Types of Mergers and Acquisitions in the Market

Overview of Takeovers

• Discounted cash flows are a more complex method of valuation, but they include synergies.

Takeover Process

• The offer public announcement is followed by a cash transaction or a stock swap, which may include a positive NPV transaction if the share price of the merged firm exceeds the pre-merger acquirer price.
• Board and shareholder approval are necessary for a takeover, but the board may not approve even if a premium is offered due to reasons such as low offer price, overvaluation of the acquirer, or self-interest.

Types of Takeovers

• Friendly takeover: a takeover where the target company board approves the acquisition.
• Hostile takeover: a takeover where the target company board rejects the acquisition.
• Corporate raider: an individual who initiates a hostile takeover.

Tax and Accounting Issues

• The form of payment received affects the taxes of target shareholders and the combined firm.
• Cash received triggers an immediate tax liability, while a stock swap can defer taxes until shares are sold.
• A step-up in the book value of the target's assets can increase the depreciable basis and reduce future taxes.

Takeover Defenses

• Proxy fight: an attempt to convince target shareholders to support the acquirer's candidates for election to the target board.
• Poison pills: rights offering that gives existing target shareholders the option to buy shares at a deeply discounted price, making it difficult to replace bad managers.
• Staggered boards: a board of directors with staggered terms, making it difficult to replace the board.
• White knights: a friendlier company that acquires the target company.
• White squire: a large, passive investor that agrees to purchase a block of shares with special voting rights.
• Golden parachutes: lucrative severance packages guaranteed to senior managers in the event of a takeover.

Regulatory Approval

• Sherman Act, Clayton Act, and Hart-Scott-Rodino Act are regulations that govern takeovers.

Value Added from a Takeover

• Toeholds: an initial ownership stake in a firm that can be used to initiate a takeover attempt.
• Corporate raiders perform an important service by keeping management accountable.
• Leveraged buyout: a method of acquiring a company using borrowed money.
• Freezeout merger: a method of acquiring a company by making a tender offer at a slight premium.

Control and Competition

• Two types of control in the market: acquirer and target.
• Two primary mechanisms used: acquisition and merger.
• Competition in the takeover market means that most of the benefit goes to the target shareholders.

Types of Mergers

• Horizontal merger: a merger between companies in the same industry.
• Vertical merger: a merger between companies in different industries.
• Conglomerate merger: a merger between companies in different industries.

Merger Waves

• Peaks of heavy takeover activity, followed by a few transactions.
• Merger activity correlates with economic expansions and bull markets.

Reasons to Acquire

• Stock swap: target shareholders swap their old stock for new stock.
• Overconfidence: CEOs pursue mergers that cannot succeed due to overconfidence.
• Synergies: the acquirer might be able to add economic value as a result of the acquisition.
• Economies of scale: savings from producing goods in high volume.
• Economies of scope: savings from combining the marketing and distribution of related products.
• Vertical integration: the merger of two companies in the same industry that make products required at different stages of the production cycle.
• Expertise: acquiring a company for its talent pool.
• Monopoly gains: acquiring a company to eliminate competition.
• Tax savings: acquiring a company to offset losses in one division with gains in another.