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Economics In Action > wk 4 - M&A > Flashcards

wk 4 - M&A Flashcards

1
Q

What is internal structure in corporate restructuring

A

How departments / Divisions are set up and work with each other

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2
Q

What is Corporate Restructuring

A

Any action that reconfigures a company in 1 of 3 ways:
Internal Structure
Heirarchical Structure
Operational Processes

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3
Q

What is Internal Structure in corporate restructuring

A

How departments / divisions are set up and how they work with each other

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4
Q

What is Heirarchical structure in corporate restructuring

A

How decision making works within companies
- Who reports to who

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5
Q

What is operational Processes in corporate restructuring

A

How the company does business
- Changing core business functions or competencies

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6
Q

What is the business life cycle

A
  1. Launch
  2. Growth
  3. Shake-Out
  4. Maturity
  5. Decline
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7
Q

What is launch in the business life cycle

A
  • Initial phase
  • High attrition
  • Slow but increasing sales
  • Typically, unproven brand / proof of concept
  • Often operates in loss with need for
    investment
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8
Q

What is Growth in the business life cycle

A

Rapid increase in revenue as company gains traction
Initial Signs of profit / break even (rev>cost)

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9
Q

What is shake-out in the business life cycle

A

Sales keep increasing but at a slower rate
Saturation of potential market
Company starts to accrue ‘Free Cash Flow’ (Cash generated after accounting for outflows towards operations and maintaining existing assets)

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10
Q

What is Maturity in the business life cycle

A

Sales start dropping
Lower margins / increased overheads
Free cash important as its generally owed to creditors / shareholders

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11
Q

What is Decline in the business life cycle

A

Usually marks the end
Sales in decline due to:
- Change in market conditions - fail to adapt
- Cash flow starts declining
- Inability to pay debts - insolvency
Creates a NEED to restructure

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12
Q

What is operational restructuring

A

Changes in the composition of a firms asset structure by aquiring new businesses
Sales of existing businesses

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13
Q

What is Financial restructuring

A

Changes in a firms capital structure relating to debt and equity
- How many loans outstanding
- How many shares publicly traded
e.g. Aug 2024: Nvidia $50bil stock buyback

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14
Q

What are Mergers and Acquisitions

A

Companies buying each other
One option when undertaking corporate restructuring
Can be done for operational or financial purposes
Represents the largest and most significant form of corporate spending / investment
Incredibly risky, costly in terms of money and time

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15
Q

What is a merger

A

2 separate entities combine to form a new entity
e.g.
2008: Activision, Inc. and Vivendi Games merge to form Activision Blizzard, Inc.
 Est. $18.9 Billion
 Combined two gaming giants with different and very complementary portfolios

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16
Q

What is an Aquisition

A

1 firm (the Acquirer) buys and integrates another firm and incorporates their business into their portfolio
e.g. Microsoft acquired Activision Blizzard for $68.7Billion

17
Q

Why does M&A occur

A

Synergy is the most common justification
Synergy: The incremental benefit a firm expects to materialise when M/A another firms in excess of both firms operating independently

18
Q

What are the 2 types of Synergy

A

Financial - Reduced cost of capital
Operational - Revenue-enhancement & cost reduction

19
Q

What are Financial Synergies

A

Improvement in financing companies
- makes things cheaper (FoP)
- Reduced cost of Capital (minimum required return for profitability)
Tax Benefits:
- Tax shields using net operating costs of target
- Tax inversion - Lower effective corporate tax rates
Increase Debt Capacity - Ability to borrow more
Diversification of Business Streams - Lower cost of Equity

20
Q

What are Operational Synergies

A

Incremental gains that enhance rev generation
Streamline expenses (greater than when companies are separate)

21
Q

What are the Sources of Synergy

A

Growth Opportunities
Economies of Scale
Economies of Scope
Expertise Gains
Efficiency Gains
Monopolistic Gains
Diversification / Consolidation
Vague before deal takes place based on expectation/forecasting/assumptions

22
Q

What are examples of Growth Opportunities as a source of Synergy

A
  • New opportunities afforded through reduced operating costs / new revenue streams
  • New competencies acquired to access new customers
  • New intellectual properties / patents
  • New territories and markets
23
Q

What are examples of
Economies of Scale as a source of Synergy

A
  • Savings larger companies enjoy from producing at higher volumes
  • Bulk-order pricing when sourcing inputs / materials
  • Enhanced relationships with suppliers
  • Lower per-unit / per-worker costs
24
Q

What are examples of Economies of Scope as a source of Synergy

A
  • Savings large companies can realise that come from marketing and distribution of different but related products
  • Costs associated with taking products to market can be streamlined
  • Resources can be pooled to deliver wider range of products

e.g. airlines carrying passengers and cargo

25
Q

What are examples of Expertise Gains as a source of Synergy

A

Buying expertise through M/A
- Rather than invest time & capital in-house, acquire a company that already has

e.g. Activision acquiring Blizzard’s
expertise and market leadership in
subscription-based revenue model

26
Q

What are examples of Efficiency Gains as a source of Synergy

A
  • Acquirers often argue they can run a target better
  • Blaming inefficient incumbent target manager
  • Claim they can optimise the target’s resources
  • Elimination of duplication
27
Q

What are examples of monopolistic Gains as a source of Synergy

A
  • The more consolidation, the bigger the market share
  • More influence = Price setting power
  • Would no doubt improve revenue generation
  • Gov. policy exists to limit this:
    e.g. UK: Competition and Markets Authority (CMA)
28
Q

What are examples of Consolidation as a source of Synergy

A
  • Consolidation: When deals occur between firms in the same industry
  • Vertical Integration: Two companies in the same industry operating in different stages of production cycle

E.g. 2012 - google and Motorola Mobility

29
Q

What are examples of Diversification as a source of Synergy

A
  • Diversification: When deals occur between firms in different industries
  • Can expand range of services, products, and
    competencies
  • Reduce revenue exposure to one specific industry

e.g. 2017: Amazon acquires Whole Foods
E-Commerce and Cloud computing giant acquires brick-and-mortar retail grocery chain

30
Q

What are examples of Financial / Tax as a source of Synergy

A
  • Reduced cost of capital
  • Increased ease of funding

Economics In Action (6 decks)

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