two of yo.
- Flip-in rights: acquisition of more than a specified ownership interest (e.g. 25%) in the target permits shareholders, except the acquirer, to purchase additional shares at a reduced price.
-
Range of provisions that reduce the value of the target to potential tender offers. Two types:
- Issuing Stock: increases amount of outstanding stocks.
- Reverse tender: target corporation might offer herself a tender to acquire control of the tender offer.
- ESOP (IFRS2) : will probably vote the shares of the stock against a raider, who will probably destabilize the target corporation’s current structure.
- White night merger: target arranges a tender offer with another acquirer who will be more benevolent.
- Crown Jewel transfer: target corporation sells or otherwise disposes of one or more assets that made it a desirable target.
- Legal action: delaying increases costs to the rather and enables further defensive action.
8
Q
Divestiture Options
(Spin-off, equity carve-out, splitup, tracking stock)
A
- A divestiture involves the sale of an operating unit of a firm to a third party
- A spin-off is a creation of a new separate entity from another entity, with the new entity’s shares distributed on a pro-rate basis to existing shareholders of the parent entity.
- Ownership proportion in parent and new is the same
- Is basically a type of dividend by stripping.
- Reasons for spinoffs or divestiture include:
- Governmental antitrust regulations
- Refocusing of a firms operations
- Raising capital for the core business.
-
An equity carve-out (SPLIT-off) involves the sale of a portion of the fir through a public offering.
- Quick way of raising capital and bringing new management while still maintaining control
- Similar to spin-off but shares are transferred to new shareholders.
- HELLOFRESHGO
- A splitup is when an entity splits in two or more entities. Shares from original are exchanged for shares in the new entities.
- Tracking stock is stock issued in a division or segment of a parent entity. This provides investors with the opportunity to invest in only a portion of the entity. However they have no claims in the asset. Rather, the parent entity controls over the division or segment.
9
Q
Proxy Fight
A
- A proxy fight is an attempt by dissident shareholders to control or at least influence the corporation by electing directors. A proxy is a power of attorney authorizing a specified person to vote corporate stock.
10
Q
Types of FX Markets
A
- Fixed exchange rate (no or limited variation but is subject to government manipulation)
- Free-float
- Managed Float Exchange Rate (within a range)
- Currently being used by the major trading nations
- Pegged exchange rate
- A government fixes the rate with respect to another country’s currency ( or to a basket of several ).
11
Q
Spot vs Forward
(Premium/Discount plus Formula)
(Cross Rate)
A
- Spot rate
- Forward rate
- Forward premium when forward > spot >> Expected to gain PP
- Forward discount when forward < spot >> Expected to lose PP
- Calculation of premium or discount:
- (Forward rate/spot rate -1) * days in year / days in forward period
- Cross rate = domestic currency per US dollar / foreign currency per US dollar
12
Q
Exchange Rate Equilibrium
(Supply and Demand)
A
- Demand curve for foreign currency is downward sloping because when that currency becomes cheaper, goods and services denominated in that currency become more affordable for domestic customers, leading them to demand more of that currency.
- The supply for the foreign currency is upward sloping because when that currency becomes more expensive, goods and services become more affordable to the users of the foreign currency, leading them to inject more of their currency in the domestic market.
13
Q
Calculation of effective interest rate on a foreign currency loan
A
- Calculation on effective rate due to FX impact:
- Difference on total repayment (interest plus principal) / initial amount borrowed
14
Q
FX Factors
5 of them
A
- 5 of them
3 are trade related factors:
Relative inflation rates
Relative income levels
Government intervention
2 financial factors:
Relative interest rates
Ease of capital flow (HAS BECOME BY FAR THE MOST IMPORTANT)
15
Q
Relative inflation, interest rates and income level
A
- Relative Inflation rates
- More inflation of foreign currency means lower price of it since value is lower as people dump it (less demand as supply increases).
- Demand for foreign shifts in (contraction)
- Supplies for foreign shifts out (expansion)
- More inflation of foreign currency means lower price of it since value is lower as people dump it (less demand as supply increases).
- Relative interest rates
- Higher foreign interest rate increases demand for its assets and foreign rate increases
- Demand shifts right.
- Supply shifts left as there is less of it available
- Higher foreign interest rate increases demand for its assets and foreign rate increases
- Relative income levels
- Higher income more you demand foreign
- Demand shifts right, increasing price and qty.
- Higher income more you demand foreign
