Wk 11 Mergers and Acquisitions Flashcards

1
Q

Takeover Definition?

A

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

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2
Q

What are the 3 types of Takeover?

A
  • Acquisition
  • Proxy Contest
  • Going Private
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3
Q

What is a Proxy Contest?

A
  • 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
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4
Q

What is Going Private?

A
  • 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
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5
Q

How can acquisitions be classified?

A
  • Mergers or consoldiation
  • Acquisition of shares
  • Acquisition of assets
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6
Q

Features of Mergers/ consolidation?

A
  • 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
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7
Q

Features of Acquisition of Assets?

A
  • 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
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8
Q

Acquisition of shares features?

A
  • 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
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9
Q

Horizontal Acquisition?

A

Both bidder and target are in the same industry

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10
Q

Vertical Acquisition?

A

Involves firms at different steps of production process or supply chain

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11
Q

Conglomerate Acquisition?

A

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

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12
Q

Examples of Merger Motives?

A
  • Synergy
  • Superior Management
  • Managerial Motives
  • Third Party Motives
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13
Q

Explain the Synergy Motive behind a Merger

A

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.

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14
Q

Synergy Formula?

A

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

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15
Q

Explain the Superior Management motive of a Merger?

A

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

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16
Q

Explain the Managerial Motives of a Merger?

A

Empire building, status, power, remuneration etc.

17
Q

Examples of Pre-bidding Defense Tactics?

A
  • 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
18
Q

Examples of Post-bidding Defense Tactics:

A
  • 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
19
Q

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

A
  • 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
20
Q
A