M&A Flashcards
Can you define M&A and explain the difference between a merger and an acquisition?
Mergers and acquisitions (M&A) is an umbrella term that refers to the combination of two businesses. To
buyers, M&A serves as an alternative to organic growth, whereas for sellers, M&A provides an opportunity to
cash out or share in the newly formed entity’s risk/reward.
The two terms are often used interchangeably but have some minor differences:
Merger: A merger suggests the combination of two similarly sized companies (i.e., “merger of equals”),
where the form of consideration is at least partially with stock, so shareholders from both entities remain.
In most cases, the two companies will operate under a combined name (e.g., ExxonMobil, Kraft Heinz,
Citigroup), whereas sometimes the new combined entity will be renamed.
Acquisition: An acquisition typically implies the target was of smaller-size than the purchaser. The
target’s name will usually slowly dissipate over time as the target becomes integrated with the acquirer. In
other cases (e.g., Salesforce’s acquisition of Slack, Google’s acquisition of Fitbit), the target will operate as a
subsidiary to take advantage of its established branding.
What are some potential reasons that a company might acquire another company?
- Value Creation from Revenue and Cost Synergies
- Ownership of Technology Assets (IP, Patents, Proprietary Technology)
- Talent Acquisitions (New Skilled Employees)
- Expansion in Geographic Reach or into New Product/Service Markets
- Diversification in Revenue Sources (Less Risk, Lower Cost of Capital)
- Reduce Time to Market with New Product Launches
- Increased Number of Channels to Sell Products/Services
- Market Leadership and Decreased Competition (if Horizontal Integration)
- Achieve Supply Chain Efficiencies (if Vertical Integration)
- Tax Benefits (if Target has NOLs)
What are the differences among vertical, horizontal, and conglomerate mergers?
Vertical Merger: A vertical merger involves two or more companies that serve different value chain
functions. From the increased control over the supply chain, the combined entity should theoretically
eliminate inefficiencies.
Horizontal Merger: A horizontal merger comprises a merger amongst companies directly competing in
the same (or very similar) market. Thus, following a horizontal merger, competition in the market
decreases (e.g., Sprint & T-Mobile merger). Notable benefits that stem from a horizontal merger are the
increased geographical coverage to sell products/services and an increase in pricing power.
Conglomerate: A conglomerate refers to the combination of multiple business entities operating in
unrelated industries for diversification purposes – an example would be Berkshire Hathaway.
In terms of vertical integration, what is the difference between forward and backward integration?
Backward Integration: When an acquirer moves upstream, it means they’re purchasing suppliers or
manufacturers of the product the company sells – this is known as backward integration.
Forward Integration: When an acquirer moves downstream, it means they’re purchasing a company that
moves them closer to the end customer such as a distributor or technical support – this is known as
forward integration.
Describe a recent M&A deal.
Acquirer/Seller, Prize (& premium), timing, key assets & rationale, competitors, other any notes, final opinion on if it was a good deal or not.
What are synergies and why are they important in a deal?
- Revenue Synergies: Cross-selling, upselling, product bundling, new distribution channels, geographic
expansion, access to new end markets, reduced competition leads to more pricing power - Cost Synergies: Eliminate overlapping workforces (reduce headcount), closure or consolidation of
redundant facilities, streamlined processes, purchasing power over suppliers, tax savings (NOLs)
Why should companies acquired by strategic acquirers expect to fetch higher premiums than those selling to private equity buyers?
Strategic buyers can often benefit from synergies, which enables them to offer a higher price. However, the
recent trend of financial buyers making add-on acquisitions has enabled them to fare better in auctions and
place higher bids since the platform company can benefit from synergies similar to a strategic buyer.
How do you perform premiums paid analysis in M&A?
Premiums paid analysis is a type of analysis prepared by investment bankers when advising a public target, in
which the average premium paid in comparable transactions serves as a reference point for an active deal. The
presumption being the average of the historical premiums paid in those comparables deals should be a proxy
(or sanity check) for the premium to be received in the current deal.
