FIN 461 Exam 1 Miami University
Finance research suggests that diversification may destroy value because -
✔️✔️Inefficient internal capital markets
Reduced managerial accountability / greater entrenchment
Loss of focus
Incentive problems
Horizontal Integration - ✔️✔️driven by economies of scale & scope
Vertical integration - ✔️✔️motive is greater control over production & distribution
-Backward integration
-Forward integration
conglomeration - ✔️✔️driven by desire to diversify
Mergers and Acquisitions tend to - ✔️✔️follow the reactions of the market (S&P 500)
M&A Motives - ✔️✔️Synergies, Diversification, Strategic, Hubris, Buy undervalued /
sell overvalued assets, Mismanagement, Managerialism, Tax considerations, Market
power
Operational Synergies - ✔️✔️Cost savings, revenue enhancements, process
involvements
Financial Synergies - ✔️✔️Financial Engineering and Tax Benefits
Leveraged Buyout (LBO) - ✔️✔️the acquisition of a target using debt to finance a large
portion of the purchase price.
-Historically, 60-70% debt and 30-40% equity
-Equity contribution comes from a financial sponsor
Leverage is key to LBOs because - ✔️✔️-Enables sponsor to contribute small equity
investment
-Enables sponsor to achieve desired returns (20%+ annualized)
-Tax savings due to tax deductibility of interest payments
, -Some argue leverage improves firm governance
Different Types of M&A financing - ✔️✔️Cash on hand
Debt financing
-Revolving credit facility
-Term loan-Bond / note
-Commercial paper
Equity financing
Contingent consideration (e.g., earnouts)
True or False: cash rather than stock is used to purchase the target often yield positive
returns to bidders. - ✔️✔️True
True or False: large acquirers and large target relative to acquirer often yield positive
returns to bidders. - ✔️✔️False
1933 Securities Act - ✔️✔️-Required investors to receive financial and other significant
information concerning securities being offered for public sale
-Prohibited deceit, misrepresentations, and other fraud in the sale of securities
Glass-Steagall Banking Act of 1933 - ✔️✔️-Effectively barred commercial banks from
operating IB businesses
-Created the FDIC
Securities Act of 1934 - ✔️✔️-Supervision of new security offerings
-Ongoing reporting requirements (e.g., 10-K, 10-Q, 8-K)
-Created the SEC
Gramm-Leach-Bliley Act of 1999 - ✔️✔️-Overturned Glass-Steagall
•Provide more stable and countercyclical business model for banks
•Allow U.S. banks to better compete with international counterparts (e.g., UBS, Credit
Suisse, Deutsche Bank)
-Led to formation of U.S.-based universal investment banks (e.g., JPM, Citigroup, and
Bank of America)
Sarbanes-Oxley Act (2002) - ✔️✔️-Corporate governance, disclosure, and conflicts of
interest
•Executives must "certify" company financial statements
•Criminal penalties for fraud
Finance research suggests that diversification may destroy value because -
✔️✔️Inefficient internal capital markets
Reduced managerial accountability / greater entrenchment
Loss of focus
Incentive problems
Horizontal Integration - ✔️✔️driven by economies of scale & scope
Vertical integration - ✔️✔️motive is greater control over production & distribution
-Backward integration
-Forward integration
conglomeration - ✔️✔️driven by desire to diversify
Mergers and Acquisitions tend to - ✔️✔️follow the reactions of the market (S&P 500)
M&A Motives - ✔️✔️Synergies, Diversification, Strategic, Hubris, Buy undervalued /
sell overvalued assets, Mismanagement, Managerialism, Tax considerations, Market
power
Operational Synergies - ✔️✔️Cost savings, revenue enhancements, process
involvements
Financial Synergies - ✔️✔️Financial Engineering and Tax Benefits
Leveraged Buyout (LBO) - ✔️✔️the acquisition of a target using debt to finance a large
portion of the purchase price.
-Historically, 60-70% debt and 30-40% equity
-Equity contribution comes from a financial sponsor
Leverage is key to LBOs because - ✔️✔️-Enables sponsor to contribute small equity
investment
-Enables sponsor to achieve desired returns (20%+ annualized)
-Tax savings due to tax deductibility of interest payments
, -Some argue leverage improves firm governance
Different Types of M&A financing - ✔️✔️Cash on hand
Debt financing
-Revolving credit facility
-Term loan-Bond / note
-Commercial paper
Equity financing
Contingent consideration (e.g., earnouts)
True or False: cash rather than stock is used to purchase the target often yield positive
returns to bidders. - ✔️✔️True
True or False: large acquirers and large target relative to acquirer often yield positive
returns to bidders. - ✔️✔️False
1933 Securities Act - ✔️✔️-Required investors to receive financial and other significant
information concerning securities being offered for public sale
-Prohibited deceit, misrepresentations, and other fraud in the sale of securities
Glass-Steagall Banking Act of 1933 - ✔️✔️-Effectively barred commercial banks from
operating IB businesses
-Created the FDIC
Securities Act of 1934 - ✔️✔️-Supervision of new security offerings
-Ongoing reporting requirements (e.g., 10-K, 10-Q, 8-K)
-Created the SEC
Gramm-Leach-Bliley Act of 1999 - ✔️✔️-Overturned Glass-Steagall
•Provide more stable and countercyclical business model for banks
•Allow U.S. banks to better compete with international counterparts (e.g., UBS, Credit
Suisse, Deutsche Bank)
-Led to formation of U.S.-based universal investment banks (e.g., JPM, Citigroup, and
Bank of America)
Sarbanes-Oxley Act (2002) - ✔️✔️-Corporate governance, disclosure, and conflicts of
interest
•Executives must "certify" company financial statements
•Criminal penalties for fraud
