Name: ________________________________________

CORNELL NOTES
Class: ______________________ Topic: Ch 29 – M&A
SHEET Date: _______/ _____/ ________
Period ______

QUESTIONS NOTES
29.1 The Basic Form of
Acquisitions

Apa penyakit di M&A? Greedy

The Winner Curse – Bought compny too expensive, because it’s good, but its
overpriced due to another sentiment & information
Mengapa co yg punay duit Untuk daripada ngasih dividen (kena pajak), mending ya akuisisi
banyak ngelakuin M&A?
What’s 3 basic forms of Merger/consol, Acq of Stocks, Acq of Assets
Acquisition?
1. MERGER OR
CONSILDATION
What’s merger? A+B = A
It’s an absorption of one firm by another.
Acquirer firm retain its name and identity
What’s consolidation? A+B=C
Absorption one firm by another, and created new firm (firm c)
Contoh basic merger? A acq B
-> Stockholder B nerima 1 lbr saham A dengan imbal 2 saham B nya itu
sendiri.
-> Stockholder A ga ngefek apa2
Two important point about - Merger is legally straightforward & don’t cost as much as other
merger & consolidation? acq.
because it avoid the necessity of transfering.
- The stockholder of each firm must approve merger
2. ACQUISITION OF
STOCK
What’s acquisition of stock?
Offer is taken directly to..?
What’s tender offer?
Sometimes general mailing is
used at tender offer. What’s
general mailing?
What’s following factors that 5 poin
involved in choosing between
acquisition of stock and
merger?
3. ACQUISITION OF
ASSET
What’s acq of asset?
Takeover varieties? Takeover
- Acquisition
o Merger/consolidation (usually acq of stocks ended with
formal mgerger in order to fully acq it)
 o Acq of Stocks - Buy L+E (uses if we can check the
opportunity of the debt capacity, so we can increase the debt)
o Acq of Asset – Buy Asset (uses if it can better if we handled
it)
- Proxy Contest
- Going Private
4. CLASSIFICATION
SCHEME
What’s the classification type of - Horizontal (Indomart buy Alfamart, same level of industry)
acquisition? - Vertical (Backward: Indomart buy indomarco; Forward: Bogasari buy
Indomie)
- Conglomerate (acq that unrelated, Sinarmas asuransi & kertas)
- Consentric
5. NOTE ABOUT
TAKEOVERS
What’s takeovers?
What’s bidder?
How bidder acq the stocks/
assets company?
What if the offer accepted?
Takeovers can occur by.. (3)?
If takeover is achieved by
acquisition?
In merger & tender offer.
Acqing firm buys?
What’s proxy contest?
What’s going-private
transactions?

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 Name: ________________________________________
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SHEET Date: _______/ _____/ ________
Period ______

QUESTIONS NOTES
29.2 Synergies

Why firm are acquired.. can

be formed into some question
(4) ...
Is there rational reason for
merger?
Where does synergy come
from?
How are these synergistic
gains shared?
Are there other motives for a
merger besides synergy?
29.3 Sources of Synergy
Revenue Enhancement? Mergers may generate greater revenue of company
Come from? 4:
-
- Marketing gains? Mergers can increased operating revenue -> improvement can be made in
folllowing areas?
- Ineffective media programming & ads effort
- A weak distribution network
- An unbalacned product mix
- Strategic benefits? Benefits with advantages of acquired company (type of subjetc)
- Market or monopoly Reduce competition -> monopoly power
power?
Cost Reduction?
- Economy of scale?
- Economies of vertical
integration?
- Technological
transfer?
- Complementary
resources?
- Elimination of
inefficient
maangement?
Tax Gaines?
- What’s use of tax
losses?
(net operating losses)
- debt capacity? 1. Unused debt capacity: unused bs dimanfaatkan -> greater debts lead
to -> greater tax shield (perusahaan bisa memanfaatkan acqed firm
unused debt capacity dengan baik)
2. Increased debt capacity: merger leads -> risk reduction -> so it leads
 to greated debt capacity (bisa pinjem lebih banyak)
- Use of surplus funds? - Company mergers to avoid tax in dividend payment
- so with the excess cash, company tends to mergers
- bcs share repo has lower tax than dividend payment
Reduced Capital
Requirements?
-
-

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Name: ________________________________________
CORNELL NOTES
Class: ______________________ Topic: Ch 29 – M&A
SHEET Date: _______/ _____/ ________
Period ______