Tell me about the two main types of auction structures in M&A.
Broad Auction: In a broad auction, the sell-side bank will reach out to as many prospective buyers as
possible to maximize the number of interested buyers. Since competition directly correlates with the
valuation, the goal is to cast a wide net to intensify an auction’s competitiveness and increase the
likelihood of finding the highest possible offer (i.e., removing the risk of “leaving money on the table”)
2. Targeted Auction: In a targeted auction, the sell-side bank (usually under the client’s direction) will have
a shortlist of buyers contacted. These contacted buyers may already have a strong strategic fit with the
client or a pre-existing relationship with the seller.
What is a negotiated sale?
A negotiated sale involves only a handful of potential buyers and is most appropriate when there’s a specific
buyer the seller has in mind. A potential reason for this type of sale approach could be the seller intends to stay
on and strongly values the partnership and growth opportunities.
Under this approach, the speed of close and confidentiality are two distinct benefits. These deals are negotiated
“behind-closed-doors” and generally on friendlier terms based on the best interests of the client.
What are some of the most common reasons that M&A deals fail to create value?
Overpaying/Overestimating Synergies: Nearly all M&A deals involve a premium in the purchase price.
Even if the deal results in positive results, it might not be enough to justify the premium. Overpaying for an
asset goes hand-in-hand with overestimating synergies. Synergies are challenging to achieve in practice
and should be estimated conservatively, but doing so would result in missing out on acquisition
opportunities and being out-bid. An acquirer often has to accept that the expected synergies used to justify
the premium paid may not be met for the sake of completing the deal.
Inadequate Due Diligence: An acquirer will often fail to perform sufficient diligence before acquiring a
company. The decision may have been made while overly-focused on the target’s positives and the
potential post-integration benefits while neglecting the risks. A competitive auction with a short timeline
can lead to this type of poor judgment, in which the other buyers become a distraction.
Lack of Strategic Plan: For an M&A deal, when an acquirer becomes fixated on pursuing more resources
and achieving greater scale without an actual strategy, this can lead to synergies not being realized despite
an abundance of resources on-hand and potential growth opportunities.
Poor Execution/Integration: Post-closing, the acquirer’s management team may exhibit poor leadership
and an inability to integrate the new acquisition. This poor integration can lead to diminished employee
morale, cultural mismatches, and a noticeable drop in product/service quality. Of all the reasons M&A
deals can fail, cultural compatibility can be the trickiest risk to assess.
Studies have repeatedly shown that a high percentage of deals destroy shareholder value. If that’s the case, why do companies still engage in M&A?
Many studies have concluded that most M&A deals destroy shareholder value. Yet,
many companies continue to pursue growth through M&A.
One reason companies choose to engage in M&A is that many deals are done out of
necessity, meaning they were defensive measures taken to protect their market share
or to maintain competitive parity. Once a company owns a sizeable percentage of a
market, its focus shifts towards protecting its existing market share as opposed to
growth and stealing more market share (i.e., the company is now the target
incumbent to steal market share from).
Therefore, the company must always be on the look-out for developing trends or companies that could
someday become a threat, which is closely related to technological adaptation and staying innovative as
industries continuously develop. M&A is a method for companies to fend off outside threats and gain new
technological capabilities.
What is the purpose of a teaser?
A teaser is a one to two-page marketing document that’s usually put together by a sell-side banker on behalf of
their client. The teaser is the first marketing document presented to potential buyers and is used to gauge their
initial interest in formally taking part in the sale process. The intent is to generate enough interest for a buyer
to sign an NDA to receive the confidential information memorandum (“CIM”).
