FIN 461 Exam 1 |89 Questions with Solutions
M&A Waves - -1. Liquidity: when interest rates are low, stock prices are high. When there
is a lot of liquidity in the market, firms are more likely to make acquisitions.
2. Technological disruption: facilitates more M&A flow because there's more of a need for
inorganic growth quick.
3. Deregulation: taking regulations out of an industry and allowing them to operate more
freely.
4. Price shock: in the financial crisis, oil prices spiked very high, and then ultimately fell
from $150 --> $30 within a couple of months. Some companies will be efficient enough to
operate at new price, and the one that can remain efficient will acquire companies that
cannot operate at this level.
-M&A Motives: why do firms engage in acquisitions? - -Most common motives:
- synergies
- diversification
Other motives:
- strategic
- hubris
- managerialism
- tax considerations
- buying undervalued/selling overvalued assets
- market power
- mismanagement
-Synergies - -Putting two companies together that operate similarly.
-Operational synergies - -Focus on revenue and cost.
1. Cost savings: we know exactly what we need to do to save costs, so it is more valuable
than revenue enhancements. Customers drive revenue enhancements, whereas we drive
cost savings.
2. Revenue enhancements: sell more by putting the two companies together through things
like cross-selling and bundling.
3. Process Involvements
-Financial synergies - -Lowers cost of capital.
4. Financial engineering: by putting two companies together, lenders will view them as less
risky as a combined entity -- more willing to give more money.
5. Tax benefits
-Diversification - -reduce risk and improve risk-return relationship of portfolio
-Finance research suggests that diversification may destroy value. Why is this? - -1.
Inefficient internal capital markets: shareholders want firm to use extra funds generated to
invest in a profitable venture, not use money to subsidize a weak business.
, 2. Reduced managerial accountability/greater entrenchment
3. Loss of focus
4. Incentive problems --> giving CEO of GE stock options when he is solely in control of GE
health. We are giving him power when he ultimately has no say in things like GE energy
and other sectors of the company.
-Main players in M&A and their roles. - -1. Acquirers: strategic vs financial, they buy the
target.
2. Target: sell themselves to buyer.
3. Investment Banks: advise of the transaction.
4. Lawyers: advise on the transaction.
5. Accountants: provide accounting advice and investigate tax issues.
6. Proxy solicitors: control shareholder vote.
7. Institutional investors: react to transaction.
8. Hedge funds and private equity funds: hedge funds often jump into M&A transactions
which can be unsuccessful. Private equity funds finance a large part of their transactions
with debt and have a sponsor to finance the equity portion.
9. M&A arbitrageurs: a strategy typically used by hedge funds. Simultaneously buy and sell
the stock of the acquirer and target to create a "riskless" profit. Target usually sold at a
lower price compared to acquisition price.
-Recent M&A trends. - -1. SPACS (Special Purpose Acquisition Corporation): do not have
commercial operations, undertakes an IPO to raise capital for the purpose of acquiring
another company. EX = Draft Kings.
2. ESG
- Partner selection
- Deal financing
- Market reaction
- Governance / integration
- Due diligence
-M&A Strategies - -Two strategies = strategic and financial.
1. Strategic: focuses on strategies such as synergies -- buying a similar operating company.
2. Financial: for investment purposes -- private equity funds and LBOs try to generate
revenue for their firms and investors to create value.
3. Horizontal integration: acquiring a company at the same level in the supply chain. This is
driven by economies of scale and scope to get bigger and stronger.
4. Vertical integration: acquiring a company at a different level of the supply chain in order
to have more control over it.
- Backward integration = moving upstream to purchase the suppliers.
- Forward integration = moving downstream to purchase the customer.
5. Conglomeration: driven by desire to diversify, putting two businesses together that are
seemingly unrelated.