QUESTIONS NOTES
29.4 Two Financial Side
Effects of Acquisitions

Earnings Growth
- Smart market
- Foolish market
Diversification
- How’s diversification
benefits firm? Or not?
- Divers can gain if
true? (3)
a. Diversification
decreases the
unsystematic risk at
the lower cost than
investor inv adj
(unlikely)
b. Diversification
reduces risk, thereby,
it increases debt
capacity (tax gaines,
increses in debt cap)
c. Internal capital/labor
allocation are better
 for diversified firms,
than would be true for
nondiversified firms
29.5 A cost to stockholders
from reduction in risk
What’s byproduct of Mergers increase safety of bonds (becasue it’s “insured” by 2 firms,
Acquisition that destroy of coinsurance effect) -> then value of bonds -> then hurting the stockholders
value?
The Base Case
Both firms have debt Bondholders gain are hurting stockholders stockholders
General conclusions:
1. Merger can help
bondholders
2. Stockholders are hurt
by amount that
bondholders gain
3. Conc 2 applies to
merger without
synergy. If there’s
synergy, it depends on
size
How can shareholders reduce 1. Firms retire its debt before merger, then reissue equal ammount of debt
their losees from coinsurance after merger announcement
effect? 2. Debt capacity are increased after merger, so management can issue
larger debt -> then it increased tax shields
29.6 NPV of a Merger
Cash NPV of Merger to Acquirer = Synergy - Premium
Common Stock
- Value of Firm B
stockholders after
rmerger?
Cash vs Common Stock
- When do bidders want
to pay with cash and
when do they want to
pay with stock?
29.7 Friendly versus Hostile
Takeovers

29.8 Defensive Tactics

Deterring takeovers before
being in play
- Corporate Characters
- Golden Parachutes
- Poison Pills
Deterring a takeover after the
company is in play
- Greenmail and
Standstill agreements
- White Knight and
White Squire
 - Recapitalizations and
Repurchases
- Exclusionary Self-
Tenders
- Asset Restructurings
29.9 Have Mergers Added
Value?
Return to Bidders
Target Companies
The Managers vs
Stockholders
- Managers of Bidding
Firms
- Managers of Target
firms
29.10 The Tax Forms of
Acquisitions
Tax Free Transactions
Taxable Transactions
29.11 Accounting for
Acquisitions
Purchase Accounting
Goodwill
29.12 Going Private and
Leveraged Buyouts

