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Mergers and Acquisitions

Terms in this set (38)

Horizontal Merger
combination of two or more firms producing the same kind of product
Vertical Merger
a combination of firms at different stages in the production of a good or service
Congeneric
A merger of firms in the same general industry, but for which no customer or supplier relationship exists
Conglomerate
Berkshire Hathway and Heinz
Friendly Merger
The merger is supported by the management of both firms
Hostile Merger
Target firms management resists the merger
Stock Merger
Stock mergers require approval by target shareholders, Acquiring company trades stock for the stock of the target company, assumes liabilities
Tender Offfer
Almost always hostile, Bidder attempts to circumvent targets board of directors by offering to purchase shares (for cash) held by targets SHs, offering price is greater than market price
Open Market Purchases
Buy enough shares on the open market to obtain controlling interest without engaging in a tender offer
Proxy Fights
Proxy for directors: Attempt to change management through the votes of other shareholders
Fair Price Provision
Must pay a fair and equal price to all the SH
White Knight
Rescues target company from a hostile takeover
White Squire
A white squire is an investor or friendly company which buys a stake in a target company to prevent a hostile takeover
Greenmail
Greenmail is the practice of buying enough shares in a company to threaten a hostile takeover so that the target company will instead repurchase its shares at a premium.
Super Majority Voting Requirements
A two thirds vote requirement
Classified Board Structure (Staggered Board)
Only a certain fraction of board members are elected each vote
Pacman defense
target tries to acquire the acquirer
Scorched Earth
Make the firm unattractive to its acquirer
Blank Check Preferred Stock
Stock which is authorized but not outstanding, management could issue stock to themselves and provide the stock with high voting rights
Poison pill
Results in distribution of "rights" upon a change in control event with purpose of issuing securities at a lower price, implemented without shareholder approval, makes firm too expensive to buy
Poison Put
Put option on bonds
Repurchase Standstill Agreement
In a targeted repurchase the firm buys back its own stock from a potential acquirer, often at a premium, critics of such payments label them greenmail, standstill agreements are contracts where the bidding firm agrees to limit its holdings of another firm
Termination fees
Fee for time and research spent
Lockup options
is a stock option offered by a target company to a white knight for additional equity or the purchase of a portion of the company
Who benefits from a takeover / merger?
Benefit target SHs, 30% premium historically, aquiring SHs earn 4% in hostile takeovers and 0% in mergers
Herfindahl Index
Computed as the sum of the squares of the proportion of revenues derived from each line of business (completely focused firm has an HI of 1.00)
How to make Target Management comply?
Golden Parachute: compensation packages designed to payoff top executives in the event of a takeover
Silver Parachutes
Tax implications of Mergers
Cash or nonvoting securities- gains are taxable at the time of the merger, Voting equity securities (common stock)- tax free
Economic Justification for Mergers
Expansion, Synergy, Break up value
Syneygy
Value of the whole exceeds the sum of the parts. Could arise from: Operating economies, financial economies, differential management efficiency, reduced competition
Questionable motives for mergers
Agency issues, Diversification, Purchase of assets at below replacement cost, Aquire other firms to increase size thus making it more difficult to be acquired
NPV of a merger Cash
=Vab-Va-Price Paid for B
Merger Activities undertaken by investment banks
Identify targets, help arrange mergers, develop defensive tactics, value target companies, help finance mergers, invest in stocks of potential merger candidates, trend is away from using investment bankers
Corporate Culture
Will merger work due to different cultures, locations, management?
Reasons for Merger Failure
Overpay by a size-able premium, overestimate likely cost savings and synergies, delay over integrating operations after merger, emphasis on cost cutting, damaging the business and losing key personnel
Earnings Multiples
Price / Earnings (market equity value / net income to common shareholders)
Book Value or Replacement Multiples
Price to Book (Market equity value / Book value of equity)
Revenue Multiples
Price / Cash Flow (Market equity value / after tax cash flow) PEG Ratio - (PE Ratio / Annual EPS Growth)
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