6. LBO: utilizing debt to purchase a company. Usually 60/70% debt and 30/40% equity.
Equity portion comes from a financial sponsor. Private equity companies can generate a
M&A Waves - -1. Liquidity: when interest rates are low, stock prices are high. When there
is a lot of liquidity in the market, firms are more likely to make acquisitions.
2. Technological disruption: facilitates more M&A flow because there's more of a need for
inorganic growth quick.
3. Deregulation: taking regulations out of an industry and allowing them to operate more
freely.
4. Price shock: in the financial crisis, oil prices spiked very high, and then ultimately fell
from $150 --> $30 within a couple of months. Some companies will be efficient enough to
operate at new price, and the one that can remain efficient will acquire companies that
cannot operate at this level.
-M&A Motives: why do firms engage in acquisitions? - -Most common motives:
- synergies
- diversification
Other motives:
- strategic
- hubris
- managerialism
- tax considerations
- buying undervalued/selling overvalued assets
- market power
- mismanagement
-Synergies - -Putting two companies together that operate similarly.
-Operational synergies - -Focus on revenue and cost.
1. Cost savings: we know exactly what we need to do to save costs, so it is more valuable
than revenue enhancements. Customers drive revenue enhancements, whereas we drive
cost savings.
2. Revenue enhancements: sell more by putting the two companies together through things
like cross-selling and bundling.
3. Process Involvements
-Financial synergies - -Lowers cost of capital.
4. Financial engineering: by putting two companies together, lenders will view them as less
risky as a combined entity -- more willing to give more money.
5. Tax benefits
-Diversification - -reduce risk and improve risk-return relationship of portfolio
-Finance research suggests that diversification may destroy value. Why is this? - -1.
Inefficient internal capital markets: shareholders want firm to use extra funds generated to
invest in a profitable venture, not use money to subsidize a weak business.
, 2. Reduced managerial accountability/greater entrenchment
3. Loss of focus
4. Incentive problems --> giving CEO of GE stock options when he is solely in control of GE
health. We are giving him power when he ultimately has no say in things like GE energy
and other sectors of the company.
-Main players in M&A and their roles. - -1. Acquirers: strategic vs financial, they buy the
target.
2. Target: sell themselves to buyer.
3. Investment Banks: advise of the transaction.
4. Lawyers: advise on the transaction.
5. Accountants: provide accounting advice and investigate tax issues.
6. Proxy solicitors: control shareholder vote.
7. Institutional investors: react to transaction.
8. Hedge funds and private equity funds: hedge funds often jump into M&A transactions
which can be unsuccessful. Private equity funds finance a large part of their transactions
with debt and have a sponsor to finance the equity portion.
9. M&A arbitrageurs: a strategy typically used by hedge funds. Simultaneously buy and sell
the stock of the acquirer and target to create a "riskless" profit. Target usually sold at a
lower price compared to acquisition price.
-Recent M&A trends. - -1. SPACS (Special Purpose Acquisition Corporation): do not have
commercial operations, undertakes an IPO to raise capital for the purpose of acquiring
another company. EX = Draft Kings.
2. ESG
- Partner selection
- Deal financing
- Market reaction
- Governance / integration
- Due diligence
-M&A Strategies - -Two strategies = strategic and financial.
1. Strategic: focuses on strategies such as synergies -- buying a similar operating company.
2. Financial: for investment purposes -- private equity funds and LBOs try to generate
revenue for their firms and investors to create value.
3. Horizontal integration: acquiring a company at the same level in the supply chain. This is
driven by economies of scale and scope to get bigger and stronger.
4. Vertical integration: acquiring a company at a different level of the supply chain in order
to have more control over it.
- Backward integration = moving upstream to purchase the suppliers.
- Forward integration = moving downstream to purchase the customer.
5. Conglomeration: driven by desire to diversify, putting two businesses together that are
seemingly unrelated.
6. LBO: utilizing debt to purchase a company. Usually 60/70% debt and 30/40% equity.
Equity portion comes from a financial sponsor. Private equity companies can generate a