The content found in a teaser will be limited, and the name of the company is never revealed in the document
(instead “Project [Placeholder Name]”), and the teaser only provides the basic background/financial
information of the company to hide the identity of the client and protect confidentiality. The information
provided is a brief description of the business operations, investment highlights, and summary financials (e.g.,
revenue, operating income, EBITDA over the past two or three years) – just enough details for the buyer to
understand what the business does, assess recent performance and determine whether to proceed or pass.
What does a confidential information memorandum (CIM) consist of?
A confidential information memorandum (“CIM”) provides potential buyers with an in-depth overview of the
business being offered for sale. Once a buyer has executed an NDA, the sell-side investment bank will distribute
the CIM to the private equity firm or strategic buyer for review.
The format of the CIM can range from being a 20 to 50-page document with the specific contents being a
detailed company profile, market overview, industry trends, investment highlights, business segments, product
or service offerings, past summary financials, performance projections (called the “Management Case”),
management biographies, and the transaction details/timing.
What are the typical components found in a letter of intent (LOI)?
Once a buyer has proceeded with the next steps in making a potential acquisition, the next step is to provide
the seller with a formal letter of intent (“LOI”). An LOI is a letter stating the proposed initial terms, including
the purchase price, the form of consideration, and planned financing sources. Usually non-binding, an LOI
represents what a definitive agreement could look like, but there’s still room for negotiation and revisions to be
made in submitted LOIs (i.e., this is not a final document).
What are no-shop provisions?
In most M&A deal agreements, there’ll be a dedicated section called the “no solicitation” provision, or more
commonly known as the “no-shop” provision. No-shop provisions protect the buyer and give exclusivity during
negotiations. The sell-side representative is prevented from looking for higher bids and leveraging the buyer’s
current bid with other buyers. Violating the no-shop would trigger a significant breakup fee by the seller, and
an investigation would be made into the sell-side bank to see if they were contacting potential buyers when
legally restricted from doing so. On the other side, a seller can protect themselves using reverse termination
fees (“RTFs”), which allow the seller to collect a fee if the buyer were to walk away from the deal.
What is a material adverse change (MAC), and could you provide some examples?
In an M&A transaction, a material adverse change (“MAC”) is a highly negotiated, legal mechanism intended to
reduce the risk of buying and selling parties from the merger agreement date to the deal closure date. MACs are
legal clauses included in virtually all merger agreements that list out the conditions that allow the buyer the
right to walk away from a deal without facing legal repercussions or significant fines.
Common Examples of MACs
Significant Changes in Economic Conditions, Financial Markets, Credit Markets, or Capital Markets
Relevant Changes such as New Regulations, GAAP Standards, Transaction Litigation (e.g., Anti-Trust)
Natural Disasters or Geopolitical Changes (e.g., Outbreak of Hostilities, Risk of War, Acts of Terrorism)
Failure to Meet an Agreed-Upon Revenue, Earnings, or Other Financial Performance Target
Compare asset sales vs. 338(h)(10) election vs stock sales?
lol just check out 77
Contrast a friendly acquisition and hostile takeover attempt.
Friendly Acquisition: A friendly acquisition is when the takeover bid was made with the consent of both
companies’ management teams and boards of directors. The two had previously agreed to come to the
table and negotiated on good terms. The target’s board will notify their shareholders of the bid and
decision, and in most cases, the shareholders will follow the lead of the board.
Hostile Takeover: Conversely, a hostile takeover usually comes after a failed friendly negotiation. The
target’s management and board of directors have expressed their objection to the acquisition, but the
acquirer has continued pursuing a majority stake by going directly to the shareholders.
What are the two most common ways that hostile takeovers are pursued?
- Tender Offer: In a tender offer, the acquirer will publicly announce an offer to purchase shares from
existing shareholders for a premium. The intent is to acquire enough voting shares to have a controlling
stake in the target’s equity that enables them to push the deal through. - Proxy Fight: Alternatively, a proxy fight involves a hostile acquirer attempting to persuade existing
shareholders to vote out the existing management team to take over the company. Convincing existing
shareholders to turn against the existing management team and board of directors to initiate a proxy
fight is the hostile acquirer’s objective, as the acquirer needs these shareholders’ votes, which it does by
trying to convince the company is being mismanaged.
