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Chapter 1
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Introduction
Goals of course
Practical guidelines for M&A analysis To evaluate policies toward M&As
M&As refer to
Traditional mergers and acquisitions Takeovers Corporate restructuring Corporate control Changes in the ownership structure of firms
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Terminology
Merger
Negotiated deals Mutuality of negotiations Mostly friendly
Tender offers
Offer made directly to the shareholders Hostile when offer made without approval of the board
Types of Mergers
Horizontal mergers
Combination between firms in same business activity Rationale
Economies of scale and scope Synergies such as combining of best practices
Vertical mergers
Combinations between firms at different stages Rationale is information and transaction efficiency
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Conglomerate mergers
Combination of firms in unrelated types of business activity
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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
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Arbitrage funds
Intensive research No investment on rumors Invest in 10-20 transactions at a given time Main risk is whether deals are completed
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Numerical example
An arbitrage firm (A) notes that a bidder (B) whose stock is selling at $50 makes an offer for a target (T) selling at $40. Exchange offer is 1 share of B for 1 T share. T rises to $48; B stays at $50. A sells 1 share of B short for $50 and goes long on T at $48. One month later the deal is completed with B at $50 and T at $50. What is A's dollar and percentage annualized gain assuming a required 50% margin on both transactions?
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Solution
A sells 1 B for $50 and buys T at $48. Assuming 50% margin, the investment is .5($50 + $48) = $47.5. In one month, A uses 1 T to cover 1 B. The gain is $2. The percentage gain is [($2/$47.5)] * 12 = 50.21% less the interest on the $47.5 borrowed on margin. If A invested the full $98, the gain would be ($2/$98) * 12 = 24.49%.
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