Week 10 Flashcards
What is an acquisition?
Acquisitions involve one company purchasing another by acquiring a controlling interest in its voting shares
When does an acquisition of assets takeover typically occur?
Acquisition of assets as a takeover method can be difficult, but is commonly used when trying to takeover a private firm.
What occurs in a proxy contest takeover?
In a proxy contest a group of shareholders will attempt to get proxys from other shareholders to attain majority vote, a proxy means they legally control the vote.
What occurs in a going private takeover?
In going private a group of shareholders which often includes managers will attempt to take the shares from other shareholders and go private, if going private is achieved with debt then this is known as leveraged going private.
What are the two parties in an acquisition?
In an acquisition there is the acquirer/bidder which gives consideration (payment) to the acquired/target firm in return for shares.
What occurs in a merger? What about a consolidation?
In a merger one firm is acquired by another, the acquiring firm retains their name and the acquired firm no longer exists, this makes it legally simple but must be approved by the stockholders of both firms. In consolidation an entirely new firm is created from the combination of the firms.
When should a firm acqquire a company? Are financing and capital structure important?
A firm should only acquire a company when the acquisition will create value for the firm and shareholders (positive NPV), the acquisition may have financing and capital structure effects that must be factored, depending on how the acquisition is financed.
What are some good reasons for acquisitions? What shareholders typically benefit the most?
Acquisitions involve changes in ownership and/or control of valuable assets, this makes it a major form of growth, expansion and industry consolidation. It is also a major source of wealth creation for shareholders, primarily from bid premiums to the target firm shareholders.
The main motives for acquisitions is the synergy creation or gains, meaning that the value of the post merger firm is greater than the value of the acquirer + the target. The synergy gain is this post acquisition value – the sum of the pre-acquisition values). The source of synergy comes from the discounted cash flow. Where the change in cash flow is the change in revenue – change in costs – change in taxes – the change in capital requirements.
What are the three main types of acquisitions?
The types of acquisition are: horizontal acquisition, this is the acquisition of a target company operating in the same line of business.
Vertical acquisition: The acquisition of a company which is either a supplier of goods or services to, or a consumer of goods and services provided by the acquirier (also known as upstream or downstream).
Conglomerate acquisition: an acquisition of an unrelated firm.
What forms can synergies come in?
Synergies can be operating synergies, these change the cash flows of the merged firm, or financial synergies, which influence the risk level of the merged firm.
What are the main sources of operating synergies in acquisitions?
Primary sources of potential operating synergy are:
Revenue enhancement: market or monopoly power, accessing new distribution networks and improving product offerings, strategic benefits (like acquiring technology).
Cost reduction: economies of scale (fixed costs spread over larger capacity), economies of scope (benefits from enhancing the breadth of products or services), technology transfers or expertise, elimination of inefficient management and reduction in agency costs.
Tax gains: accessing net tax losses to reduce company tax payable, accessing unused debt capacity or risk reduction due to portfolio effects, allowing the use of more debt and hence greater interest tax shields.
Reduced capital requirements as a result of identification and disposal of duplicate fixed capital and working capital.
What are some of the financial side effects of acquisitions?
Financial side effects of acquisitions:
Earnings growth: Possible to increase EPS without actually creating ‘synergy’ by acquiring a firm with a lower P/E ratio and than the acquirers.
Diversification:
The portfolio effect may provide risk reduction benefits, particularly with conglomerate acquisitions, It is easier for investors to crease a ‘homemade’ merger by buying shares in both bidder and target companies, access to private companies or firms with low liquidity.
What is an off-market offer in terms of acquisitions? What must the bidder issue?
In an off-market (formal) offer is an offer made directly to all shareholders of the target to acquire part or all of their shares, the consideration can be cash, shares or a combination of these payment forms, the offer terms may be revised during the offer period and must remain open for a minimum of 1 month. The bidder is required to issue a statement outlining the terms of the offer, and the target management must respond with a response statement (with recommendation to shareholders and possibly an independent expert’s report).
What is an on-market offer in terms of acquisitions?
In an on-market offer the bidder or representative take a stand in the market with an unlimited buy order and acquire, for a period of at least 1 month, all shares offered on the exchange at a specified cash-only price, this cannot have conditions and can be revised and extended for up to 12 months without approval, it requires similar offer documents to an off-market offer.
What is a creeping acquisition?
A creeping acquisition allows the acquisition of no more than 3% of the target’s shares very 6 months, provided that a threshold ownership level of 19% has been maintained for at least 6 months. It is quite rare because it takes a long time to use. Though it requires no announcement.