How does a tender offer differ from a merger?
When a public company has received a tender offer, an acquirer has offered a takeover bid to purchase some or
all of the company’s shares for a price above the current share price. Often associated with hostile takeovers,
tender offers are announced publicly (i.e., public solicitation) to gain control over a company without its
management team and board of directors’ approval. In contrast, a traditional merger would involve two
companies jointly negotiating on an agreement to combine.
What are some preventative measures used to block a hostile takeover attempt?
Poison Pill Defense: A poison pill defense is a tactic used by the company being targeted to prevent a
hostile takeover attempt. Poison pills give existing shareholders the option to purchase additional shares
at a discounted price, which dilutes the acquirer’s ownership and makes it more difficult for the acquirer
to own a majority stake (i.e., more shares necessary).
Golden Parachute Defense: A golden parachute is when key employees’ compensation packages are
adjusted to provide more benefits if they were to be laid off post-takeover. Since the takeover was hostile,
it’s improbable the acquirer would keep the existing management team and board, so they would have to
honor the benefits and severance agreements such as continued insurance coverage and pension benefits
that these executives included to fend off the acquirer.
Dead Hand Defense: A dead hand provision is similar to the traditional poison pill defense strategy and
has the same purpose of creating additional dilution to discourage the acquirer. Rather than giving
shareholders the option to purchase new discounted shares, additional shares are automatically issued to
every existing shareholder (excluding the acquirer).
Crown Jewel Defense: The “crown jewels” are defined as a company’s most valuable assets, which most
often include patents, intellectual property (IP), and trade secrets. This defense strategy is based on
creating an agreement where the company’s crown jewels could be sold if the company is taken over. In
effect, this would immediately make the target less valuable and less desirable to the acquirer.
What are some active defense measures used to block a hostile takeover attempt?
White Knight Defense: The white knight defense is when a friendly acquirer interrupts the takeover by
purchasing the target. The unfriendly bidder is referred to as the “black knight,” and this tactic is usually
done only when the target is on the verge of being acquired. The target’s management and board have
accepted it’ll give up its independence and lose majority ownership, but the result is still in their favor.
White Squire Defense: A white squire defense is similar to the white knight defense in that an outside
acquirer will step in to buy a stake in the company to prevent the takeover. The distinction being the target
company will not have to give up majority control over the business as the white squire investor only
purchases a partial stake, sized just large enough to fend off the hostile acquirer.
Acquisition Strategy Defense: Another option the target company can resort to is to make an acquisition.
While the acquisition may not have been necessary and a premium may have to be paid, the end result is
the balance sheet is less attractive post-deal from the lower cash balance (and/or use of debt).
Pac-Man Defense: The Pac-Man defense is when the target attempts to acquire the hostile acquirer. This
retaliation deters the hostile attempt, rather than being intended to acquire the company. The Pac-Mac
defense is employed as a last-resort as having to follow-through on the acquisition is not the end-goal.
Greenmail Defense: Greenmail is when the acquirer gains a substantial voting stake in the target
company and threatens a hostile takeover unless the target repurchases its shares at a significant
premium. Thus, in a greenmail defense, the target will be forced to resist the takeover by repurchasing its
shares at a premium. However, anti-greenmail regulations have made this nearly impossible nowadays.
What is a staggered board and how does it fend off hostile takeover attempts?
When the board of directors of a company is organized as a staggered board, each board member is
intentionally classified into distinct classes regarding their term length. A staggered board is used to defend
against hostile takeover attempts as this type of ordering protects the existing board of directors and the
management team’s interests. Since the board is staggered, gaining additional board seats becomes a more
complicated and lengthy process for hostile acquirers (and deters takeover attempts).
