İŞLETME FİNANSI II - Deneme Sınavı - 12

The activities of firms that expand/downsize their core business operations, or significantly change their assets and financial structure are called as corporate restructuring activities. Such operational restructuring decisions include various forms of combining business activities like mergers, acquisitions, and other business alliances as well as different forms of exiting strategies.

For both mergers and acquisitions, the company that is to be targeted for such a transaction is called “target firm”. After the transaction made, these firms can be called “acquired firm”. On the other hand, the company that is to pay premium to hareholders  if target firm in exchange of shares is called “acquirer firm” or “acquiring firm”.

Merger is a combination of two firms in a way that only one firm survives after combining. Merger can be in three ways. If the acquirer firm assumes the assets and liabilities of the target firm, then it is a statutory merger. If the target firm becomes a subsidiary of the acquired, then it is a subsidiary merger.

Acquisition is taking a controlling ownership in another firm, subsidiary of another firm, or business unit of another firm by an acquirer firm. The acquired firm may continue its existence after the acquisition as a subsidiary of the acquirer. In the opposite position, a divestiture is a sale of all of a company or all of a business/product line to another party in exchange for cash or securities.

Benefits from economies of scope stem from combining the business with suppliers or customers. Benefits are the outcomes of vertical integration.

Negotiation in M&A activity refers to the process of bargaining between the acquiring firm and the target firm aimed at coming to an agreement over the terms, needs and aims of both parties. If the acquiring company’s intention is to continue with the management of the target company after the acquisition, the heart of the negotiation first will be the integration of business activities and management after the closing. Price will be the second theme of the negotiation if both parties have an agreement on the first theme.

Culture clash is a widely used term to describe the failure of management in the post acquisition integration process. Bringing two different sets of fundamental values of employees in all levels and fuctions together in a context of achieving business goals can create problems. This can lead to “very damaging actions from passive resistance and the loss of good staff to sabotage”

If the acquirer company finances the M&A deal by largely using debt it is called as Leveraged Buyout (LBO). Sometimes debtfinancing may be up to 90% for a deal. Typically, the target company’s assets are used as a warranty
for the loan.

Income-based valuation focuses on finding the fair value of the company, depending on the future cash flows. The key of income-based valuation is future cash flows that a company will generate. The value of a company then, is the sum of present value of its future net cash flows. Calculation of future cash flows is not an easy task, though. It includes long-term business plans, growth plans, and risks associated with future cash flows.

Price to cash flow ratio analyses relationship between cash flows and market price. This approach suggests using cash flows instead of earnings because companies may use different depreciation techniques. Cash flow is calculated as net income plus depreciation.

How can we define risk? There is no uniform definition, but generally, it is defined as the probability of facing loss or unintended consequences.

Market risk can be defined as the risk related to a financial institution’s financial condition resulting from unexpected market movements in the price level of certain risk factors.

Market risk can be defined as the risk related to a financial institution’s financial condition resulting from unexpected market movements in the price level of certain risk factors. These risk factors can be categorized into four main classes: equity prices, commodity prices, foreign exchange rates, and interest rates.

The amount and direction of financial flows depend on various factors, including but not limited to the following factors:
- the condition of the global economy. The global economic conditions change over time along with the economic and business cycles, the economy goes through
expansion and contraction. Economic conditions are considered to be sound or positive when an economy is expanding and are seen as adverse or negative when the economy is contracting. Furthermore, the economic recession in developed countries usually causes a decline in the world trade by reducing the demand for goods, this, in turn, affects the developing country economies,
- the size of the international trade barriers;
- different rates of economic development of the countries (synchrony or asynchrony in the major countries’ economies);
- the differential break of inflation’s rate and the level of interest rates,
- the increase of balance of payments’ deficits due to the imbalance of international payments.

A multinational corporation (MNC) consists of a parent company in the firm’s resident country and the operating subsidiaries, branches, and affiliates it controls both at home and abroad. Although there can be various types and structures of an MNC, there are four categories of multinationals that exist. They include:

Banks’ activities have been separated into the trading book and the banking book; the former refers to market risk components, and the latter, to credit risk. With the evolution of the Basel-II, a new set of risks, called operational risk, was added to the regulation, this was joined by liquidity risk following the global financial crisis.

According to the Basel Committee, market risk is defined as the risk of losses arising from movements in market prices.

Basel uses two main methods to assess market risk: Value-at-risk (VaR) and Expected shortfall (ES).

Broadly speaking, credit risk is the risk that a borrower fails to meet obligations for a loan granted.