w8 : M&A and interest rate risk

Question 1

state the seven reasons to acquire.

Answer 1

• large synergies (for cost-reduction or revenue enhancement)
• EoS
• economies of scope
• vertical integration (better coordination)
• expertise (compete more efficiently)
• tax advantage (offset losses between divisions)
• risk reduction
• diversification (risk reduction, lower chance of bankruptcy, asset allocation, liquidity)
• earnings growth
• managerial motives (add. pay & prestige)

Question 2

what are the steps involved for a merger or acquisition?

Answer 2

1. valuation
2. offer (pay using cash or stock)
3. board & SH approval (is takeover friendly, hostile?)

Question 3

why do acquirers choose to pay such a large premium?

Answer 3

avg premium of 43% over pre-merger price of firm. pay this due to competition in takeover market. once acquirer starts bidding on firm, other potential acquirers submit bids, creating auction style, where firm sold to highest bidder.

Question 4

what is a floating interest rate?

Answer 4

IR that adjusts to current market conditions

Question 5

what is an interest rate swap?

Answer 5

two parties agree to exchange int. payments from tow diff types of loans