Unit 9: Merger & Acquisitions

Question 1

What are reasons for acquisitions?

Answer 1

• increase market power
• overcome entry barriers
• cost of new product development
• increase speed to market
• lower risk vs. new products
• increased diversification
• avoid excessive competition

Question 2

What are problems in achieving success of acquisitions?

Answer 2

• integration difficulties
• inadequate evaluation of great
• large or extraordinary debt
• inability to achieve synergy
• too much diversification
• managers overly focused on acquisitions
• too large

Question 3

What is a takeover/an acquisition?

Answer 3

When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition.

From a legal point of view, the target company ceases to exist, the buyer “swallows” the business and the buyer’s stock continues to be traded.

Question 4

What is merger?

Answer 4

A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated.

This kind of action is more precisely referred to as a “merger of equals”.

The firms are often of about the same size. Both companies’ stocks are surrendered and new company stock is issued in its place.

Question 5

Factors in choosing between an acquisition of stock and a merger

Answer 5

1. In an acquisition of stock, shareholder meetings need not be held and a vote is not required. If the shareholders of the target firm do not like the offer, they are not required to accept it and need not tender their shares.
2. In an acquisition of stock, the bidding firm can deal directly with the shareholders of a target firm via a tender offer. The target firm’s management and board of directors are bypassed.
3. Target managers often resist acquisition. In such cases, acquisition of stock circumvents the target firm’s management. Resistance by the target firm’s management often makes the cost of acquisition of stock higher than the cost by merger.
4. Frequently a minority of shareholders will hold out in a tender offer, and thus, the target firm cannot be completely absorbed.
5. Complete absorption of one firm by another requires a merger.

Question 6

What are ways to acquire a company?

Answer 6

• a raid
  Buying as many of a company’s stocks as possible on the stock market
• a takeover bid
  a public offer to a company’s stockholders to buy their stocks at a certain price during a limited period of time

Question 7

What are types of mergers?

Answer 7

• Horizontal
  two companies making the same products combined
• vertical
  a company either acquires or mergers with another company in an immediately - related stage of production and distribution
• diversification/conglomorate
  A company acquires another company in an entirely different sphere.

The acquiring firm and the acquired firm are not related to each other. The acquisition of a food products firm by a computer firm would be considered a conglomerate acquisition.

Question 8

What are reasons for horizontal mergers?

Answer 8

• to reduce competition
• to increase market share
• to acquire additional plants and equipment
• to achieve synergy and economies of scales

Question 9

What are reasons for vertical mergers?

Answer 9

• to guarantee the supply and cost of raw material and components
• to be closer to the customers, by cutting out the wholesaler for example and dealing directly with the retail trade