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Questions and Answers
What happens to the acquired firm in a merger?
What happens to the acquired firm in a merger?
- It becomes part of the acquiring firm. (correct)
- It continues to operate independently.
- It is sold to another company.
- It merges and retains its own identity.
What is the primary advantage of a merger?
What is the primary advantage of a merger?
- It is legally simple and cost-effective. (correct)
- It always requires government approval.
- It creates a new legal entity.
- It allows for stockholder voting rights.
What occurs during a consolidation?
What occurs during a consolidation?
- The acquiring firm absorbs the acquired firm completely.
- Only the acquired firm is terminated.
- The acquired firm retains its name.
- An entirely new firm is created. (correct)
What is a tender offer?
What is a tender offer?
What is a disadvantage of a merger?
What is a disadvantage of a merger?
What is a common strategy used to circumvent management resistance in stock acquisitions?
What is a common strategy used to circumvent management resistance in stock acquisitions?
Which of the following is NOT a source of synergistic effects in mergers?
Which of the following is NOT a source of synergistic effects in mergers?
In an acquisition of stock, what is not necessary?
In an acquisition of stock, what is not necessary?
What advantage does acquiring a firm's assets offer compared to stock acquisition?
What advantage does acquiring a firm's assets offer compared to stock acquisition?
Which statement best describes the outcome of a merger?
Which statement best describes the outcome of a merger?
How does an acquisition of stock differ from a merger?
How does an acquisition of stock differ from a merger?
How can tax considerations influence a merger?
How can tax considerations influence a merger?
What is the primary objective of increasing market power through mergers?
What is the primary objective of increasing market power through mergers?
What might delay the realization of a merger after a stock acquisition?
What might delay the realization of a merger after a stock acquisition?
Which of the following best describes the rationale of revenue enhancement in mergers?
Which of the following best describes the rationale of revenue enhancement in mergers?
What is a potential downside of acquiring a firm’s assets?
What is a potential downside of acquiring a firm’s assets?
What is one potential source of revenue increase for a firm?
What is one potential source of revenue increase for a firm?
Which analysis uses proforma statements to forecast incremental cash flows?
Which analysis uses proforma statements to forecast incremental cash flows?
What two key items are needed for Discounted Cash Flow Analysis?
What two key items are needed for Discounted Cash Flow Analysis?
How is a company's value estimated using Market Multiple Analysis?
How is a company's value estimated using Market Multiple Analysis?
Why might a target firm be considered a good acquisition candidate?
Why might a target firm be considered a good acquisition candidate?
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Study Notes
Legal Forms of Acquisition
- Merger: Complete absorption of one firm by another; acquiring firm retains its name and identity, acquiring all assets and liabilities.
- Example of Merger: Philippine National Bank (PNB) merged with Allied Bank, with PNB as the surviving entity.
- Consolidation: Creation of an entirely new firm, terminating the previous legal existence of both merging firms.
- Example of Consolidation: PCIBank and Equitable Bank became Equitable PCI Bank after merging.
Key Advantages and Disadvantages
- Merger advantages: Legally straightforward, cost-effective compared to other acquisition forms.
- Merger disadvantage: Requires approval through a two-thirds vote by stockholders of both firms.
- Consolidation challenges: Creation of a new firm diminishes the identity of existing firms.
Types of Stock Acquisition
- Acquisition of Stock: Involves purchasing a firm's voting stock for cash, shares, or other securities.
- Tender Offer: Public offer for shares made directly to shareholders, bypassing management and Board of Directors.
- Stock acquisition can be unfriendly, often encountering resistance from target management.
- Majority shareholders may delay realization of merger through tender offer holds.
Acquisition of Assets
- Involves buying most or all assets of a firm; does not necessitate cessation of the target firm’s existence.
- Requires formal stockholder votes from the selling firm; mitigates issues with minority shareholders.
- Cost implications arise due to the need for transferring titles to individual assets.
Rationale for Mergers
- Synergy: Incremental net gain from combining two firms, arising from operating economies, financial economies, differential efficiency, and increased market power.
- Tax Considerations: Profitable firms can acquire firms with tax losses, leading to immediate tax savings.
- Revenue Enhancement: Combined firms may generate more revenue than separate firms through strategic benefits and market power increase.
- Asset Purchase Below Replacement Cost: Firms may acquire undervalued assets rather than opting for costly exploratory methods, exemplified by Chevron’s acquisition of Gulf Oil.
Valuation of Target Firm
- Discounted Cash Flow Analysis: Uses capital budgeting techniques to forecast the firm’s incremental free cash flows and discounts them to determine value.
- Market Multiple Analysis: Values a target company by applying market multiples (like P/E ratio) to key financial metrics such as net income, illustrating valuation techniques with examples from forecasted earnings.
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