Everything

Question 1

When would synergies be positive? and who does this power hurt?

Answer 1

if the merger results in:
- economies of scale
- economies of scope
Market power (horizontal merger) hurts customers, employees suppliers and competitors
vertical integration (vertical mergers)
diversification and financial gains (conglomorate mergers)
improving management (discipline) hurts managers

Question 2

When are synergies < 0

Answer 2

Empire building (agency problem)
hubris and mistake

Question 3

when are there no synergies but an acquisition could still make money? and who does this hurt

Answer 3

exploiting misvaluation
exploiting information advantage

both hurt the sellers

Question 4

what is a warrant?

Answer 4

a call option given by a firm

Question 5

Formula for the Wacc

Answer 5

= E/V * re + D/V * rd*(1-t)

Question 6

Market or book values?

Answer 6

Always have market vlaues in mind at least for equity

Question 7

Current or target ratios?

Answer 7

usually use target because we are discounting future cash flows, if the target ratio is not available it is normally assumed to be the average of the industry leverage ratio

if the firms business risk is expected to remain constant and the firm is a pure player current is fine

Question 8

how to get cost of debt?

Answer 8

if traded use yield to maturity if not find or estimate credit rating and take one of the following approaches:
risk free rate + beta of debt for corporate bonds for the rating * market risk premium
risk free rate + credit spread for the rating

Question 9

how to get the beta for multi-segment firms?

Answer 9

first find beta of comparable pure players for each divison then unlever the beta and re lever the beta

Question 10

how to find D/V

Answer 10

peer average / historical average

Question 11

how to find return debt?

Answer 11

RF + debt beta * market risk premium

Question 12

When is tax shield risk similar to asset risk?

Answer 12

when the firm maitains a target leverage ratio (aligning with the assumption of the WACC method)

Question 13

When to choose APV and when to choose Wacc?

Answer 13

APV if there is a debt schedule rather than a target leverage

Question 13

How to choose growth rate?

Answer 13

2 procent voor de meeste industrien die matured zijn als de industrie sneller gaat goreien dan inflatie 3 of 4 dan pak je inflatie en long term GDP growth (groei industrie) krimp industrie kan je naar 0

Question 14

Value APV = V unlevered firm + PV (Financial side effects) what are those side effects?

Answer 14

Interest rate tax shield,
issuance costs
cost of financial distress
agency costs and benefits of debt

Question 14

How should the Interest tax shield be discounted?

Answer 14

If the tax shield is a s certain as the debt repayment than the cost of debt is appropriate
if the tax shiled is more risky than the ability to apyoff the debt, then a higher discount rate is necessary
in particular, when the firm maintains a target leverage ratio, the discount rate is the cost of unlevered equity.(but in this case you could also use the WACC)

Question 15

Which valuationto use for constant leverage ratio?

Answer 15

The Wacc, for a level you use APV

Question 16

which valuation method is best for incorporating other market imperfections?

Answer 16

the APV

Question 17

What are types of completion risks? in the merger agreement

Answer 17

Closing conditions (anti trust, financing, etc.)
best effort/hell or high water
ticking fee
termination fee

Question 18

what are valuation risks

Answer 18

Consideration Cash vs stock
MAE/MAC clause

Question 19

What do you have to substract from the Enterprise value to get to the Equity value

Answer 19

debt
Minority interest
preferred equity

and add cash and cash equivalents

Question 20

How to quickly get the maximum price per share?

Answer 20

calculate NPV of the standalone firm per share
and calculate the NPV of the synergies per share

Question 21

What is a squeeze out?

Answer 21

the forced sale of stock owned by minority shareholders, usually in the context of an acquisition.
a squeeze out requires fair cash value bepaid to the minority shareholders from the acquiring corporation in exchange for their stock, treshold differ usually around 90%

Question 22

Freeze out

Answer 22

any tactic used by majority shareholders to deprive minority shareholders of governing control of a corporate
used to pressure minority shareholders to sell their stock

Question 23

what to do before taking the average beta?

Answer 23

filter out companies that you do not think match exactly

Question 24

how to calculate the debt beta?

Answer 24

credit spread / risk premium

Question 25

What to use to calculate growth (not for terminal)

Answer 25

three year average, not five

Question 26

what is the zero premium exchange ratio?

Answer 26

current stock priceof the one getting acquirerd/ stock price of the acquirer

Question 27

how to get the exchange ratio if you have the end NPV?

Answer 27

Start with the NPV and reverse engineer, you need to know howmany shares own to the company to get that NPV

so if Synergies = 4700 and you want to split them evenly you calculate:
2350 + marketcap own company / market cap newco + synergies. this way you get the percentage of shares and you can work your way back

Question 28

What takeaways does the announcement effect give you?

Answer 28

lean what the market thinks about:
Synergies
the terms of the deal
the quality of management

Question 29

What does a collar provide?

Answer 29

the target shareholders exposure to the bidder

Question 30

What is a spread collar and how can it be replicated?

Answer 30

Places a cap and floor on an equity offer
can be replicated with stock puts and calls or bond and hosrt and long calls to value the collar

Question 31

what is a local collar?

Answer 31

locks in an exact price wihtin a certain range of the bidders stock price
can be replicated with stock and shot and long calls to value the collar

Question 32

What are closing conditions in a merger agreement?

Answer 32

specific requirements that must be met before a merger can be finalized. they typically include regulatory approvals like antitrust clearance, financing arrangement and other prerequisites that both aprties agree must be resolved to complete the transaction

Question 33

What are the best effort and hell or high water clause?

Answer 33

Best effort - requires one or both of the merging parties to make their best effort to ensure that the merger goes througb. . this might involve securing necessary approvals or meeting other specified conditions.

Hell or high water is a stronger commitment it obligates the parties to complete the transaction no matter what obstacles arise often including a commitment to divest assets to meet antitrust requirements.

Question 34

What is a ticking fee?

Answer 34

a fee paid by one party to another if the merger takes longer than expected to close, typically after a certain deadline. it compensates the other party for the time value of money and other opportuniites lost due to the delay

Question 35

Termination fee

Answer 35

also konwn as a breakup fee, htis is paid by one party to the other if the merger agreement is terminated under specified circumstances. for example if one party decides to accespt a superior offer from a third party

Question 36

consideration (cash vs Stock)

Answer 36

This refers to what the shareholders of the target company receive in return for their shares. It can be in the form of cash, stock of the acquiring company, or a combination of both. The form of consideration affects the financial outcomes for shareholders and the tax implications of the deal.

Question 37

MAE/MAC clause

Answer 37

Material Adverse Effect/Material Adverse Change: This clause allows a party to back out of the transaction without a penalty if a significant event occurs that negatively affects the target company’s business, financial condition, or prospects significantly. The specifics of what constitutes a material adverse change must be clearly defined in the merger agreement.