MGT 181 chapter 26

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16 Terms

1

Merger

the complete absorption of one company by anther, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity

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2

The bidder

the acquiring firm

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3

the target firm

the firm that is sought (and perhaps acquired)

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4

the consideration

cash or securities offered to the target firm in the aquisition

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5

Consolidation

a merger in which an entirely new firm is created and both the acquired firm and the acquiring firm cease to exist

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6

Board and shareholder approval

the target and the acquiring board of directors must approve. the deal and put the question to a vote of the shareholders of the target

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7

friendly takeover

when a target’s board of directors supports a merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote

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8

Hostile takeover

A situtation in which an individual or organization purchases a large fraction of a target corporation’s stock and. In doing so get enough votes to replace the target’s board of directors/CEO, or management.

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9

acquisition premium

  • paid by an acquirer in takeover, it is the percentage difference between the acquisition price and the pre-merger price of a target firm

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10

Horizontal merger

  • target and acquirer are in the same industry

  • one risk is anti-trust regulation

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11

Vertical merger

refers to a merger of two companies in the same industry that make products required at different stages of the production cycle

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12

Conglomerate merger

target and acquirer operate in unrelated industries

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13

Synergy

the positive incremental net gain associated with the combination of two firms through a merger or acquisition

Value of firm b to firm a = Vb* = change V + Vb

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14

A bidder can use one of two methods to pay for a target

1) Cash: the bidder simply pays for the target, including any premium, in cash

2) Stock: bidder pays for the target by issuing new stock and giving it to the target’s shareholders

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15

Purchase accounting

assets of acquired firm must be reported at fair market value

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16

Goodwill is created

the difference between purchase price and estimated fair market value of net assets

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