Define each of the following terms: d. Operating merger; financial merger

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Define each of the following terms: d. Operating merger; financial merger

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Define each of the following terms:
d. Operating merger; financial merger

Define each of the following terms:
e. Purchase accounting

Define each of the following terms:
f. White knight; proxy fight

Define each of the following terms:
g. Joint venture; corporate alliance

Define each of the following terms:
h. Divestiture; spin-off

Define each of the following terms:
i. Holding company; operating company; parent company

Define each of the following terms:
j. Arbitrage; risk arbitrage

Explanation & AnswerSolution by a verified expert

Explanation

In an operating merger, the operating synergies are expected in the post-merger cash flows as both firms' operations are combined. Thus, the incremental cash flows to the acquiring company are higher than the expected value of the target company's cash flows because of its operating synergy. The goals of the operating merger are growth and better operating efficiency.
 
A financial merger is a merger where both firms continue to operate separately. The merger does not produce any operating synergy. The goal of the financial merger is simply the investment returns from acquiring the target company.

Verified Answer

An operating merger is a merger where the operations of two firms are combined.
 
A financial merger is a merger where incremental post-merger cash flows to the acquiring company are the target company's expected cash flows. The merger does not produce any synergistic gains.

Explanation

Purchase accounting is the method of reporting assets and liabilities in the books of the acquiring company where the acquiring company is assumed to have purchased the target company. If assets are purchased at the net asset value, then the consolidated balance sheet will be similar to combining the statements of two companies. If the assets are purchased at a price more than the net asset value, then the appraised value of assets are added to the acquiring company’s statements. However, if they are purchased below the net asset value, then they are written down to the purchase price in the financial statements of the acquiring company.

Verified Answer

Purchase accounting is the method of reporting assets and liabilities in the books of the acquiring company. In this method, the acquiring company is assumed to have purchased the target company, and all the assets and liabilities are recorded in a manner similar to a purchase.

Explanation

The white knight is a friendly company that acquires the target company to prevent the target company from acquiring another firm (black knight). It is one of the hostile takeover defenses by the target company.
 
The proxy fight is a shareholder fight where a group of shareholders join forces and get enough votes to win a corporate vote over the decision of merger. In case of a hostile takeover, the acquiring company may join forces with the target company’s board of directors so that they vote in favor of the merger.

Verified Answer

The white knight is a friendly company that acquires the target company in order to prevent the target company from being acquired by another firm (black knight).
 
The proxy fight is a shareholders’ fight where a group of shareholders join forces and get enough votes to win a corporate vote over the decision of merger.

Explanation

A joint venture is a form of corporate alliance where parts of companies are joint for a specific objective on a limited basis. It is controlled by a management team composed of representatives from parent companies.
 
In a corporate alliance, firms  pool their resources to focus on a particular business line.This business line produces the most synergistic gains.This does not form a new entity, only the resources are pooled together for a specific purpose. The alliances may include marketing, joint ownership of operations, etc.

Verified Answer

Joint venture is a form of corporate alliance where parts of companies are joint for a specific objective.
 
A corporate alliance allows firms to pool their resources to focus on a particular business line that produces the most synergistic gains.

Explanation

Divestiture is the process of selling off a unit/segment of a business or operating assets of the business. Divestiture can be done in the form of:
 

Sale of assets to another company
Liquidation
Spin-off
Equity carve-out

A spin-off is a particular type of divestiture where the divested division forms a new entity, and the existing shareholders are given new stock in the new entity. The divested division forms its own board of directors, and new officers are appointed. The resulting new entity is a completely separate entity after the spin-off as the shareholders now have the controlling stake in the new division.

Verified Answer

Divestiture is the process of selling off a unit/segment of a business or operating assets of the business.
 
A spin-off is a particular type of divestiture where the divested division forms a new entity, and the existing shareholders are given new stock in the new entity.

Explanation

A holding company is a company which is formed for the purpose of owning the stocks of other companies. It owns sufficient stock in the subsidiary company to control it. It is also called the parent company and the other companies whose stock it owns are called the subsidiaries.
 
An operating company is a company which is controlled by the holding company. It is also called the subsidiary company.
 
A parent company is also called a holding company. It is a company which is formed for the purpose of owning the stocks of other companies.

Verified Answer

A holding company is a company which is formed for the purpose of owning the stocks of other companies. It owns sufficient stock in the subsidiary company to control it.
 
An operating company is a company which is controlled by the holding company.
 
A parent company is also called a holding company. It is a company which is formed for the purpose of owning the stocks of other companies.

Explanation

Risk arbitrage is when big investors purchase shares of possible takeover target companies to increase the target company’s stock price when the takeover is announced. This possesses a certain degree of risk because the potential target company that the investor invests in may not be the actual target company. This uncertainty is the risk involved in this process.
 
Simultaneously purchasing and selling stock of two merging companies to gain riskless profit is called arbitrage. The stock price of the target company increases when the merger is announced. The arbitrator determines the probability of the deal being completed and buys the stock of the target company before the merger's announcement. This way, the stock gains when its price increases.

Verified Answer

Some big investors purchase shares of possible takeover target companies. This is done in hope that when the takeover is announced, the target company’s stock price increases. This is called risk arbitrage.
 
Arbitrage is a strategy of simultaneously purchasing and selling stock of two merging companies. This strategy helps in gaining riskless profits.

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