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Questions and Answers
What is the purpose of Revlon Duties?
What is the purpose of Revlon Duties?
Why might a board not approve a takeover offer even if a premium is offered?
Why might a board not approve a takeover offer even if a premium is offered?
What can trigger an immediate tax liability for target shareholders in a merger?
What can trigger an immediate tax liability for target shareholders in a merger?
What is a Proxy Fight in the context of takeover defenses?
What is a Proxy Fight in the context of takeover defenses?
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What is the purpose of Staggered Boards as a takeover defense?
What is the purpose of Staggered Boards as a takeover defense?
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What is the function of White Knights in takeover scenarios?
What is the function of White Knights in takeover scenarios?
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Which type of merger occurs when the target and acquirer are in the same industry?
Which type of merger occurs when the target and acquirer are in the same industry?
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What is a potential reason for an acquisition related to the acquirer's belief in their abilities?
What is a potential reason for an acquisition related to the acquirer's belief in their abilities?
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Which of the following is a potential synergy that an acquirer might seek from an acquisition?
Which of the following is a potential synergy that an acquirer might seek from an acquisition?
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What is the purpose of the valuation step in the takeover process?
What is the purpose of the valuation step in the takeover process?
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What is a potential benefit of a vertical merger?
What is a potential benefit of a vertical merger?
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Which valuation method incorporates potential synergies from an acquisition?
Which valuation method incorporates potential synergies from an acquisition?
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Which of the following is NOT a potential reason for an acquisition?
Which of the following is NOT a potential reason for an acquisition?
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What is the purpose of using the discounted cash flow method in the valuation step of the takeover process?
What is the purpose of using the discounted cash flow method in the valuation step of the takeover process?
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What type of merger occurs when the target and acquirer operate in different industries?
What type of merger occurs when the target and acquirer operate in different industries?
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Which of the following is NOT a potential synergy that an acquirer might seek from an acquisition?
Which of the following is NOT a potential synergy that an acquirer might seek from an acquisition?
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In a stock swap acquisition, what do the target shareholders receive?
In a stock swap acquisition, what do the target shareholders receive?
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What is the purpose of the valuation step in the takeover process?
What is the purpose of the valuation step in the takeover process?
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What is the primary purpose of a Poison Pill defense?
What is the primary purpose of a Poison Pill defense?
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In the context of mergers and acquisitions, what is the significance of Goodwill?
In the context of mergers and acquisitions, what is the significance of Goodwill?
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What is the primary purpose of a White Squire defense?
What is the primary purpose of a White Squire defense?
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In a stock swap merger, which factor may influence the target company's board to reject the offer?
In a stock swap merger, which factor may influence the target company's board to reject the offer?
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What is the purpose of the Unocal standard in the context of mergers and acquisitions?
What is the purpose of the Unocal standard in the context of mergers and acquisitions?
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What is the primary purpose of Revlon Duties in the context of mergers and acquisitions?
What is the primary purpose of Revlon Duties in the context of mergers and acquisitions?
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Why might a target company's board reject a stock swap offer in a merger?
Why might a target company's board reject a stock swap offer in a merger?
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What is the primary purpose of a Poison Pill defense in the context of takeover defenses?
What is the primary purpose of a Poison Pill defense in the context of takeover defenses?
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What is the significance of having staggered boards as a takeover defense mechanism?
What is the significance of having staggered boards as a takeover defense mechanism?
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What is the purpose of White Squire defense in a takeover scenario?
What is the purpose of White Squire defense in a takeover scenario?
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How do Poison Pills affect a target company's financial performance once adopted?
How do Poison Pills affect a target company's financial performance once adopted?
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What is the primary reason for an acquirer to pursue a horizontal merger?
What is the primary reason for an acquirer to pursue a horizontal merger?
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What is a potential motivation for an overconfident CEO to pursue an acquisition?
What is a potential motivation for an overconfident CEO to pursue an acquisition?
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In a stock swap merger, what do the target company's shareholders receive?
In a stock swap merger, what do the target company's shareholders receive?
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What is the purpose of the valuation step in the takeover process?
What is the purpose of the valuation step in the takeover process?
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Which valuation method is better suited to incorporate potential synergies from an acquisition?
Which valuation method is better suited to incorporate potential synergies from an acquisition?
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What is a potential benefit of a vertical merger?
What is a potential benefit of a vertical merger?
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What type of merger occurs when the target's industry buys or sells to the acquirer’s industry?
