Chapter 1 - Intro

Question 1

What dictates patterns observed in many other countries (eg Australia)?

Answer 1

US and European deal volume patterns

Question 2

Pattern in China

Answer 2

Different (from Us and Europe); Chinese govt took measures to restrain capital flows

Question 3

Pattern in India

Answer 3

Growth in M&A

Question 4

Pattern in Japan

Answer 4

Steady growth

Question 5

Pattern in Brazil and Argentina

Answer 5

Hardship in M&A growth (Mexico seeming more promising in comparison)

Question 6

Consolidation

Answer 6

Business combo whereby two or more firms join to form a wholly new firm (eg A + B = C)

Question 7

Merger

Answer 7

Business combo whereby one or more firms join an existing firm (eg A + B = A)

Question 8

Horizontal merger

Answer 8

When two competitors combine

Question 9

Vertical merger

Answer 9

Combination of companies that have buyer-seller relationship

Question 10

Conglomerate merger

Answer 10

Combination of companies that are not competitors and do not have buyer-seller relationship either

Question 11

Anticompetitive effect of mergers

Answer 11

US adopted liberal stance; EU more cautious

Question 12

Merger payment

Answer 12

Can be cash, securities or combo of both. (all-cash compensation may force bidder to incur debt => add complexity if more external financing req.)

Question 13

Contingent value rights (CVR)

Answer 13

secure a certain future value if specific events take place (eg sales target is met)

Question 14

Holdback provision

Answer 14

withholding of part of merger compensation (eg escrow account) which will be available if specific event takes place

Question 15

Merger professionals

Answer 15

• Investment bankers
• Legal M&A advisors
• Accountants
• Valuation experts

Question 16

Investment bankers

Answer 16

Can work on sell side or buy side

Question 17

Buy side bankers

Answer 17

Assist buyers in developing proposal with certain deal structure

Question 18

Sell side bankers

Answer 18

Screen potential buyers according to degree of interest and payment capability

Question 19

Legal M&A advisors

Answer 19

Especially relevant in hostile takeovers (taking place via legal manoeuvres); help with filing at SEC and legal due diligence process

Question 20

Accountants

Answer 20

Carry out accounting due diligence and prepare proforma financial statements set forth by management or other factors

Question 21

Valuation experts

Answer 21

Determine value of company; establish model that encompasses multiple assumptions (eg revenue, growth rates, costs) which could be suppressed after the deal

Question 22

Risk arbitrage

Answer 22

Purchase of stocks in low-priced markets of firms that may be taken over and sale of those stocks in high-priced markets (profit = takeover premium if the deal actually occurs)

Question 23

Leveraged buyout (LBO)

Answer 23

Acquisition of a public company where the target firm is delisted from stock exchange (also referred to as “going private”); acquirer could sometimes be management of target firm (ie management buyout)

Question 24

Material adverse change clause

Answer 24

Allows either party to walk away from deal if major change in circumstances that could alter the deal takes place

Question 25

Auction vs privately negotiated transactions

Answer 25

Little difference in shareholder wealth effects

Question 26

Confidentiality agreement (or NDA)

Answer 26

Governs responsibilities of providers and recipients of nonpublic info from target

Question 27

Standstill agreements

Answer 27

limit actions of bidder (eg purchase of target shares)

Question 28

Term sheet

Answer 28

Contains major terms of deal in writing, typically identifying buyer and seller, purchase price, and relevant factors influencing price

Question 29

Letter of intent (LOI)

Answer 29

Shows more detailed terms of agreement but it may not necessarily be binding on the parties (ie it could signal that one of the parties may not be ready to make the deal)

Question 30

Merger negotiations

Answer 30

Firms may not mislead market by spreading inaccurate or deceptive info

Question 31

Asset purchase agreement

Answer 31

Outlines assets acquired and liabilities incurred in the deal

Question 32

Asset basis step-up

Answer 32

Done by buyer; an increase of value of acquired assets to fair market value as opposed to carrying forwards the value in seller’s balance sheet (more depreciation = less taxes)

Question 33

Third party consents

Answer 33

May be necessary if there exists clauses in financing agreements enabling target to secure assets

Question 34

Stock entity deals

Answer 34

• Generally involves closely held firms
• No conveyance issues (ie contractual restrictions on transfer of assets)
• No appraisal rights, which sidesteps litigation issues related to fair value
• Buyer could have to assume certain unwanted liabilities
• Sent directly to target’s shareholders => deal may not be completed if some of those SH oppose it

Question 35

Merger entity deals

Answer 35

• Generally involves publicly held firms
• Constituent corporations are the two companies doing the deal and the surviving one is the survivor
• [Delaware] majority of SH must approve the deal, those dissatisfied may opt for defending their appraisals in court

Question 36

Forward (or statutory) merger

Answer 36

• Target merges directly into acquirer and then disappears
• Acquirer assumes target’s liabilities but no conveyance issues
• [Delaware law] treats them as asset deals followed by liquidation of target => may pose as deterrent if 3rd party consents exist
• Voting approval of SHs of BOTH acquirer and target required as per Delaware laws (option: subsidiary deal)