Chapter 13

Question 1

Pre bid defences

Answer 1

Communicate effectively with shareholders
Revalue non-current assets
Poison pill
Crown jewels defence
Change the articles of association to require ‘super majority’ approval for a takeover

Question 2

Post bid defences

Answer 2

Appeal to their own shareholders
Attack the bidder
White knight
Counterbid sometimes called a ‘pacman’ defence
Refer the bid to the competition authorities

Question 3

Three common forms of consideration

Answer 3

Cash offer
Share for share exchange
Earn-out

Question 4

Cash offer

Answer 4

Target company shareholders are offered a fixed cash sum per share

Question 5

Share for share exchange

Answer 5

Bidding company issues some new shares and then exchanges them with the target company shareholders

Question 6

Earn-out

Answer 6

Consideration is split so that there is an intitial amount paid at the time of acquisition, and the balance deferred

Question 7

Cash offer advantages

Answer 7

Speed
Certainty about the bid value
Increased liquidity to target company shareholders
Lower cost to bidder

Question 8

Cash offer disadvantages

Answer 8

Taxable chargeable gain
Target company shareholders are bought out
Financing problems

Question 9

Financing a cash offer

Answer 9

Existing cash reserves
Borrowing
Rights issue to existing shareholders

Question 10

Advantages of share for share exchange

Answer 10

Can be used to finance large acquisitions
No cash needed
Bootstrapping opportunity
Shareholder capital is increased

Question 11

Disadvantages of share for share exchange

Answer 11

Sharing gains
Price risk

Question 12

Bootstrapping

Answer 12

Valuation of company post-acquisition by applying the large company’s higher P/E ratio to the earnings of the combined company