Mergers and Acquisitions Quiz: Types of M&A in the Market

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Questions and Answers

What is a horizontal merger?

A merger during an economic expansion

A merger between two companies in the same industry (correct)

A merger between two companies in unrelated industries

A merger between a company and its supplier

Which of the following is NOT a potential reason for an acquisition?

Avoiding tax liabilities

Overconfidence of the acquiring company's CEO

Reducing competition in the market (correct)

Achieving economies of scale

What is a conglomerate merger?

A merger between two companies in the same industry

A merger during an economic contraction

A merger between a company and its supplier

A merger between two companies in different industries (correct)

What is meant by 'merger waves'?

Periods of high merger activity followed by periods of low activity Signup and view all the answers

What is meant by 'vertical integration' in the context of mergers?

A merger between a company and its supplier or customer Signup and view all the answers

What is the purpose of valuation in the takeover process?

To gain a rough estimate of the target company's value Signup and view all the answers

Why might the board not approve a premium offered by an acquirer in a takeover?

They may believe the acquirer is overvalued. Signup and view all the answers

What is the main purpose of a White Knight strategy in a takeover situation?

To prevent a hostile takeover by a less desirable company. Signup and view all the answers

How do Poison Pills affect a company's stock price and financial performance?

Stock price drops and financial performance worsens. Signup and view all the answers

What is the main function of a Staggered Board in takeover defense strategies?

To ensure that only a fraction of the board is up for election each year. Signup and view all the answers

What is the purpose of a Golden Parachute in a takeover scenario?

To provide senior managers with lucrative severance packages if let go after a takeover. Signup and view all the answers

How does a Freezeout Merger differ from other takeover strategies?

It requires acquiring all outstanding shares of a target company. Signup and view all the answers

What impact does competition in the takeover market have on the benefits of a merger?

Most benefits go to the target company's shareholders. Signup and view all the answers

'Toeholds' in a firm are primarily used by corporate raiders for what purpose?

To initiate a takeover attempt by gaining initial ownership stake. Signup and view all the answers

What can be inferred about Unocal duties based on the text?

They require boards to act in target shareholders' best interests. Signup and view all the answers

What is the purpose of Proxy Fight as a takeover defense method?

To convince target shareholders to support acquirer-nominated board candidates. Signup and view all the answers

Study Notes

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.

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Description

This quiz covers the different types of mergers and acquisitions in the market, including horizontal mergers, vertical mergers, conglomerate mergers, and merger waves. Learn about the distinctions between acquirer and target companies, as well as the primary mechanisms used in these transactions.

Types of Mergers and Acquisitions in the Market

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