Wk 11 Mergers and Acquisitions

Question 1

Takeover Definition?

Answer 1

Refers to the transfer of control of a firm from one set of shareholders to another set of shareholders

Question 2

What are the 3 types of Takeover?

Answer 2

• Acquisition
• Proxy Contest
• Going Private

Question 3

What is a Proxy Contest?

Answer 3

• Occurs when a group of shareholders attempt to gain a seat in the board of directors
• A ‘proxy’ is a written authorization of a shareholder to allow someone to vote on their behalf
• In a proxy contest a new group of shareholders try to solicit proxies from other shareholders to achieve control of the board

Question 4

What is Going Private?

Answer 4

• A small group of shareholders purchase most of the shares of a public firm then delist it from the stock exchange
• Provides shareholders more freedom to act as they are outside of the jurisdiction of the stock exchange

Question 5

How can acquisitions be classified?

Answer 5

• Mergers or consoldiation
• Acquisition of shares
• Acquisition of assets

Question 6

Features of Mergers/ consolidation?

Answer 6

• Absorption of one company by another
• In a consolidation an entirely new firm is created as a result
• Both legally straightforward and mutually agreed upon by shareholders of respective firms

Question 7

Features of Acquisition of Assets?

Answer 7

• Refers to the purchase of all the assets of another firm
• Target firm does not necessarily vanish, usually remains as a shell
• Formal vote of target shareholder required to facilitate sale of assets to a bidder
• Complicated as involves individual transfer of title of assets

Question 8

Acquisition of shares features?

Answer 8

• Refers to the purchase of a firm’s voting shares in exchange for cash, equity and other securities
• Usually starts as a ‘tender offer’
• Offer does not need to be approved by target shareholders/ managers
• Target managers often resist such acquisitions.. can lead to expensive hostile acquisition/ takeover

Question 9

Horizontal Acquisition?

Answer 9

Both bidder and target are in the same industry

Question 10

Vertical Acquisition?

Answer 10

Involves firms at different steps of production process or supply chain

Question 11

Conglomerate Acquisition?

Answer 11

Acquirer firm and the acquiring firm are not related to each other. Diversifying strategy

Question 12

Examples of Merger Motives?

Answer 12

• Synergy
• Superior Management
• Managerial Motives
• Third Party Motives

Question 13

Explain the Synergy Motive behind a Merger

Answer 13

The two firms together are worth more than the value of the firms apart. Examples: Market power, Econ of Scale, entry to new markets etc.

Question 14

Synergy Formula?

Answer 14

PV(a+b) = PV(a) + PV(b) + Gains

Question 15

Explain the Superior Management motive of a Merger?

Answer 15

Target can be purchased at a price below the present value of the target’s future cash flow under new management

Question 16

Explain the Managerial Motives of a Merger?

Answer 16

Empire building, status, power, remuneration etc.

Question 17

Examples of Pre-bidding Defense Tactics?

Answer 17

• External Vigilance: Be most effective management team and educate/ inform shareholders
• Defensive Investments: Buy shares in friendly firm and that firm buys shares of your company
• Forewarned is forearmed: Identify any accumulations of shareholding

Question 18

Examples of Post-bidding Defense Tactics:

Answer 18

• PR Techniques: Attack logic of bid, Attack value creating record of bidder, lobby shareholders/ stakeholders
• Try for OFT Block or Competition Commission Enquiry
• White Knight: Invite second bid from friendly company
• Begin litigation against bidder
• Share Repurchase: Reduce no. of shares available in market for bidder

Question 19

Examples of some Defense Tactics Generally not allowed in the UK:

Answer 19

• Poison Pills: Allows target firm to issue new shares at deep discount to all shareholder except bidder
• Crown Jewels Defense: Sell off attractive parts of business
• Pac-man Defense: Make a counter-offer for the bidder itself
• Golden Parachutes: Managers get massive pay-offs if takeover goes through
• Give in to greenmail: Target buys off its own equity at a massive premium