FBE 560 - Midterm Question & Answers copy Flashcards
Questions
Answers
3 successful stratigies
1.(1) low cost leadership, (2) differentiation, and (3) focus
Economies of scale
§Economies of scale arise when one large firm can perform a function more efficiently than two smaller firms
Economies of Scope
§Economies of scope arise from increasing a companys product or service offerings by sharing costs related to these product or service offerings
ACQUISITION STRATEGIES THAT CAN CREATE VALUE BUT ARE LESS RELIABLE
1.Roll-up Strategy 2.Enter into a transformational merger 3.Buy cheap
Righty Way
First Strategy, then deal
Alternatives to M&A
joint ventures and strategic alliances
franchising
licensing
minority investments
Provide two pros and two cons of running a broad auction.
Pros:
Maximizes potential competitive dynamics and probability of achieving maximum sale price
Helps to ensure that all likely bidders are approached
Cons:
Difficult to preserve confidentiality
Unsuccessful outcome can create perception that the business is tainted
What are the seven most common and accepted techniques for valuing a company?
- Discounted cash flow of the target firm
- Trading multiples of comparable firms applied to the target
- Transaction multiples of comparable acquisitions applied to the target
- Premium to market
- Break-up
- Liquidation analysis
- Private equity/venture capital approach
What is a break-up fee? Who is it designated to protect and why?
Break-up fees act as a deal protection device to compensate the buyer in the event the seller pursues a superior bid consistent with the boards fiduciary duties to seek the highest value (relevant for public targets)
Which of the following represent alternative ways for businesses to reap some or all of the advantages of M&As
a. Joint ventures and strategic alliances
b. Strategic alliances, minority investments, and licensing
c. Minority investments, alliances, and licensing
d. Franchises, alliances, joint ventures, and licensing
The purpose of a fairness opinion from an investment bank is to
a. To evaluate for the targets board of directors the appropriateness of a takeover offer
Which of the following are not true about economies of scale?
d. Most common in businesses whose costs are primarily variable
Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders
a. 30%
Which of the following is the most common reason that M&As often fail to meet expectations?
a. Overpayment
- Each of the following is true about the acquisition search process except for
b. The number of selection criteria should be as lengthy as possible.
- All of the following statements are true about letters of intent except for
a. Are always legally binding
- The actual price paid by the buyer for the target firm is determined when
b. As a result of the negotiation process
- All of the following are true of buyer due diligence except for
b. Can be replaced by appropriate representations and warranties in the agreement of purchase and sale.
Refining the target valuation based on new information uncovered during due diligence is most likely to affect which of the following
Total consideration
Closing is included in which of the following activities?
Development of a business plan
b. Development of an acquisition plan
c. The search process
d. The negotiation process
e. None of the above - the answer
The development of search criteria is included in which of the following activities?
Development of the acquisition plan
- Which one of the following factors is not considered in calculating the firms cost of equity?
a. risk free rate of return
b. beta
c. interest rate on corporate debt - answer
d. expected return on equities
e. difference between expected return on stocks and the risk free rate of return
Which of the following factors is excluded from the calculation of free cash flow to the firm?
a. Principal repayments- answer
b. Operating income
c. Depreciation
d. The change in working capital
e. Gross plant and equipment spending
Which of the following is true of the enterprise DCF valuation model?
Discounts free cash flow to the firm by the weighted average cost of capital
- Investment bankers offer strategic and tactical advice and acquisition opportunities, screen potential buyers and sellers, make initial contact with a seller or buyer, and provide negotiation support for their clients.
TRUE
- A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core business. (True or False)
FALSE
- Most empirical studies support the conclusion that unrelated diversification benefits a firms shareholders. (True or False)
FALSE
- Because of hubris, managers of acquiring firms often believe their valuation of a target firm is superior to the markets valuation. Consequently, they often end up overpaying for the firm. (True or False)
TRUE
- Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring firm shareholders. (True or False)
FALSE
- The process of consolidation of fragmented industries is referred to as rollups. (True or False)
TRUE
- Consolidation occurs when two or more companies join to form a new company. (True or False)
TRUE
- The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions.
FALSE
- Financial considerations, such as an acquirer believing the target is undervalued, a booming stock market or falling interest rates, frequently drive surges in the number of acquisitions. (True or False)
TRUE
- In an auction, the document that details the process for submitting a 1st round bid is the Teaser. (True or False)
FALSE
- The takeover premium is the dollar or percentage amount the purchase price proposed for a target firm exceeds the acquiring firms share price. (True or False)
FALSE
- In the auction process, the data room typically is housed online, although in pre Internet days it was a physical location with paper files. (True or False)
TRUE
- Stakeholders in a firm refer to shareholders only. (True or False)
FALSE
- Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years. (True or False)
TRUE
- A no-shop agreement prohibits the target from seeking other bids. (True or False)
TRUE
- The form of payment does not affect whether a transaction is taxable to the sellers shareholders. (True or False)
FALSE
- Decisions made in one area of a deal structure rarely affect other areas of the overall deal structure.
FALSE
- Revenue enhancing synergies are more difficult to achieve than cost economies. (True or False)
TRUE
- An advantage of extensive representations and warranties is that they convert the parties claims about their businesses into contract. (True or False)
TRUE
- The merger agreement usually will provide that the falsehood of a representation or warranty is grounds for terminating the agreement. (True or False)
TRUE
- Some agreements create an escrow account in which part of the consideration is held back if a representation or warranty turns out to be false. (True or False)
TRUE
- Covenants are a series of promises about how the parties will behave during the interim between the time the agreement is signed and closing. (True or False)
TRUE
- A typical covenant is that the target will refrain from doing anything other than engaging in transactions that are in the ordinary course of business. (True or False)
TRUE
- 5% is a good estimate of the market risk premium that should be used in the CAPM estimate of the cost of equity. (True or False)
TRUE