What is a divestiture and why would one be completed?
A divestiture is the sale of a business segment (and the assets belonging to the unit). Often, divestitures are
completed once the management has determined that a segment doesn’t add enough value to the core business
(e.g., redundant, a distraction from core operations, and non-complementary to other divisions).
The divestiture allows the parent company to cut costs and shift their focus to their core business while
allowing the divested business’s operations to become leaner and unlock hidden value potential. However,
sometimes, the rationale behind the divestiture can be related to restructuring (i.e., prevents falling into
insolvency) or regulatory pressure to prevent the existence of a monopoly.
From the viewpoint of investors, a divestiture can arguably be interpreted as a failed strategy in the sense that
this non-core business failed to deliver the expected benefits (e.g., economies of scale) and show that there’s a
need for cash for reinvestment or to better position themselves from a liquidity standpoint. Hence, many
divestitures are influenced by activist investors that push for the sale of a non-core business and then request a
capital distribution.
How does an equity carve-out differ from a divestiture?
An equity carve has many similarities to a divestiture and is often referred to as a “partial IPO.” The mechanism
of an equity carve-out is that the parent company will sell a portion of their equity interest in a subsidiary to
public investors. In nearly all cases, the parent company will still retain a substantial equity stake in the new
entity (usually > 50%).
Upon completing the equity carve-out, the subsidiary will be established as a new legal entity with its separate
management team and board of directors. The cash proceeds of the sale to 3rd investors are then distributed to
the parent, the subsidiary, or a combination.
What is a spin-off and why are they completed?
In a spin-off, a parent company will separate a particular division to create an independent entity with new
shares (ownership claims). The existing shareholders will receive those shares in proportion to their original
proportion of ownership in the company (i.e., pro-rata). The decision is up to the shareholders whether to hold
on to those shares or sell them in the open market. The rationale for spin-offs is usually in response to
shareholders’ pressure to divest a subsidiary that would be better off as a standalone company.
What is the difference between a subsidiary and an affiliate company?
Subsidiary: A subsidiary is when the parent company remains the majority shareholder (50%+).
Affiliate Company: An affiliate company is when the parent company has only taken a minority stake.
What is a reverse merger and what benefits does it provide?
A reverse merger is when a privately held company undergoes a merger with another company that’s already
publicly traded in the markets. The public company can either be an operating company or be an empty
corporate shell. The benefit of reverse mergers is that the public entity can now issue shares without incurring
the costs associated with IPOs.
What is an S-4 filing and when does it have to be filed?
An S-4 is a required form that must be filed with the SEC prior to a merger and acquisition activity taking place.
Contained in the S-4 will be material information related to the transaction, such as the deal rationale,
negotiated terms, risk factors, pro forma financials, and other related material.
What is the difference between the Schedule 13-D and the 13-G filing?
The Schedule 13-D and 13-G are forms intended to disclose publicly when an investor has taken a significant
stake in a company in terms of ownership and voting power. These filings notify other investors of the
influential investor’s stake (i.e., “beneficial owners”).
Schedule 13-D: A Schedule 13-D must be filed when an investor acquires a minimum of 5% of a public
company’s total common equity, and over 2% was acquired in the last twelve months. Within ten days of
the triggering acquisition, the Schedule 13-D must be filed. There must be a direct statement in the filing,
answering whether they intend to acquire more of the company’s shares to gain further influence.
Schedule 13-G: A Schedule 13-G can be filed in lieu of the 13-D as long as the investor doesn’t intend to
take control of the company. This alternative, short-form version is filed when an investor acquires 5%+ of
the total equity but less than 2% in the last twelve months. Since there appears to be no intent to further
increase their stake on the filing date, the reporting requirements are shorter, less detailed, and depend on
the investor’s classification (e.g., institutional investor, passive investor). If the investor’s intent is
amended, the 13-D must be filed within ten days of the change.
