Mergers and Acquisitions Chapter 0

product extension merger

A merger between firms that deal in related products and the firms operate in the same market. The product extension merger permits the merging companies to group together their products and get access to a bigger set of consumers and increase their profits.

vertical merger/integration

A merger between two or more firms producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Vertical integration dictates that one company controls the end product as well as its component parts. Vertical mergers increase synergies created by merging firms that would be more efficient operating as one.

tracking or targeting stocks

A separate class of common shares of a firm that tracks the performance of a particular business segment or division or subsidiary rather than the operations of the company as a whole.Tracking stocks trade as separate securities. If the unit or division does well, the value of the tracking stock may increase—even if the company as a whole performs poorly. The opposite may also be true. The subsidiary still remains under the control of the parent.

Management Buyout

A special case of a LBO where the incumbent management team with little or no ownership of the firm acquires a substantial portion of the shares of the company.

Equity Carve outs

A transaction in which a parent firm offers some of its stock or stocks of its subsidiary to the public (Through IPO or secondary equity offering) to raise cash. The parent firm does not lose control of the subsidiary.

spin off

A transaction in which the parent firm creates a new legal subsidiary and distributes shares in the subsidiary to its current shareholders as a stock dividend. The shares are distributed on pro-rata basis (proportion of shareholding in parent firm).

minority investments

Acquisition of non-controlling interest in small firms with the aim of providing development of new products and technologies for the small firms in exchange for representation in the BOD of the small firm.

Leveraged Buyout (LBO)

An acquisition of a company (target) or division of another company or a single asset such as real estate property financed with equity (owners' funds) and a substantial portion of borrowed funds/debt. LBOs are structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the money borrowed to purchase the target-company/asset

Merger

Combination of two or more firms, usually of comparable size in which all but one ceases to exist legally. A merger involves formation of a single economic unit

Securities Exchange Act of 1934

Established the SEC to ensure no illegal practices or fraud investors in stocks, bonds and other securities traded on organized exchanges and OTC (from 1964) Empowers SEC to revoke registration

Joint venture

Formation of a relationship by two or more distinct legal entities or parties to attain a common goal. Each party in JV remains a separate and distinct legal entity during the JV

Celler Kefauver Act

It is often simply called the Antimerger Act. -Amended Clayton Act to include asset as well as stock purchases to effect a merger stopped vertical integration and asset acquisitions that reduced competition

conglomerate merger

Merger between two or more firms in unrelated industries. Each unrelated business produces unique product/service for unique end users/consumers and requires unique managerial expertise.

Clayton Anti-Trust Act of 1914

No price discrimination between different purchasers, if such discrimination created a monopoly or is not justified by quantity discounts CIVIL SUITES. : prohibit a firm from buying stocks (not assets)of another firm if their combination results reduces competition

Sherman Act of 1890

Public opposition to the concentration of economic power in large corporations and in combinations of business concerns (trusts) after the Civil War especially in sugar, tobacco, railroads, steel and meatpacking industries Section 1 makes mergers creating monopolies or "unreasonable" market control illegal. It applies to firms already dominant in their served markets to prevent them from "unfairly" restraining trade Section 2 deals with end results that are anti-competitive in nature

FTC Act 1914

Purpose: Enforce Antitrust laws with the help of Economists, lawyers, Accountants etc.The FTC Act bans "unfair methods of competition" and "unfair or deceptive acts or practices." The Supreme Court has said that all violations of the Sherman Act also violate the FTC Act.

Securities Act of 1933

Requires registration of publicly offered securities to ensure accuracy of facts in the registration statement and prospectus. Misleading information attracts fine, imprisonment or both.

divestitures

Sale of all or substantially all of a company or product lines, assets, subsidiaries etc.) to a third party firm to raise cash. A share of share exchange between buyer and seller firms can result in the seller firm having ownership interest in the buyer firm.

Asset or portfolio restructuring

Significant change in the composition of assets owned by the firm or lines of business in which the business operates. This includes asset sales, spin-offs, asset sales, liquidations, divestitures, bankruptcy

financial restructuring

Significant changes in the firm's capital structure including LBOs, exchange offer, leverage recapitalizations, MBOs, MBIs, stock repurchase/buyback etc.

Managed buy in

Similar to MBO only that the acquisition is made by an external management team acquires the shares.

statutory consolidation

The merging firms terminate their pre-merger legal existence and then merge to form a completely new entity

subsidiary merger

The target becomes the subsidiary of the bidder/acquirer but continues to operate under its own name albeit it is owned and controlled by the bidder.

Tender offers

The target's BOD and bidder agree that the bidder will acquire target by offering to directly buy shares from the target's shareholders.

Blue Sky Laws

These are securities' laws designed to protect investors against fraudulent securities' sales practices and activities. Require firms making offerings of securities to register their offerings before they can be sold in a particular state, unless a specific state exemption is available. License brokerage firms, their brokers, and investment adviser representatives.

Acquisition or Takeover

This arises when one firm (acquirer or bidder or predator) takes a controlling interest or ownership in another firm or a legal subsidiary of another firm or selected assets (such as manufacturing facility) of another firm. The firm which is the subject of acquisition is called the target. A target is usually (but not always) smaller in size than bidder. The acquirer/bidder gains the ability to direct the activities of the target.

market extension merger

This is a merger between two firms that deal in the same products/service but in separate geographical markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger geographical market and expand the client base.

leveraged recapitalization

This is a strategy where a company takes on significant additional debt with the purpose of either paying a large dividend or repurchasing shares. So, it is a debt-equity swap (sell bonds to raise debt and use debt to pay dividends or repurchase own stocks.

statutory merger(acquisition)

This is where the acquiring firm subsumes the assets and financial liabilities of the target according to the statutes of the state in which the combined firms are incorporated. The target ceases to exist.

congeneric merger

This occurs when merging firms are in the same industry do not compete for same supplier or customer base. A congeneric merger allows the resultant company to offer more products or services to its customers.

internal or organic growth

Through offering existing products to new markets, expanding production of existing products, new products in existing market, expand customer base by complementing or redesigning or promoting existing products

hostile takeover

is when the target's board of directors objects to a unsolicited takeover offer bid by the acquirer. The acquirer may attempt to circumvent the target's BOD and management by open market purchase(buying target's shares in public stock exchange) or hostile tender offer(acquirer offer to buy target's shares directly from target's shareholders)

strategic alliance

legally binding or informal arrangements among or between firms to co-develop a product or process or technology or simply sell each other's product to their respective customers.

horizontal merger

merger (acquisition of a firm) between two or more firms in the same industry. It is a business consolidation that occurs between firms which operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.

Williams Act of 1968

protect shareholders of target from quick-fire takeover sans enough information or time to evaluate the value of the takeover. Defines rights of shareholders and time within which the tender offer remains open.Disclosures for negotiated /friendly, hostile takeovers or self-tender offers

organizational or operational restructuring

significant change in organizational and operational structureof the firm including divisional redesign and close downs, employment downsizing, workforce re-alignmentand reduction

friendly takeover

transaction is when the target company board of directors and management endorses the acquisition offer. The acquirer pays a premium (price paid less target's pre-acquisition stock price) representing the perceived value of obtaining controlling interest