Week 1 Content

What is a Financial Acquiror?

A buyer—often a private equity firm—who purchases a company primarily for financial return (e.g., improving operations, reducing costs, selling later at a profit), rather than for strategic business integration.

What is a Strategic Acquiror?

A company that buys another business to enhance its own operations—gaining market share, technology, talent, or other strategic advantages.

What is a Conglomerate?

A corporation composed of multiple, unrelated businesses operating under one parent company (e.g., a firm owning manufacturing, media, and insurance subsidiaries).

What is a Synergy?

The increase in value created when two companies combine (1+1 > 2).

What is an Horizontal Acquisition?

When a company acquires another firm in the same industry and at the same stage of the supply chain (e.g., two competitors).

What is a Vertical Acquisition?

When a company buys a business upstream or downstream in its supply chain (e.g., a manufacturer buying a supplier or distributor).

What is a Dis-Synergy?

Negative effects caused by a merger or acquisition—such as culture clashes, loss of customers, or increased complexity—where the combined company is worth less than the sum of its parts.

What is an Enterprise Value?

Equity value + debt + preferred stock − cash. It reflects the total cost of acquiring the operating assets of the target

What is an Equity Value?

The value of the shareholders’ ownership in a company.

What is a Roll-up Acquisition Strategy?

A strategy where an acquirer buys many small companies in the same industry and combines them into a larger, more efficient entity—often to gain scale and improve margins.

What is a Take-Over Premium?

The amount a buyer offers above the current market price to persuade shareholders to sell during an acquisition.

What is Corporate Developement?

An internal company function that manages mergers & acquisitions, strategic partnerships, divestitures, and strategic planning.

What is SEDAR?

The Canadian system through which public companies file financial statements and other disclosures—similar to the U.S. EDGAR system.

What is EDGAR?

The U.S. Securities and Exchange Commission (SEC) online database where public companies file mandatory reports such as 10-Ks, 10-Qs, and 8-Ks.

What is a Cost Synergy?

Reduced expenses through consolidation

What is a Revenue Synergy?

Increased sales via cross-selling, expanded distribution, etc.

What macroeconomic conditions typically increase M&A activity?

Strong stock markets, easy credit availability, and robust economic growth.

How do recessions affect M&A volume?

Recessions reduce deal volume sharply because financing contracts, valuations fall, and firms become more cautious.

What general pattern characterizes global M&A cycles?

M&A activity across the U.S., Europe, and other regions tends to rise and fall in coordinated cycles driven by global economic and financial conditions.

What factors influence differences in M&A levels across regions?

Regulatory frameworks, access to capital, industry structure, and country-specific economic conditions.

What is a Merger?

A transaction in which one firm absorbs another; one company survives and the other ceases to exist as a legal entity. A + B = A.

What is a Consolidation?

A transaction in which two or more firms combine to form a new entity; all previous firms dissolve. A + B = C.

Why is enterprise value used instead of equity value alone?

EV accounts for the target’s debt obligations and cash holdings, giving a complete picture of the economic outlay required.

How is the “buyer” designated for valuation reporting?

The firm with the larger market capitalization or the firm whose shares are exchanged in the transaction.

What is the primary regulatory concern with horizontal mergers?

Increased market power and potential anticompetitive effects.

What are potential effects of vertical mergers?

Increased control over production stages, potential efficiency gains, and potential concerns about foreclosure of rivals

What strategic purpose can conglomerate mergers serve?

Diversification of revenue streams and risk reduction, though evidence suggests conglomerates often destroy rather than create value.

What forms of consideration can be used in M&A transactions?

Cash, acquirer stock, preferred stock, debentures, or combinations.

What is a floating exchange ratio?

The acquirer offers a fixed dollar value of stock; the number of shares adjusts with the acquirer’s stock price during a pricing period.

What is a collar in a stock deal?

A mechanism establishing minimum and maximum share counts in floating exchange ratio deals.

What is an Earnout?

A payment structure where part of the acquisition price is contingent on the target achieving performance goals.

What are Contingent Value Rights (CVRs)?

Rights guaranteeing additional future payments if specific milestones (e.g., regulatory, commercial) occur

What is a Holdback Provision?

