Strategic Acquirers |
|
use acquisitions to extend their current business, to leverage their current capabilities or to diversify into new businesses |
| |
Investment Acquirers |
|
do not extend or enhance, they acquire a portfolio of under performing firms and then implement a variety of incentives and control systems to help turn these under performing firms into high-performing firms |
| |
Private equity firms |
|
similar to investment, but impose a variety of fees and other charges on the firms they acquire almost immediately |
| |
Common way a firm can accomplish its vertical integration and diversification objectives? |
|
mergers and acquisitions |
| |
Acquisition |
|
A firm engages in acquisition when it purchases a second firm |
| |
Ways to purchase an acquisition |
|
use cash generated from ongoing business, go into debt to purchase, use own equity to purchase, or a a mix |
| |
How much can an acquiring firm purchase? |
|
all of its assets, a majority (51%), or a controlling share |
| |
Controlling Share |
|
enough assets so that the acquiring firm is able to make all the mgmt and strategic decisions in the target firm |
| |
Friendly vs. Unfriendly Acquisitions(Hostile Takeovers) |
|
when the mgmt wants the firm to be acqrd, vs when mgmt doesn't want the firm to be acqrd. |
| |
How are firms acquired otherwise? |
|
through direct negotiations(privately held or closely held), publicly announce it is willing to purchase the outstanding shares for a particular price |
| |
Privately held |
|
when it has not sold shares on the public market |
| |
Closely held |
|
when it has not sold very many share on the public stock market |
| |
Acquisition premium |
|
the difference between the current market price of a target firm's shares and the price a potential acquirer offers to pay for those shares |
| |
What is the approach to purchasing a firm through an acquisition premium called? |
|
Tender offer |
| |
Merger |
|
when the assets of two similar-sized firms are combined |
| |
Current Market Value |
|
the price of each of a firm's shares times the number of shares outstanding |
| |
FTC responsibility (Federal Trade Commission) |
|
charged with the responsibility of evaluating the competitive implications of proposed mergers or acquiitions |
| |
FTC Categories of Mergers and Acquisitions |
|
vertical merger, horizontal merger, product extension merger, market extension merger, and conglomerate merger |
| |
Vertical merger |
|
when a firm vertically integrates forward or backward thorough its acquisition efforts, acquires former suppliers or customers |
| |
FTC disallows any acquisition involving firms with headquarters in the U.S. that could have the potential for generating |
|
monopoly or oligopoly profits in an industry |
| |
Horizontal Merger |
|
when a firm acquires a former competitor |
| |
Product extension merger |
|
firms acquire complementary products through their merger and acquisition activities |
| |
Market extension merger |
|
primary objective is to gain access to new complementary geographic markets |
| |
Conglomerate Merger |
|
when there is no strategic relatedness between a bidding and a target firm |
| |
Mergers and acquisitions between strategically unrelated firms will not generate what? |
|
economic profits for either bidders or targets |
| |
Potential sources of strategic relatedness between bidding and target firms |
|
technical economies, pecuniary economies, and diversification economies |
| |
Technical economies |
|
scale economies that occur when the physical processes inside a firm are altered so that the same amounts of input produce a higher quantity of outputs. (marketing, production, experience, scheduling, banking, and compensation) |
| |
Pecuniary economies |
|
economies achieved by the ability of firms to dictate prices by exerting market power |
| |
Diversification economies |
|
economies achieved by improving a firm's performance relative to its risk attributes or lowering its risk attributes relative to its performance (portfolio mgmt and risk reduction) |
| |
Why bidding firms might want to engage in merger and acquisition strategies |
|
to reduce production or distribution costs, financial motivations |
| |
Reduce production or distribution costs |
|
through economies of scale, vertical integration, the adoption of more efficient production or organizational technology, increased utilization of the bidder's mgmt team, and through a reduction of agency costs by bringing organization-specific assets under common ownership |
| |
Financial motivations |
|
gain access to underutilized tax shields, avoid bankruptcy costs, increase leverage opportunities, other tax advantages, gain market power in product markets, and to eliminate inefficient target mgmt |
| |
Retained earnings |
|
capital generated from ongoing operations, debt capital provided by banks, customers, and suppliers |
| |
Business angels |
|
wealthy individuals looking to invest in entrepreneurial ventures or venture capital firms |
| |
Venture capital firms |
|
raise money from numerous smaller investors that they then invest in a portfolio of entrepreneurial firms |
| |
Why do bidding firms engage in mergers and acquisitions even though they usually do not generate profits for them? |
|
to ensure survival, free cash flow, agency problems, managerial hubris, and the potential for above-normal profits |
