Monday, November 12, 2007

M&A - Points to Refresh Weston's Book Ch.1

The Takeoer Process

Points to remember

M&As refer to
- Traditional mergers and acquisitions
- Takeovers
- Corporate restructuring
- Change in corporate control
- Changes in the ownership structure of firms

The 10 Change Forces

-Technological change
-Economies of scale, economies of scope, complementarity, and the need to catch up technologically
-Globalization and freer trade
-Changes in industry organization
-New industries
-Deregulation and regulation
-Favourable economic and financial conditions for much of the past two decades
-Negative trends in certain individual economies and industries
-Widening inequalities in income and wealth
-Relatively high valuations for equities during the 1990s



Negotiated deals
Mutuality of negotiations
Mostly friendly

Tender offers

Offer made directly to the shareholders
Hostile - when offer is made without approval of the board

Restructuring — changes in organization structure or policies to alter the firm’s approach to achieving its long-term objectives.

Types of Mergers

Horizontal mergers

Mergers - Legal Framework of USA

Statutory merger — formal legal procedures
Short-form merger — streamlined legal procedures when ownership is 90%
Holding company — parent company has a controlling interest

Tender Offers

Bidder seeks target's shareholders approval
Minority shareholders
Terms may be "crammed down"
May be subject to "freeze-in"
Minority has the right to bring legal actions

Kinds of tender offers and provisions

Conditional vs. unconditional
Restricted vs. unrestricted
"Any-or-all" tender offer
Contested offers
Two-tier offers
Three-piece suitor

Risk Arbitrage in M&A Activity

In mergers and acquisitions, risk arbitrage is the practice of being long in the target stock and short in the bidder stock.

The position implies that arbitrageurs are betting that the merger will be successful.

Nature of the arbitrage industry
Information gathering and analysis is the principal raw material

Some arbitragers attempt to anticipate takeover bids and acquire stock before public announcement also.

Combination between firms in same business activity


Economies of scale and scope
Synergies such as combining of best practices
Government regulation due to potential anticompetitive effects

Vertical mergers

Combinations between firms at different stages

Rationale is information and transaction efficiency

Conglomerate mergers

Combination of firms in unrelated types of business activity

Distinctions between conglomerate and nonconglomerate firms

- Investment companies — diversify to reduce portfolio risk
- Financial diversified — provide funds and expertise on generic management functions of planning and control
- Concentric diversified — combine with firms in less related activities to broaden market potentials

Risk Arbitrage in M&A Activity

Usually, long in the target stock and short in the bidder stock
Nature of the arbitrage industry
Information gathering and analysis is the principal raw material
Arbitragers attempt to anticipate takeover bids

Arbitrage funds

Abritrage funds invest in multiple merger parties to diversify the risk.

To minimise risk, funds undertke intensive research and do not investment on rumours.

They invest in 10-20 transactions at a given time.

They aim to give annual returns of 10% or greater and also to provide returns uncorrelated with overall stock market returns.


This chapter has summarized some basic terminology and concepts, providing a foundation of further knowledge and understanding of M&As.
Main risk is whether deals are completed

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