What type of merger occurs when the target's industry buys or sells to the acquirer’s industry?
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Which reason for acquisition involves the idea that an acquirer can add economic value as a result of the acquisition?
Which reason for acquisition involves the idea that an acquirer can add economic value as a result of the acquisition?
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What is the term used to describe the savings achieved from producing goods in high volume?
What is the term used to describe the savings achieved from producing goods in high volume?
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In a takeover scenario, what might an acquirer aim to achieve through Monopoly Gains and Tax Savings?
In a takeover scenario, what might an acquirer aim to achieve through Monopoly Gains and Tax Savings?
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What is the primary motivation for an overconfident CEO to pursue mergers that cannot succeed?
What is the primary motivation for an overconfident CEO to pursue mergers that cannot succeed?
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When a target company's board rejects a stock swap offer in a merger, what factor could be influencing their decision?
When a target company's board rejects a stock swap offer in a merger, what factor could be influencing their decision?
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What is the primary purpose of a Poison Pill defense?
What is the primary purpose of a Poison Pill defense?
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In the context of mergers and acquisitions, what is the significance of Goodwill?
In the context of mergers and acquisitions, what is the significance of Goodwill?
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In a stock swap merger, which factor may influence the target company's board to reject the offer?
In a stock swap merger, which factor may influence the target company's board to reject the offer?
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What is the purpose of Revlon Duties in the context of mergers and acquisitions?
What is the purpose of Revlon Duties in the context of mergers and acquisitions?
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What is the purpose of the Unocal standard in the context of mergers and acquisitions?
What is the purpose of the Unocal standard in the context of mergers and acquisitions?
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What is the primary purpose of a White Squire defense in a takeover scenario?
What is the primary purpose of a White Squire defense in a takeover scenario?
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Study Notes
Types of Control in the Market
- Two primary mechanisms: Acquisition, and Merger
Types of Mergers
- Horizontal Merger: Target and acquirer are in the same industry
- Vertical Merger: Target's industry buys or sells to acquirer's industry
- Conglomerate Merger: Target and bidder are in different industries
Reasons to Acquire
- Stock Swap: Target shareholders swap their old stock for new stock
- Overconfidence: Overconfident CEOs pursue mergers that cannot succeed
- Synergies: 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 Slope: Savings from combining the marketing and distribution of related products
- Vertical Integration: Merger of 2 companies in the same industry that make products required at different stages of the production cycle
- Expertise: May be more efficient to purchase a company for its talent pool that is already a functional unit
- Monopoly Gains: Losses in 1 division can be offset by another division
- Tax Savings: Losses in 1 division can be offset by another division
The Takeover Process
- Valuation: Compare the target to similar firms to gain a rough estimate of the value, and does not incorporate synergies
- Discounted Cash Flows: Harder to implement, but does include synergies
- The Offer Public Announcement:
- Cash transaction
- Stock swap, which includes the exchange ratio, and positive NPV transaction if share price of merged firm exceeds pre-merger acquirer price
- Board and Shareholder Approval:
- Multiple takeover methods: Friendly Takeover, Hostile Takeover (which includes a corporate raider)
- Board may not approve even if a premium is offered because:
- Might think offer price is too low
- In a stock swap, Board may think acquirer is overvalued
- Might be acting in self-interest
- Revlon Duties: Duties in which you must seek the highest value
- Unocal: When a board takes defensive actions, they are subject to extra security
Tax and Accounting Issues
- Form of payment received affects taxes of target shareholders and combined firm
- Cash received triggers an immediate tax liability
- Stock swap can defer taxes until shares are sold
- Setup: Increase in the book value of the target's asset against the purchase price
- Higher depreciable basis reduces future taxes
- Goodwill can be amortized
Takeover Defenses
- Proxy Fight: Acquirer attempts to convince target shareholders to use proxy votes to support acquirers' candidates for election to the target board
- Poison Pills: Rights offering that gives existing target shareholders to buy shares in the target at a deeply discounted price under certain conditions
- Staggered Boards: Board of Directors' terms are staggered so that only 1/3rd of the directors are up for election each year
- White Knights: Target looks for a friendlier company to acquire it
- White Squire: A large, passive investor agrees to purchase block of shares in a target with special voting rights
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Description
This quiz covers the different types of mergers - horizontal, vertical, and conglomerate, as well as the reasons for acquisition such as stock swap and overconfidence among CEOs. Test your knowledge on market control mechanisms and acquisition strategies.