A clause allowing the buyer to withhold part of payment (often in escrow) pending resolution of specific risks.

What are the main roles of investment bankers on the buy side?

Target identification, valuation, due diligence, negotiating deal terms, and arranging financing

What are the main roles of investment bankers on the sell side?

Preparing offering materials, running auctions, screening buyers, managing confidentiality, and evaluating competing bids.

What roles do attorneys play in M&A?

Legal due diligence, SEC/regulatory filings, drafting and negotiating agreements, and guiding defensive measures in contested transactions.

What roles do accountants play in M&A?

Financial due diligence, evaluating accounting policies, preparing pro forma financial statements, and assessing earnings quality.

What do valuation experts contribute to the M&A process?

Independent valuation analyses using various assumptions (e.g., growth, synergies), creating valuation ranges for negotiation

What is merger arbitrage?

Buying shares of announced acquisition targets to profit from the spread between the trading price and the offer price.

Why is merger arbitrage considered risky?

Returns depend on deal completion, and deals may fail due to regulatory, financing, or market conditions.

When does merger arbitrage become especially hazardous?

During credit crises or recessions when deal financing disappears and deal cancellations increase

What is a leveraged buyout (LBO)?

An acquisition financed primarily with debt, often taking a public company private.

What is the defining feature of an LBO structure?

Use of high leverage supported by the target’s cash flows and assets.

What is a management buyout (MBO)?

A type of LBO where the company’s existing management team purchases the firm.

What is a merger wave?

A period of abnormally high merger and acquisition activity occurring across many firms and industries at the same time.

What role do technological shocks play in merger waves?

They disrupt existing industries or create new ones, prompting restructuring and consolidation.

Are technological shocks alone sufficient to cause merger waves?

No. They create incentives for mergers, but waves do not occur without supporting financial conditions

Why is capital liquidity necessary for merger waves?

Firms require accessible financing to complete acquisitions; without liquidity, waves do not materialize even when shocks exist.

How does high liquidity influence M&A volume?

It makes large-scale dealmaking possible by enabling firms to fund acquisitions through debt or equity financing.

What is the market misevaluation hypothesis?

The idea that mergers occur because firms exploit mispricing in the market, such as overvalued bidder stock.

How do valuation errors influence M&A activity?

Managers may pursue deals when market values differ from intrinsic values, using mispricing as an opportunity

Does research agree on the role of misevaluation in merger waves?

No. Some research finds it important, while other studies argue it is not a main driver of waves.

What typically occurs before a wave of stock-financed mergers?

A wave of seasoned equity offerings

What financial event commonly precedes seasoned equity offerings?

Initial public offerings

What corporate action often follows a wave of stock-financed mergers?

Share repurchases

How does this sequence support efficiency theory?

It shows managers act on growth opportunities first and return excess capital when opportunities diminish.

What is a defensive merger?

A merger pursued to prevent a firm from becoming a takeover target, allowing managers to retain control.

Why do defensive mergers occur during merger waves?

Increased takeover activity heightens fear of hostile bids, prompting vulnerable firms to seek protective combinations.

What does neoclassical efficiency theory propose about merger waves?

Waves arise when external shocks create opportunities for firms to improve efficiency through consolidation.

How does efficiency theory explain industry clustering in merger waves?

Firms in the same industry experience similar shocks, prompting many of them to restructure at the same time.

How do economic shocks influence merger waves?

Sudden changes in economic conditions can force industries to restructure, generating high levels of M&A.

How do regulatory shocks affect merger activity?

Changes in regulation may remove barriers or alter competitive dynamics, encouraging consolidation.

How do technological shocks influence market structure?

They can rapidly make existing business models obsolete, leading to mergers for survival or adaptation.

Why are equity market valuations important in merger waves?

High valuations provide acquirers with a strong acquisition currency, especially for stock-based deals.

Why does deal volume fall when credit markets tighten?

Firms cannot secure financing necessary for acquisitions, reducing the feasibility of large M&A transactions.

How might managers use overvalued stock during merger waves?

They may acquire targets using equity they believe is overpriced, capturing value for existing shareholders.

How does uncertainty about true value contribute to M&A activity?

When intrinsic values are difficult to estimate, valuation errors may lead managers to believe acquisitions are beneficial.