Gains from Acquisitions
This term describes when the combined value of two firms is greater than their separate values.
What is synergy?
This metric determines if an acquisition creates value after paying for the target firm.
What is Net Present Value (NPV)?
A company buys back shares from a potential bidder at a premium.
What is greenmail or targeted repurchase?
Selling assets or divisions to another company is called this.
What is a divestiture?
What are the four main sources of synergy?
What is (1) revenue enhancements, (2) cost reductions, (3) lower taxes, (4) reduced capital needs.
When paying with stock, the acquiring firm faces this drawback.
What is ownership dilution or sharing gains?
This tactic gives shareholders the right to buy shares at a discount if a bidder crosses a threshold.
What is a poison pill?
When a parent sells a minority stake in a subsidiary through an IPO, it’s called this.
What is an equity carve-out?
Name one way a merger can reduce costs.
What is economies of scale or spreading overhead?
Paying with this method usually keeps control with the acquiring firm but is taxable.
What is cash?
A friendly company that acquires a target to prevent a hostile takeover is called this.
What is a white knight?
Hewlett-Packard divided into HP Inc. and Hewlett Packard Enterprise, and the original company ceased to exist. What restructuring method is this?
What is a split-up?
What does "market power" allow a merged firm to do?
Raise prices or negotiate better with suppliers.
Firm A issues 10 shares to acquire Firm B. After merger, share price rises to $25. What is the true cost of acquisition, and how does it compare to the initial offer of $200?"
Expected: True cost = 10 × $25 = $250; Higher than initial $200 offer.
A company changes its bylaws so that two-thirds of shareholders must approve any merger. What tactic is this?
What is a supermajority amendment?
eBay separated PayPal into an independent company by distributing shares to existing shareholders. What restructuring method is this?
What is spin-off?
Firm A and Firm B each generate $10 million in annual after-tax cash flow. The discount rate is 10%. After merging, the combined firm generates $22 million annually.
Calculate:
Stand-alone value:
Each firm = $10M ÷ 0.10 = $100M
Both firms = $100M + $100M = $200M
Merged value:
$22M ÷ 0.10 = $220M
Synergy (ΔV):
$220M – $200M = $20M
(Meaning the merger creates $20M of extra value.)
Firm A has 50 shares outstanding at $40 each. It offers $200M worth of stock to acquire Firm B. How many new shares will be issued, and what will be the new share price if combined value is $600M?
Shares issued = $200M ÷ $40 = 5M; Total shares = 50M + 5M = 55M; New price = $600M ÷ 55M = $10.91.
A company has a staggered board structure, meaning only a fraction of directors can be replaced each year. Explain why this tactic is effective against hostile takeovers, and how bringing in a white knight could complement this strategy.
A staggered board slows down a hostile bidder because they can’t replace the entire board in one election cycle—it may take years to gain control. This gives management time to negotiate better terms or find alternatives. One alternative is a white knight, a friendly company that acquires the target under better conditions, protecting management and shareholder interests.
If a firm is under financial distress, which restructuring option—spin-off, carve-out, or split-up—would you recommend? Explain your reasoning.
Sale or carve-out for immediate cash infusion.