Mergers

A common exam move is to match the deal to its motive or the regulator’s concern: a combination flagged for raising the Herfindahl–Hirschman Index (HHI) — the concentration screen regulators use — is horizontal; “securing input supply” is vertical; “diversifying across cycles” is conglomerate. A second pattern compares payment methods (light at Level I, deeper at Level II): a stock offer signals the acquirer thinks its own shares are richly valued and shares the deal’s risk and reward with target holders (now part-owners), whereas an all-cash offer keeps all post-deal risk and reward with the acquirer — the “tell” that management is confident.

Versus investment, the trap is treating an acquisition as plain positive-NPV capital budgeting; the point is that the control premium plus winner’s-curse overpayment can push the bid toward zero or negative NPV for the buyer, even for a “good” target. And don’t confuse mergers with spinoffs — the opposite direction of restructuring, splitting a unit into an independent company. Memory hook: cash = confident, stock = “I’d rather pay with paper I think is rich.”