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Ans: The concept that the value and performance of two companies combined will be
greater than the sum of the separate individual parts. Synergy is a term that is most
commonly used in the context of mergers and acquisitions. Synergy, or the potential
financial benefit achieved through the combining of companies, is often a driving force
behind a merger.
Q: explain the effect of revenue gain as one of the source of synergy from acquisition?
Ans: A mergeris the combining (or “pooling”) of two businesses, while an acquisitionis the
purchase of the ownership of one business by another.
Acquisition is a corporate strategy that may increase value of a corporation is a revenue gaining
sources of synergy. Increase and diversify sources of revenue by the acquisition of new and
complementary product and service offerings (Revenue Synergies)
Synergies)
Reduction of financial risk and potentially lower borrowing costs (Financial Synergies
Synergies)
Ans: 2. Selloffs
The two types of selloffs are (1) spinoffs and (2) divestitures.
a company might spin off one of its mature business units that is experiencing little or no
growth so it can focus on a product or service with higher growth prospects.. In some sense
a spinoff represents a form of a dividend to existing shareholders. It can also offer its existing
shareholders a discount to exchange their shares in the parent for shares of the spinoff.
For example, an investor could exchange $100 of the parent’s stock for $110 of the
spinoff’s stock. Spinoffs tend to increase returns for shareholders because the newly
independent companies can better focus on their specific products or services.
Divestitures is a group of transactions in which cash comes in to the firm. Basically, a divestiture
involves the sale of a portion of the firm to an outside third party. Typically the buyer is an existing firm,
so that no new legal entity results. It simply represents a form of expansion on the part of the buying
firm.
A variation on divestiture is the equity carve-out, which involves the sale of a portion of the firm via
an equity offering to outsiders. In other words, new shares of equity are sold to outsiders, which give
them ownership of a portion of the previously existing firm. A new legal entity is created.
Explain the effect of tax reduction as one of the sources of synergy from acquisition?
ANS: Tax reduction may be a powerful incentive for some acquisitions. This reduction can come
from:
1. The use of tax losses: Normally a profitable firm accused an unprofitable firm.
Unprofitable firm is in distress that is why they have low tax bill.
2. The use of unused debt capacity: This debt capacity is beneficial because greater debt
leads to a greater tax shield. every firm can borrow a certain amount before the
marginal costs of financial distress equal the marginal tax shield.
3. The use of surplus funds: Another quirk in the tax law involves surplus funds. Consider a
firm that has free cash flow. That is, it has cash flow available after payment of all taxes
and after all positive net present value projects have been funded. In this situation,
aside from purchasing securities, the firm can either pay dividends or buy back shares.
Instead, the firm might make acquisitions with its excess funds. Here, the shareholders
of the acquiring firm avoid the taxes they would have paid on a dividend. And no taxes
are paid on dividends remitted from the acquired firm.
In an efficient market with no tax effect, should an acquiring firm use cash or stock?
Ans: The Company should use cash. Because if the acquiring company exchange its share with
the target company the number of share holder will rise. Instead of share if company use cash
then the number of shareholder remain same and the exchanged cash will not be taxed.
Concept of financial distress in terms of stock and flow variable.
These two ways of thinking about insolvency are depicted in. Stock-based insolvency occurs
when a firm has negative net worth, so the value of assets is less than the value of its debts.
Flow-based insolvency occurs when operating cash flow is insufficient to meet current
obligations. Flow-based insolvency refers to the inability to pay one’s debts. Insolvency may
lead to bankruptcy.
Z-score
score of Z less than 2.675 indicates that a firm has a 95 percent chance of becoming bankrupt
within one year. However, Altman’s results show that in practice scores between 1.81 and 2.99
should be thought of as a gray area. In actual use, bankruptcy would be predicted if Z ≤ 1.81
and non bankruptcy if Z ≥ 2.99.
What are sources of possible synergy in acquisitions?
MERGER ANALYSIS
Investment bankers put together merger models to analyze the financial profile of two combined
companies. The primary goal of the investment banker is to figure out whether the buyer’s earnings
per share (EPS) will increase or decrease as a result of the merger. An increase in expected EPS from
a merger is called Accretion (and such an acquisition is called an Accretive Acquisition), and a
decrease in expected EPS from a merger is called Dilution (and such an acquisition is called a
Dilutive Acquisition).
Q: explain the strategy of golden parachutes and crown jewels as the mechanism for takeover
defense?
Ans:
Golden para: Golden refers to the fact that it's money or other income. Google , apple , tim cook
benifited by apple for resign so tht google doesn’t buy
Sometimes there is a legitimate concern that the executive might be forced out. For example, if
the company is bought by
Dividend policy:
Q: what you know and what you don’t know about divined policy?
Know
The homemade dividends theory is used to justify the irrelevance of dividend policy for investors.
Homemade Dividend means dividend created by a stockholder through selling a portion of shares held.
Its an opposition to a dividend received from the company that issued the stock. If investors want an
income from their stocks, even if the company does not declare a dividend, they can sell a portion of
their shares.
On 1 January 2012, Alex bought 100 shares of Google (NYSE: GOOG) stock for $642.5 per share. His
investment amounted to $64,250. By 30 November 2012, Google stock price had climbed to $699 but it
had paid no dividends. Alex needed cash so he encashed the capital gain of $56.5 per share as
homemade dividends by selling 8 shares (capital gain per share of $56.5 multiplied by the number of
shares (100) divided by current share price ($699)).
When stock price unexpectedly rise tht time for signaling effect it happens.
6 Q ans: