Week 1 - DEP 1,3,7 Flashcards
Corporate restructuring describes..
Actions taken to
1. expand or contract a firm’s basic operations or
2. fundamentally change its assets or financial stracture.
Synergy is…
Synergy is the notion that two businesses in combination will create greater shareholder value than if they operated separately.
There are two types: financial and operating.
Economies of scale are achieved by…
…spreading the fixed costs over increasing production levels.
What are the 2 types of operating synergy?
- Economies of scale
- Economies of scope
A firm with … fixed costs (as a % of total costs) will have a … earning variability.
high
greater
Economies of scope are achieved by…
using a specific set of skills or an asset
Financial synergy refers to…
the impact of the M&A on the cost of capital of the acquiring firm or the newly formed one.
Diversification in M&A is…
buying firms outside a company’s main scope of business.
Conglomerates are…
Big firms that operate in a large number of unrelated industries, e.g. General Electric, Samsung, etc.
Conglomerate discount or Diversification discount refers to…
…the fact that conglomerate shares often trade at a discount due to the investors’ perception that companies diversified in unrelated areas are riskier.
This is due to mistrust that management perceives all these industries deeply or their own not understating how to price them.
If motive is Undervaluation Target firm should…
Trade at a price below EV
If motive is Diversification Target firm should
Not be in a horizontal business
If motive is Operating Synergy Target firm should
Have opportunity for cost savings
and/or higher growth
If motive is Financial Synergy Target firm should..
Provide tax benefits, or lack
debt capacity, or cash
availability
If motive is Control, Target firm should..
Be poorly managed,
underperforming
