WSO - M&A Flashcards
What are some reasons that two companies would want to merge?
The main reason two companies would want to merge would ideally be the synergies that the companies will gain by combining their operations. However, some other reasons would be gaining a new market presence, an effort to consolidate their operations, gain brand recognition, grow in size, or to potentially gain the rights to some property (physical or intellectual) that they couldn’t gain as quickly by creating or building it on their own.
What are some reasons two companies would not want to merge?
Often the synergies that a company hopes to gain by going through with a merger don’t materialize. Additionally, a company may also be enticed to do a merger due to management ego and/or wanting to gain media attention. Finally, the investment banking fees associated with completing a merger can be prohibitively high.
What are Synergies?
The concept of synergies is that the combination of two companies results in a company that is more valuable than the sum of the values of the two individual companies coming together. The reason for synergies can be either cost-saving synergies like cutting employees, reduction in office size, etc. or it can include revenue generating synergies such as higher prices and economies of scale.
What is the difference between a Strategic Buyer and a Financial Buyer?
Strategic Buyers and Financial Buyers are very different. A Strategic Buyer is usually one company who is looking to buy another company in order to enhance their business strategically, whether it be through cost cutting, synergies, gaining property, etc. A financial buyer is traditionally a group of investors such as a Private Equity Firm who is buying a company purely as an investment, looking to generate a return for their investors and carry for the fund.
Which will normally pay a higher price for a company, a Strategic Buyer or a Financial Buyer?
A Strategic Buyer will normally pay a higher price. This is due to their willingness to pay a premium to potentially gain synergies of lowering costs, improving their existing business and/or revenue synergies. The Financial Buyer typically looks at the company purely in terms of returns on a standalone basis unless they have other companies in their portfolio that could significantly improve operations of the target.
What is a stock swap?
A stock swap is when a company purchases another company by issuing new stock of the combined company to the old owners of the company being acquired, rather than paying in cash.
What is the difference between shares outstanding and fully diluted shares?
Shares outstanding represent the actual number of shares of common stock that have been issued as of the current date. Fully diluted shares are the number of shares that would be outstanding if all “in the money” options were exercised.
How do you calculate the number of fully diluted shares?
The most common way of determining the number of fully diluted shares is the treasury stock method. This method involves finding the number of current shares outstanding, adding the number of options and warrants that are currently “in the money” and then subtracting the number of shares that could be repurchased using the proceeds from the exercising of the options and warrants.
What is a cash offer?
A cash offer is payment for the ownership of a corporation in cash.
Would I be able to purchase a company at its current stock price?
Due to the fact that purchasing a majority stake in a company will require paying a Control Premium, most of the time a buyer would not be able to simply purchase a company at its current stock price.
Why pay in stock versus cash?
If a company pays in cash, those receiving cash will need to pay taxes on the amount received. Additionally, if the owners of the company being acquired want to be part of the new company, they may prefer to gain stock if they believe the new company will perform well and the stock will increase in value. Current market performance may also affect the stock/cash decision. If the market is performing poorly, or is highly volatile, the company being acquired may prefer cash for the stability it provides.
What is a tender offer?
A tender offer is often a hostile takeover technique. It occurs when a company or individual offers to purchase the stock of the target company for a price usually higher than the current market price in an attempt to take control of the company without management approval.
If Company A purchases Company B, what will the combined company’s balance sheet look like?
The new balance sheet will simply be the sum of the two company’s balance sheets plus the addition of “goodwill” which would be an intangible asset to account for any premium paid on top of Company B’s actual assets.
What is the difference between an Accretive Merger and a Dilutive Merger, and how would you go about figuring out if a merger is in fact Accretive or Dilutive?
An Accretive merger is one in which the acquiring company’s earnings per share will increase following the acquisition. A Dilutive Merger is one in which the opposite occurs. The quickest way to figure out if a merger is Accretive or Dilutive is to look at the P/E ratios of the firms involved in the transaction. If the acquiring firm has a higher P/E ratio that the firm they are purchasing, the merger will be accretive because the acquirer will pay less per dollar of earnings for the target company than where they are currently trading..
Company A is considering acquiring Company B. Company A’s P/E ratio is 50 times earnings, whereas Company B’s P/E ratio is 20 times earnings. After Company A acquires Company B, will Company A’s earnings per share rise, fall, or stay the same?
Since the P/E of the firm doing the purchasing is higher than the firm it is purchasing, the new company’s EPS will be higher, therefore creating an Accretive Merger.
