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Level 143

Mergers & Takeovers

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reorganisation or assets between two equal-sized companies who agree to join together.
Takeover (acquisitions)
buying of the share capital of one company by another
Horizontal Acquisition
companies in same industry and stage of production combine into a single entity
Vertical Acquisition
Companies of same industry at different stages of production merge
Conglomerate Acquisition
companies in different industries merge
Mergers (motives)
Cost synergies (merger)
achieved through economies of scale in R&D, procurement, manufacturing, sales/marketing, distribution, and administration
Revenue synergies (merger)
created through cross-selling of products, expanded market share, or higher prices arising from reduced competition
Organic Growth
making investments internally
External Growth
buying the necessary resources externally
Mergers & Acquisitions growth
common when company is in mature industry
Increasing Market Power
Market share is sufficiently concentrated:
pursue competitive advantages
Unique Capabilities & Resources
investing in a portfolio whose returns do not always move together with the result that overall risk is lower than for individual assets ( You shouldn't put all your eggs in one basket)
Bootstrap Effect
Company's earning increase as a consequence of the merger transaction itself rather than because of resulting economic benefits of combination
Theories posit that because executive compensation is highly correlated with company size, corporate executives are motivated to engage in mergers to maximise the size of their company rather than shareholder value
tax considerations
Share repurchases as dividend decisions
Unlocking Hidden Value
potential target is under performing AND we can help it reach its potential (synergy, etc.)
Breakup Value
value that can be achieved if a companies assets are divided and sold separately
Cross-Border Motivations
achieving international business goals
Acquisition (justifications)
market value of new firm exceeds market values
Financial Synergy
decrease in cost of capital through acquisition
Target Undervaluation (acquisition justification)
if target company shares are undervalued, capital markets cannot be efficient
Earning per Share (acquisition justification)
Share-for-Share offer: higher PER than target
Managerial Motives (acquisition justification)
Power, perks, job security are goal
Acquisition (negatives)
Referral to Competition Commission
Share-for-Share Offer (cost of acquisition)
pay Dividends on New shares
Cash Offer (cost of acquisition)
gearing levels may increase sharply
Merger Waves
tend to be characterised by different types of merger and acquisition activities and different motives
Business cycles
The upward and downward movement of aggregate output produced in the economy
Stock Market Valuation
#shares x market price per share
Quoted Price
reflects marginal trading
NAV (book value)
asset based valuation
asset based valuation
NAV (net realisable value)
Earnings Yield Value
Annual Maintainable Earnings / Earnings Yield
Earnings Yield (capitalisation rate)
should reflect size of firm and nature of its business
P/E ratio valuation
Which P/E ratio to use?? difficult to know
dividend growth model
a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth
DCF Valuation
Value of Target = PV of incremental cash flows gained by acquirer
Cash Offers (financing, +)
target firm shareholders advantage:
Capital Gains Tax
Cash Offers (financing, -)
Cash Offers (source)
Share-for-Share Offers
target company shareholders offered fixed number of shares in the bidder in exchange for their shares
Share-for-Share Offers (advantages)
Share-for-Share Offers (disadvantages)
Acquiring company/shareholders:
Security Packages (financing)
non-equity securities used: ordinary or convertible bonds, preference shares
Mixed Bids (financing)
share-for-share offer is supported by a cash alternative
Bid Defences
Decision to contest a bid in best interests of shareholder
Sell-Offs (divestment strategy)
company sells off part of its operations to a third party, usually for cash
Spin-off or demerger (divestment strategy)
pro rata distribution of subsidiary shares to parent shareholders
Management buyout (MBO) (divestment strategy)
purchase of part of or all of a firm by incumbent management
MBOs (financing)
comprehensive business plan essential
MBOs (difficulties)
need to replace services one run by parent
Empirical Research (economy)
efficiency gains neutralised by greater monopoly power
Empirical Research (shareholders)
unprofitable to acquire
Empirical Research (managers)
acquiring managers benefit: