a subsidiary of the acquirer is merged with the target and the subsidiary is the remaining legal entity

A

B+c

= 

A

B

subsidiary merges with a target but the target is the remaining legal entity

A

B+C

=

A

C

merged firms form a new entity

A+B=C

Occurs when the sum of parts is mroe valuable than the individual components

1+2=5

Floating Exchange Ratio

derives fees through advisory work usually 1-2% of deal upon completion

Experts in structuring deal and handling strategy

enables a buyer to withdraw from a signed deal if certain criteria defined int he clause are met

Meant to protect buyers against any changes or developments

Made when buyer is prepared to make an offer

Indicates buyer, seller, purchase price, and factors that may cause price to vary

Less detailed version than LOI

companies that raise capital in an IPO where the funds are earn marked for acquistions

publically traded comps similar to PE firms.. shells that have intent to buy assets of firms

become corp shell with cash and or secutities as its sole assets

then distribute cash as dividends and go out of existence

OR

Use cash to make tender offer to purchase its own shares

OR

Use cash to do business and buy new assets or comps

1. Mgmt team reaches out to other or IB
2. Friendly mergers go fast, if negotiatoins fall thru, can turn hostile
3. sign confidentiality agreement, share CIM
4. Buyer prepares term sheet (non- binding) (IOI)
5. deep due dilligence 
6. Board of Directors of buying and selling agree to deal
7. SH vote... % required defined in corps articles
8. Recieve approval from regulators before final close

Stock

more common

Straight forward

Assets

acquirer can purchase partial or all firms assets

Buying assets doesnt free buyer form targerts liabs

sometimes can avoid SH approval

Reverse Mergers

Private company goes bulic by merging with an already pub comp

cheaper and faster than IPO

IPO

Allows the company going public to raise capital and provides opportunity for owners to liquidate their shares

Publicity

Owns enough stock to have controling interest

Adv:

lower cost by acquiring fewer shares opposed to 100%

no control premium on shares

No need for SH approval

DIS:

Multiple taxation... taxed at corp leve, dividends paid to holding comp, div paid to SHs of holding comp --> Triple taxation

antitrust issues

disagreements on direction without 100% control

Studies on mgmt were produced which led mgmt to think that they could manage firms without specific expertise

during 3rd merger wave

Main source of income comes from takeover attempts

doesnt need to make acquisition... greenmail

consolidating larger scale acquisitions of companies

strategy to combine smaller companies into national business and enjoy economies of scale while gaining benefits of being able to market nationally as opposed to regionally

Known for creating Large Monopolies
Railroads made national companies possible rather than jsut reg
Predominantly horizontal mergers to create monops

first billion dollar deal - Carnegie steel->US steel (75% steel prod)

Sherman Anti Trust Act (1890)- made formation of monopolies and other trade restrains unlawful

^not very effective and not really enforced

came to close after crash of shipbuilders union ad stock market crash of 1901

"Merging for Oligopoly"

economic boom and easy access to capital following WWI

Clayton Act- strengthened Sherman anti trust act

More vertical mergers

First time we see conflomorates 

Ended with great depression in 1929

Made sherman act more effective

Made Illegal: price discrimination, Exclusive dealing contracts, corporate mergers, interlocking directorates

"conglomorate Wave"

80% of mergers during this wave were conglomorates

^study was released saying that a successful mgmt doesnt need expertise in industry to be successful

Celler-Kefauver Act- closed loop hole in clayton act

Equity and junk bonds as main source of financing

Bootstrap effect- short fun increases earnings per share when a share-for-share exchange happened because of the uses of convertable bonds to finance transaction

Ended with stricter regulations on conglomerates, Litton(conglomorate) decreased in earnings for first time in 1968, Tax reform Act ended convertable bonds as source of financing

Closed loophole of Clayton act of 1914 which allowed acquisitions to occer why purcahsing assets of firm rather than stock

coupled with stronger enforcement by govnt

"hostile Takeover"

Hostile takeovers believed to be due to inefficient mgmts.. if a firm as an inefficient mgmt it is undervalued... corp raider would come in put in place new mgmt and comp will realize true value

