WEEK 8 - Mergers

Question 1

What are dif types of mergers?

Answer 1

Horizontal Merger
One that takes place between two firms in the same line of business

Vertical merger
Involves companies at different stages of production

Conglomerate merger
Involves companies in unrelated lines of business

Question 2

What are some legit reasons for mergers? (pt 1)

Answer 2

Economies of Scale
A larger firm may be able to reduce its per-unit cost by using excess capacity or spreading fixed costs across more units

Economies of Vertical Integration
Control over suppliers “may” reduce costs.
Over-integration can cause the opposite effect

Complementary Resources
Merging may result in each firm filling in the “missing pieces” of its firm with pieces from the other firm.

Question 3

What are some legit reasons for mergers? (pt 2)

Answer 3

Surplus Funds
If your firm is in a mature industry with few, if any, positive-NPV projects available, acquisition may be the best use of your funds

Eliminating Inefficiencies
Poor management may waste money, make poor decisions, conduct improper risk/return investments, and harm the value of the company. Sometimes, the only way to remedy the situation is to change management

Industry Consolidation

Question 4

What are some dubious reasons for mergers?

Answer 4

Diversification
Diversification is easier and cheaper for the stockholder than for the corporation. There is little evidence that investors pay a premium for diversified firms.

Increasing Earnings per Share: The Bootstrap Game
Acquiring firm has high P/E ratio
Selling firm has low P/E ratio (due to low number of shares)
After merger, acquiring firm has short-term EPS rise
Long term, acquirer will have slower than normal EPS growth due to share dilution

Question 5

What are some takeover defences?

Answer 5

White knight: Friendly potential acquirer sought by a target company threatened by an unwelcome suitor.

Shark repellent: Amendments to a company charter made to forestall takeover attempts.

Poison pill: Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.

Question 6

CALCULATING MERGERS IN NOTES

Answer 6

SEE IN NOTES

Question 7

Proxy Contest

Answer 7

A proxy is the right to vote another shareholder’s shares

Dissident shareholders attempt to obtain enough proxies to elect their own slate to the BOD

Question 8

Takeovers

Answer 8

Alternative to a proxy fight
Tender offer directly to the shareholders
If successful, new owner is free to make any management changes