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M&A > FBE 560 - Midterm Question & Answers copy > Flashcards

FBE 560 - Midterm Question & Answers copy Flashcards

1
Q

Questions

A

Answers

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2
Q

3 successful stratigies

A

1.(1) low cost leadership, (2) differentiation, and (3) focus

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3
Q

Economies of scale

A

§Economies of scale arise when one large firm can perform a function more efficiently than two smaller firms

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4
Q

Economies of Scope

A

§Economies of scope arise from increasing a company’s product or service offerings by sharing costs related to these product or service offerings

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5
Q

ACQUISITION STRATEGIES THAT CAN CREATE VALUE BUT ARE LESS RELIABLE

A

1.Roll-up Strategy 2.Enter into a transformational merger 3.Buy cheap

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6
Q

Righty Way

A

First Strategy, then deal

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7
Q

Alternatives to M&A

A

joint ventures and strategic alliances
franchising
licensing
minority investments

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8
Q

Provide two pros and two cons of running a broad auction.

A

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”

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9
Q

What are the seven most common and accepted techniques for valuing a company?

A
  1. Discounted cash flow of the target firm
  2. Trading multiples of comparable firms applied to the target
  3. Transaction multiples of comparable acquisitions applied to the target
  4. Premium to market
  5. Break-up
  6. Liquidation analysis
  7. Private equity/venture capital approach
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10
Q

What is a break-up fee? Who is it designated to protect and why?

A

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 board’s fiduciary duties to seek the highest value (relevant for public targets)

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11
Q

Which of the following represent alternative ways for businesses to reap some or all of the advantages of M&As

A

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

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12
Q

The purpose of a “fairness” opinion from an investment bank is to

A

a. To evaluate for the target’s board of directors the appropriateness of a takeover offer

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13
Q

Which of the following are not true about economies of scale?

A

d. Most common in businesses whose costs are primarily variable

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14
Q

Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders

A

a. 30%

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15
Q

Which of the following is the most common reason that M&As often fail to meet expectations?

A

a. Overpayment

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16
Q
  1. Each of the following is true about the acquisition search process except for
A

b. The number of selection criteria should be as lengthy as possible.

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17
Q
  1. All of the following statements are true about letters of intent except for
A

a. Are always legally binding

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18
Q
  1. The actual price paid by the buyer for the target firm is determined when
A

b. As a result of the negotiation process

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19
Q
  1. All of the following are true of buyer due diligence except for
A

b. Can be replaced by appropriate representations and warranties in the agreement of purchase and sale.

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20
Q

Refining the target valuation based on new information uncovered during due diligence is most likely to affect which of the following

A

Total consideration

21
Q

Closing is included in which of the following activities?

A

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

22
Q

The development of search criteria is included in which of the following activities?

A

Development of the acquisition plan

23
Q
  1. Which one of the following factors is not considered in calculating the firm’s cost of equity?
A

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

24
Q

Which of the following factors is excluded from the calculation of free cash flow to the firm?

A

a. Principal repayments- answer
b. Operating income
c. Depreciation
d. The change in working capital
e. Gross plant and equipment spending

25
Q

Which of the following is true of the enterprise DCF valuation model?

A

Discounts free cash flow to the firm by the weighted average cost of capital

26
Q
  1. 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.
A

TRUE

27
Q
  1. A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core business. (True or False)
A

FALSE

28
Q
  1. Most empirical studies support the conclusion that unrelated diversification benefits a firm’s shareholders. (True or False)
A

FALSE

29
Q
  1. Because of hubris, managers of acquiring firms often believe their valuation of a target firm is superior to the market’s valuation. Consequently, they often end up overpaying for the firm. (True or False)
A

TRUE

30
Q
  1. Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring firm shareholders. (True or False)
A

FALSE

31
Q
  1. The process of consolidation of fragmented industries is referred to as rollups. (True or False)
A

TRUE

32
Q
  1. Consolidation occurs when two or more companies join to form a new company. (True or False)
A

TRUE

33
Q
  1. The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions.
A

FALSE

34
Q
  1. 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)
A

TRUE

35
Q
  1. In an auction, the document that details the process for submitting a 1st round bid is the Teaser. (True or False)
A

FALSE

36
Q
  1. The takeover premium is the dollar or percentage amount the purchase price proposed for a target firm exceeds the acquiring firm’s share price. (True or False)
A

FALSE

37
Q
  1. 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)
A

TRUE

38
Q
  1. Stakeholders in a firm refer to shareholders only. (True or False)
A

FALSE

39
Q
  1. Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years. (True or False)
A

TRUE

40
Q
  1. A no-shop agreement prohibits the target from seeking other bids. (True or False)
A

TRUE

41
Q
  1. The form of payment does not affect whether a transaction is taxable to the seller’s shareholders. (True or False)
A

FALSE

42
Q
  1. Decisions made in one area of a deal structure rarely affect other areas of the overall deal structure.
A

FALSE

43
Q
  1. Revenue enhancing synergies are more difficult to achieve than cost economies. (True or False)
A

TRUE

44
Q
  1. An advantage of extensive representations and warranties is that they convert the parties’ claims about their businesses into contract. (True or False)
A

TRUE

45
Q
  1. The merger agreement usually will provide that the falsehood of a representation or warranty is grounds for terminating the agreement. (True or False)
A

TRUE

46
Q
  1. 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)
A

TRUE

47
Q
  1. 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)
A

TRUE

48
Q
  1. 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)
A

TRUE

49
Q
  1. 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)
A

TRUE

M&A (1 decks)

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