Known for: Aggressive IBs - reacking in fee revenue on transactiosn

inc sophistication of takeover and strategies

aggressive use of debt.. orgins of LBOs MBOs

international takeovers

deregulation

Ended with collapse of junk bonds which was primary source of financing

MegaMergers

And Rollups

emphasis on long term strategy

First global merger wave

Because of the economic boom and record high stock prices, CEOs got cocky which lead to some unsuccessful mergers

Ended with 8 month recession in 2001

Record low interest rates bc of 9/11

lead to a strong rise in Private Equity firms with easy access to low interest rate debt to finance transactions

Ended with subprime mortgage crisis of 2008

(value of the combined firm) - (the parts of both firms) - (premium paid) - (expenses associated with merger)

if this is still positive it is the NAV. 

May be corss marketing products, broader product line, better brand name, better distribution etc.

Revenue enhancement is harder to quantify

ability of a firm to utilize set of inputs to provide a broader range of products and services

Ex. consolidation of banking industry to offer mroe services

related diversification

diversification into a related business ex. merck buys medco a pharma buying a marketer of pharma

Higher prob of synergistic gains

Unrelated

ex. Mcdonalds buying sports authority

Capitalize on opportunities before they disappear, company has developed a new product or process

Growth via expansion into different geographical area

Economies of scale

Economies of Scope

FInancial Synergy

Operating synergy (brand name, distribution)

ability to set and maintain price above competitive levels

measured by Lerner Index = (P-Marginal cost)/P

Sources of market power: 

Product differentiation

BtE

Market Share

managers seek to acquire firms for their own personal motives and that the purce economic gains to the acquiring firm are not the sole motivation or even the primary motivation in the acquisition

This is bc pay is often linked to success of transactions, market cap and prestige

Studies show that after announcement A firm stock price declines while T stock price increases

bidders who overestimate the value of a target will most likely win a contest

^bc they will overpay where other bidders had a more realistic valuation of the firm

Chances are that if you are the winning bidder you overvalued a target

Companies taht make acquisitions  taht cause their equity to lose value are increasingly likely to become targets of other takeovers

A manager with hubris will over pay bc he/she believes that he can find synergistic gains above premium and will act in own best interest to grow firm at expense of SHs

Pure

firms with nothing in common

Mixed

firms that are looking for produt extention or market extentions

nonprofit corp that oversees firms that audit public companies

oversees audit committees of public companies

system of rules, practices and processes by which a company is directed and controlled

balances the interests of the many stakeholders in a company: shareholders, mgmt, customers, suppliers, financiers, goverment and community

Corporations are one of three types of business organizations, they are a way for investors to put capital into a resky venture, the board of directors oversees mgmt and looks out for SH

when managers pursue their own self-interest rather than interest of SH

a control to agency cost is to vreate incentives that align mgmt and SH

outside member of a board that can receive some other benefit beyond direct compensation

ex. family member of CEO or CEO of competitor

a member of a companys board of directors also serves on another board or within another company's mgmt

Directors that sit on each others boards, study found that 20% of 700 large public firms had interlocked boards

Inside

Mgmt/employees of the firm

have direct ties with the company

outside

not an employee or statkeholder within the company

more outside members the greater the governance

two friendly firms merge after extensive negotiations by mgmt

Upper level mgmt of target gets positions in new entity while trading off returns for SHs

CFO and CEO have to certify statements that they are not aware of any material misstatements, or can be sued otherwise and comp bonues

Section 404: requires that the auditors look at internal controls, companies also report any weaknesses they ahve detected in regards to controls

*very costly for public companies to establish and maintain internal controls

Special compensatoin agreements that the company provides upper mgmt 

Benefits:

Believed to make it easier to hire and retain top executives

lucrative benefits packages allow execs to remain objective if the company is involved in a takeover or merger...

discourage takeovers bc of the costs associated with them in contracts

Costs:

compensating already well-paid execs

mgmt being rewarded for mismgmt

big taxes on pmt

Smaller boards are more effective 

Boards with fewer grey directors

directors under teh age of 69

serve on fewer than 3 boards

fewer interlocked directorships

members who were selected with little CEO influence

JV

defined period of time

companies exist apart form each toerh 

easier to end JVs and Strategic Alliances than M&As

less drastic and expensive than M&As

M&As

no defined time period

firms are one legal entity