ACF 7: Mergers & Acquisitions

  • Created by: charlie
  • Created on: 05-05-18 15:28
Managerial motives to merge 1) Conflict of interest
Entrenched managers like running large companies (prestige + pay), knowing they are destroying SH wealth for personal gain
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Managerial motives to merge 2) Overconfidence in own ability
Pursue mergers that have a low chance of success + overpay target SH premium, believe they are helping increase SH wealth
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Types of M&A 1) Strategic acquisitions
synergy = larger combined value
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Types of M&A 2) Financial/ disciplinary acquisitions
discipline on managers who are doing a poor job (poses threat)
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Types of M&A 3) Conglomerate acquisitions (Since 2008)
Diversification benefits: 1) Risk reduction (less idiosyncratic risk) 2) Debt capacity increases = borrowing costs decreases (less chance of financial distress)
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Alternative M&A classifications: 1) Hostile takeover (tender offer/ proxy fight)
bid/ offer not approved by board of directors, so purchase large % of stock (at very high premium off SH) or persuade current SH = increase voting power = replace board of directors + CEO
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Alternative M&A classifications: 2) Friendly takeover
target company management + board of directors agree, then subject to SH approval
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M&A characteristics: Merger Waves
Mergers cluster at points in time/ certain industries due to 1) Industry shocks (post 2008 regulation increase) 2) Stock market bubbles/ overvaluation (SH will experience fall in wealth from takeovers)
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Economic Nationalism + Acquisitions
Governments prefer target companies to remain domestically owned for competitiveness (nationalist governments reactions affect outcome of merger + future foreign companies detracted from bidding)
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Economic Nationalism + Acquisitions: e.g. Broadcom acquiring Qualcomm
US Gov had previously praised Broadcom, however when blocked it from acquiring Qualcomm over fears that acquisition would drop R&D spending on 5G + US would lose competitive rivalry against foreign nations
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Gains from acquisition (developing world)
1) Synergy (combined value greater) 2) Revenue enhancement (market power/ strategy) 3) Cost reductions (economies of scale/ vertical integration) 4) Lower taxes 5) Reduced borrowing costs
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Gains from acquisition (developed world)
1) Synergy (combined value greater) 2) Lower taxes 3) Reduced borrowing costs
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M&A Winners: Target firm's SH
1) Get large premium on shares (>20%)
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M&A Losers: Acquiring firm's SH
1) Acquiring managers conflict of interest (larger size) 2) Overconfident managers overestimate gains = overpay 3) larger firm so smaller % distributed 4) Takeover announcement may give -ve signals if overconfident CEO's
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Private acquirers pay less compared to public acquirers due to...
1) Less agency issues (public managers have low % ownership + much more to gain from increasing size) 2) High-powered incentives at private (gains flow direct to parties) 3) Management collusions 4) Direct cash deals preferred (over shares)
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Other cards in this set

Card 2

Front

Managerial motives to merge 2) Overconfidence in own ability

Back

Pursue mergers that have a low chance of success + overpay target SH premium, believe they are helping increase SH wealth

Card 3

Front

Types of M&A 1) Strategic acquisitions

Back

Preview of the front of card 3

Card 4

Front

Types of M&A 2) Financial/ disciplinary acquisitions

Back

Preview of the front of card 4

Card 5

Front

Types of M&A 3) Conglomerate acquisitions (Since 2008)

Back

Preview of the front of card 5
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