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Side ASide B
use acquisitions to extend their current business, to leverage their current capabilities or to diversify into new businesses
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...
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
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
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
when it has not sold shares on the public market
when it has not sold very many share on the public stock market
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?
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
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
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
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
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,...
economies achieved by the ability of firms to dictate prices by exerting market power
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...
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...
capital generated from ongoing operations, debt capital provided by banks, customers, and suppliers
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...
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...
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
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...
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...
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...
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
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...
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...
any variety of actions that target firm managers can take to make the acquisition of the target prohibitively expensive
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.
another bidding firm that agrees to acquire a particular target in the place of the original bidding firm
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...
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
5 dimensions of Culture
social orientation- individualism/ collectivismpower orientation- power respect/ power toleranceuncertainty orientation- uncertainty acceptance/ avoidancegoal orientation= aggressive/...