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FINA 6604 - 26

Chapter 26

QuestionAnswer
A potential merger which products synergy: creates value and therefore should be pursued
"B" is being acquired by "A" for $162K worth of "A" stock. The incremental value of the acquisition is $4,600. "A" has 8,500 shares of stock outstanding at $36 a share. "B" has 5,900 shares of stock outstanding at $27 a share. What is the value per share Value per share = [(8,500 × $36) + (5,900 × $27) + $4,600]/[8,500 + ($162,000/$36)] = $36.15
For financial statement purposes, goodwill created by an acquisition: must be reviewed each year and amortized to the extent that it has lost value
Glendale Marine is being acquired by Inland Motors for $53K worth of Inland Motors stock. IM has 6,200 shares of stock outstanding at a price of $49 a share. GM has 1,700 shares outstanding with a market value of $30 a share. The incremental value of the Total number of shares = 6,200 + ($53,000/$49) = 7,282 shares
Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay Weston's shareholders the current value of its stock in shares of Dressler stock. Dressler's currently has 6,200 shares of stock outstanding at a market price of $30 a share. West Number of shares = 6,200 + [(2,200 × $25)/$30] = 8,033 shares
Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to acquire 100 percent of the outstanding shares of Southern Fried Chicken. This transaction is known as a: leveraged buyout.
Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a: joint venture.
A proposed acquisition may create synergy by: I. increasing the market power of the combined firm. II. improving the distribution network of the acquiring firm. III. providing the combined firm with a strategic advantage. IV. reducing the utilization I, II, and III only
An acquisition completed simply to diversify a firm will: generally not add any value to the firm
Assume the shareholders of a target firm benefit from being acquired in a stock transaction. Given this, these shareholders are most apt to realize the largest benefit if the: acquiring firm has the better management team and replaces the target firm's managers.
Proxy Contest acquiring firm has the better management team and replaces the target firm's managers.
Proxy the right to cast someone else's votes
going-private transactions Transactions in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group.
leveraged buyouts (LBOs) Going-private transactions in which a large percentage of the money used to buy the stock is borrowed. Often incumbent management is involved.
management buyouts (MBOs) when existing management is heavily involved in LBOs
Strategic Alliance Agreement between firms to cooperate in pursuit of a joint goal.
Joint Venture Typically an agreement between firms to create a separate, co-owned entity established to pursue a joint goal.
Horizontal acquisition: This is an acquisition of a firm in the same industry as the bidder
Vertical acquisition: involves firms at different steps of the production process.
Conglomerate acquisition: When the bidder and the target firm are in unrelated lines of business
Tender Offer A public offer by one firm to directly buy the shares of another firm.
Consolidation A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist.
Merger an entirely new firm is created and both the acquired and acquiring firms cease to exist.
Takeover a general and imprecise term referring to the transfer of control of a firm from one group of shareholders to another
capital gains effect refers to the fact that the target firm's shareholders may have to pay capital gains taxes in a taxable acquisition
write-up effect the depreciation expense on the acquired firm's assets can be increased in taxable acquisitions
Tax Reform Act of 1986 increase in value from writing up the assets is now considered a taxable gain. Before this change, taxable mergers were much more attractive because the write-up was not taxed
Goodwill calculation each year firms must assess the value of the goodwill on their balance sheets. If the value has gone down (or become “impaired” in accounting-speak), the firm must deduct the decrease; otherwise, no amortization is required
purchase accounting method method of reporting acquisitions requires that the assets of the target firm be reported at their fair market value on the books of the bidder
Goodwill the difference between the purchase price and the estimated fair market value of the net assets (assets less liabilities) acquired
Synergy The positive incremental net gain associated with the combination of two firms through a merger or acquisition.
diversification 1) reduces unsystematic risk 2) does not create value
supermajority amendment Firms can make it more difficult to be acquired by changing this required percentage to 80 percent or so.
Greenmail In a targeted stock repurchase, payments made to potential bidders to eliminate unfriendly takeover attempts.
Standstill agreements contracts wherein the bidding firm agrees to limit its holdings in the target firm
targeted repurchase a firm buys a certain amount of its own stock from an individual investor, usually at a substantial premium
Poison Pill A financial device designed to make unfriendly takeover attempts unappealing, if not impossible. It is used to force the bidder to negotiate with management.
Share Rights Plan Provisions allowing existing stockholders to purchase stock at some fixed price should an outside takeover bid come up, discouraging hostile takeover attempts.
The goal of the flip-in provision is to massively dilute the raider's ownership position.
Golden parachute: Some target firms provide compensation to top-level managers if a takeover occurs
Poison put: a variation on the poison pill. A poison put forces the firm to buy securities back at some set price.
Crown jewel: major assets of a firm
white squires or big brothers individuals, firms, or even mutual funds involved in friendly transactions
lockup an option granted to a friendly suitor (a white knight, perhaps) giving it the right to purchase stock or some of the assets (the crown jewels, possibly) of a target firm at a fixed price in the event of an unfriendly takeover.
shark repellent any tactic (a poison pill, for example) designed to discourage unwanted merger offers.
A bear hug an unfriendly takeover offer designed to be so attractive that the target firm's management has little choice but to accept it.
A fair price provision a requirement that all selling share holders receive the same price from a bidder.
Dual class capitalization: firms have more than one class of common stock and that voting power is typically concentrated in a class of stock not held by the public. Such a capital structure means that an unfriendly bidder will not succeed in gaining control.
Countertender offer: Better known as the “Pac-Man” defense, the target responds to an unfriendly overture by offering to buy the bidder!
Divestiture The sale of assets, operations, divisions, andy or segments of a business to a third party.
equity carve-out The sale of stock in a wholly owned subsidiary via an IPO.
spin-off The distribution of shares in a subsidiary to existing parent company stockholders.
split-up The splitting up of a company into two or more companies. A way of “unlocking” value, meaning a situation where the whole is worth less than the sum of the parts.
Created by: ecuecon05