Mergers

Question 1

Operational restructuring

Answer 1

Change in composition of firm’s assets

Question 2

Financial restructuring

Answer 2

Change in firm’s capital structure

Question 3

Merger

Answer 3

All companies but one ceases to exist legally (also in case of 100% acquisition)

Question 4

Consolidation

Answer 4

Combination of firms joining to form a new company

Question 5

Horizontal merger

Answer 5

In the same industry (create economies of scale)

Question 6

Vertical merger

Answer 6

Different stages of the same business (create economies of scope)

Question 7

Conglomerate merger

Answer 7

Different industries (unrelated to lower risk through diversification)

Question 8

Friendly acquisition

Answer 8

With the agreement of the board of directors

Question 9

Hostile acquisition

Answer 9

Tender offer (buying stocks from minorities)

Proxy fight (vote to install new management)

Question 10

Asset sale

Answer 10

Purchase of individual assets and liabilities.

Preferred by buyer because of:

• additional tax benefits (allocating higher value to assets that depreciate quickly),
• price possibly lower than historical one
• avoid inheriting potential liabilities
• certain assets are difficult to transfer

Question 11

Stock sale

Answer 11

Purchase of the owner’s shares of a corporation. It is preferred by seller because:

• only one tax and not double taxation as with asset sale
• use of the long term capital gain rate (lower than short term one)
• compensate the taxes with capital losses

Question 12

Common issues in mergers

Answer 12

• transferability of liabilities (tax burden, change of ownership clause)
• number and type of approvals for a transaction
• consensus: for stock purchase unanimity, for asset sales decide the BoD
• taxation

Question 13

Reasons for an M&A

Answer 13

• Strategic realignment: technology, deregulation, market power
• Synergy: premium higher than expected synergies
• Financial reasons: low interest, booming stock market, target underval.
• Tax considerations: acquisition of shell companies with tax losses
• Ego/Hubris: personal power, empire building theory
• Diversification: V. Enhancing (Nippa), InvertedU (Pidun), V. Destroying

Question 14

Variables to see if M&A pays off

Answer 14

economies of the opportunity, SWOT, culture, brand, law risks, ethics.

Question 15

M&A process in brief

Answer 15

search for partners, due diligence, negotiation, law & regulation, deal design, post-merger integration

Question 16

Outcome of the deal if M&A pays off

Answer 16

creation of market value, financial stability, strategic & competitive advantages, organizational benefits, enhanced brand…

Question 17

How to estimate if M&A pays off

Answer 17

event studies, accounting ones, surveys.

Question 18

Which factors explain the M&A waves?

Answer 18

Explained by:
macro factors (monopoly, competitive positioning, industry shocks)
financial factors (overvaluation of stocks, low interest rates)
others (pride, market mania, agency costs).

Question 19

Which are the M&A waves?

Answer 19

1-Horizontal consolidation: merger for monopoly (metals, transports…)
2-Increasing concentration: merger for oligopoly (post-war boom)
3-Conglomerate wave: buy earnings to boost share price
4-Retrenchment era: hostile takeovers (cost-cutting post deal strategies)
5-Strategic megamerger: deregulation (banking, health care, defenc, tech)
6-Cross-border & horizontal megamerger: globalization (high tech)

Question 20

Similarities and differences between the M&A waves

Answer 20

Similarities: economic growth, rising stock market, low interest

Differences: technologies, industry focus, type of transactions