Wk 11 Mergers and Acquisitions Flashcards
Takeover Definition?
Refers to the transfer of control of a firm from one set of shareholders to another set of shareholders
What are the 3 types of Takeover?
- Acquisition
- Proxy Contest
- Going Private
What is a Proxy Contest?
- 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
What is Going Private?
- 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
How can acquisitions be classified?
- Mergers or consoldiation
- Acquisition of shares
- Acquisition of assets
Features of Mergers/ consolidation?
- 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
Features of Acquisition of Assets?
- 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
Acquisition of shares features?
- 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
Horizontal Acquisition?
Both bidder and target are in the same industry
Vertical Acquisition?
Involves firms at different steps of production process or supply chain
Conglomerate Acquisition?
Acquirer firm and the acquiring firm are not related to each other. Diversifying strategy
Examples of Merger Motives?
- Synergy
- Superior Management
- Managerial Motives
- Third Party Motives
Explain the Synergy Motive behind a Merger
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.
Synergy Formula?
PV(a+b) = PV(a) + PV(b) + Gains
Explain the Superior Management motive of a Merger?
Target can be purchased at a price below the present value of the target’s future cash flow under new management