29.13 Divestitures
Sale
Spin-off
Carve-Out
Tracking Stocks

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CORNELL NOTES
SHEET
QUESTIONS
CONCEPT QUEESTION
1. Merger Accounting –
Explain purchase
accounting for
mergers?
Effect on cash flows &
EPS
2. Merger Concepts
By merging competitors.
Takeovers have created
monopolies that will raise
product prices, reduce
production, and harm
consumer
Managers act in their own
interest at times, and in reality
may not be answerable to
shareholders. Takeovers may
reflect runway management.
In an efficient market,
takeovers wouldn’t occur
because market prices would
reflect the true value of
corporations.
Thus, bidding firm would not
be justified in paying
premium abve market price
for target firm.
Traders and institutional
investors, ahving extremely
short time horizons, are
influenced by their
perceptions of what otehr
market traders will be
thinking of S prospect and
dont value takeover based on
fundamental factors.
Name: ________________________________________
Class: ______________________ Topic: Ch 29 – M&A
Date: _______/ _____/ ________
Period ______
NOTES
- In the purchase method, assets are recorded at market value, and
goodwill is created to account for the excess of the purchase price over
this recorded value (USUALLY ACQUISITION)
- In the pooling of interests method, the balance sheets of the two firms
are simply combined; no goodwill is created. The choice of accounting
method has no direct impact on the cash flows of the firms
(USUALLY MERGER)
- The choice of accounting method has no direct impact on the cash
flows of the firms.
- EPS will probably be lower under the purchase method because
reported income is usually lower due to the required amortization of
the goodwill created in the purchase.
- False.
- Although the reasoning seems correct, in general, the new firms do not have
monopoly power.???
- This is especially true since many countries have laws limiting mergers when it
would create a monopoly
- True.
- When managers act in their own interest, acquisitions are an important control
device for shareholders.
- It appears that some acquisitions and takeovers are the consequence of underlying
conflicts between managers and shareholders
- False
- Even if markets are efficient, the presence of synergy will make the value of the
combined firm different from the sum of the values of the separate firms.
- Incremental cash flows provide the positive NPV of the transaction.
- False
- In an efficient market, traders will value takeovers based on “fundamental
factors” regardless of the time horizon. Recall that the evidence as a whole
suggests efficiency in the markets. Mergers should be no different.
Thus,they will sell shares in
target firms despite true value
of firms.
Mergers are a way of avoiding
taxes because they allow the
acquiring firm to write up the
value of the assets of the
acquired firm
Acquisitions analysis freq
focus on total value of firms
involved. An acquisition,
however will usually affect
relative value of stocks
3. Merger Rationale
Explain why diversification
per se is probably not a good
reason for merger
4. Corporate Split
Dow wants to sell subsdiriary
(Angus, Sodium,
Why might company do it?
Is there reverse synergy?
- Carve-Out: Penjualan
subsidiary ke inv luar
(stake aja)
5. Poison Pills
Are poison pills good/bad for
stockholders?
How do u think firm are able
to get around poison pills?
6. Merger and Taxes
Describe advantages &
disadvantages of taaxable
merger as opposed to a tax-
free exchange.
What’s the basic determinant
of tax status in a merger?
7. Economics of Scale
What does it mean to say that
a proposed merger will take
advantage of available
economies of scale?
....
Explain why a merger
between eastern and western
might make sense?
8. Hostile Takeovers
- False
- The tax effect of an acquisition depends on whether the merger is taxable or non-
taxable. In a taxable merger, there are two opposing factors to consider, the
capital gains effect and the write-up effect. The net effect is the sum of these two
effects.
- True
- Because of the coinsurance effect, wealth might be transferred from the
stockholders to the bondholders. Acquisition analysis usually disregards this
effect and considers only the total value.
- Smart and foolish? EPS change but price doesnt chage
- Total Shares * price/shares
- Bcs its diversfication dont create value, and it’s reduced the
unsystematic risk.
- Reducing unsystematic risk -> benefit bondholders
If mergers are = 0 synergy, then bondholders are benefited and the
stockholders are worse off
- A firm might choose to split up because the newer, smaller firms may be better
able to focus on their particular markets.
- Thus, reverse synergy is a possibility. An added advantage is that performance
evaluation becomes much easier once the split is made because the new firm’s
financial results (and stock prices) are no longer commingled.
- It DEPENDS how it’s used
- If they are used to protect management, then they are not good for stockholders
- If they are used by management to negotiate the best possible terms of a merger,
then they are good for stockholders.
- One of the primary advantages of a taxable merger is the write-up in the basis of
the target firm’s assets,
- while one of the primary disadvantages is the capital gains tax that is payable. The
situation is the reverse for a tax-free merger
- The basic determinant of tax status is whether or not the old stockholders will
continue to participate in the new company, which is usually determined by
whether they get any shares in the bidding firm. An LBO is usually taxable
because the acquiring group pays off the current stockholders in full, usually in
cash.
- Economies of scale occur when average cost declines as output levels increase.
- A merger in this particular case might make sense because Eastern and Western
may need less total capital investment to handle the peak power needs (by
different times), -> thereby reducing average generation costs
- Among the defensive tactics often employed by management are seeking white
What type of actions might
management of firm take fight
to hostile acquisition bid from
an unwanted suitor?
How do target firm
shareholders benefti from
defensive tactics of their
management team?
knights, threatening to sell the crown jewels, appealing to regulatory agencies and
the courts (if possible), and targeted share repurchases.
- Frequently, anti-takeover charter amendments are available as well, such as
poison pills, poison puts, golden parachutes, lockup agreements, and
supermajority amendments, but these require shareholder approval, so they can’t
be immediately used if time is short.
- While target firm shareholders may benefit from management actively fighting
acquisition bids, in that it encourages higher bidding and may solicit bids from
other parties as well,

- there is also the danger that such defensive tactics will discourage potential
How are the target firm bidders from seeking the firm in the first place which harms the shareholders
shareholder harmed by such
actions?

9. Merger Offers - In a cash offer, it almost surely does not make sense. In a stock offer,
Suppose a company in which management may feel that one suitor is a better long-run investment than the
other, but this is only valid if the market is not efficient.
you own stock has attracted
two takeover offer. - In general, the highest offer is the best one
It depends of benefit. If cash: highest, if stock:better long run investment
Would it ever make sense for
ur company management to
favor the lower over?

Does the form of payment

affect ur answer at all?
10. Merger Profit
Acquiring firm stockholders
seem to benefit little from
takeovers. Why is this finding
a puzzle? What are some the
reasons offered of it?
Various reasons include:
(1) Anticipated gains may be smaller than thought;
(2) Bidding firms are typically much larger, so any gains are spread thinly across shares;
(3) Management may not be acting in the shareholders’ best interest with many
acquisitions;
(4) Competition in the market for takeovers may force prices for target firms up to the zero
NPV level; and
(5) Market participants may have already discounted the gains from the merger before it is
announced.

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