| |
Free cash flow |
|
the amount of cash a firm has to invest after all positive net present-value investments in its ongoing businesses have been funded |
| |
When is free cash flow created? |
|
when a firm's ongoing business operations are very profitable but offer very few opportunities for additional investment |
| |
Event study analysis |
|
the most popular way to evaluate the performance effects of acquisitions for bidding firms, compares the actual performance of a stock after an acquisition has been announced to the expected performance of that stock, if no acquisition had been announced |
| |
cumulative abnormal return (CAR) |
|
any performance greater or less than what was expected in a short period of time around when an acquisition is announced is attributed to that acquisition, can be positive or negative depending on whether the stock in question performs better or worse than what was expected without an acquisition |
| |
Firms have only two investment options: |
|
to invest their free cash flow in strategies that generate competitive parity or in strategies that generate competitive disadvantages |
| |
Mergers and acquisition strategies can benefit managers in two ways: |
|
to help diversify their human capital investments in their firm,and to quickly increase from size measured in either sales or assets |
| |
Managerial Hubris |
|
the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management |
| |
Market for corporate control |
|
the market that is created when multiple firms actively seek to acquire one or several firms |
| |
An imperfectly competitive market for corporate control can exist when a target is worth more to one bidder than it is to any other bidders and when no other firms including bidders and targets are... |
|
aware of this additional value |
| |
Rules for bidding firm managers |
|
search for valuable and rare economies of scope, keep information away from other bidders, keep information away from targets, avoid wining bidding wars,close the deal quickly, and operate in "thinly traded" acquisition markets |
| |
Thinly traded market |
|
a market where there are only a small number of buyers and sellers, where information about opportunities in this market is not widely known, and where interests beside purely maximizing the value of a firm can be important. |
| |
Rules for target firm managers |
|
seek information from bidders, invite other bidders to join the bidding competition, and delay but do not stop the acquisition |
| |
MGMT responses that reduce the wealth of target firm equity holders |
|
greenmail, standstill agreements, and poison pills |
| |
MGMT responses that do not affect the wealth of target firm equity holders |
|
shark repellents, Pac Man defense, Crown Jewel Sale, and Lawsuits |
| |
mGMT responses that increase the wealth of target firm equity holders |
|
search for white knights, creation of bidding auctions, and golder parachutes |
| |
Greenmail |
|
a maneuver in which a target firm's management purchase any of the target firm's stock owned by a bidder and does so for a price that is greater than the current market value of that stock |
| |
Standstill agreements |
|
often negotiated in conjunction with greenmail, a contract between a target and a bidding firm wherein the bidding firm agrees not to attempt to take over the target for some period of time ( prevents the current acquisition effort from being completed and reduces the number of bidders that might become involved) |
| |
Poison Pills |
|
any variety of actions that target firm managers can take to make the acquisition of the target prohibitively expensive |
| |
Shark Repellents |
|
a variety of relatively minor corporate governance changes that is supposed to make it somewhat more difficult to acquire a target firm |
| |
Supermajority voting rules |
|
more than 50% of the target firm's board of directors must approve a take over and state incorporation laws |
| |
Pac Man Defense |
|
taking over the firm or firms bidding for them |
| |
Crown Jewel Sale |
|
to prevent an acquisition, the target firm can sell of these crown jewels, either directly to the bidding firm or by setting up a separate company to own and operate these businesses. |
| |
White Knight |
|
another bidding firm that agrees to acquire a particular target in the place of the original bidding firm |
| |
Golden Parachute |
|
a compensation arrangement between a firm and its senior mgmt team that promises these individuals a substantial cash payment if their firm is acquired and they lose their job in the process |
| |
Mergers and acquisitions designed to create diversification strategies |
|
should be managed through the M-form structure |
| |
Mergers and acquisitions designed to create vertical integration strategies |
|
should be managed through the U-form structure and have mgmt controls and compensation policies consistent with this strategy |
| |
The most significant challenge in integrating bidding and target firms has to do with |
|
cultural differences |
| |
5 dimensions of Culture |
|
social orientation- individualism/ collectivismpower orientation- power respect/ power toleranceuncertainty orientation- uncertainty acceptance/ avoidancegoal orientation= aggressive/ passivetime orientation- long term/ short term |
| |