M&A Part 2

Question 1

What is the difference between a merger and an acquisition?

Answer 1

A merger is when two companies of similar size come together as equals to form a new, single entity, often sharing control and combining resources under a unified identity. In contrast, an acquisition is when one company takes over another, with the acquiring company absorbing or controlling the target, which may lose its original identity.

Question 2

What is the general rule of thumb for determining the accretion/dilution impact for all-stock transactions?

Answer 2

When a buyer with a higher price-to-earnings (P/E) ratio acquires a company with a lower P/E ratio, the deal is considered accretive because it boosts the buyer’s earnings per share (EPS). However, if the buyer’s P/E is lower than the target’s, the deal is dilutive since it reduces the buyer’s EPS.

Question 3

Which deal structure is more likely to result in a higher valuation: an all-cash or all-stock deal?

Answer 3

Generally, an all-stock valuation tends to result in a lower valuation compared to an all-cash because the target’s shareholders are able to participate in the potential of the holding shares in the new entity

Question 4

Which type of synergies are most likely to be realized: revenue synergies or cost synergies?

Answer 4

Cost Synergies

Question 5

What is the difference between vertical integration and horizontal integration

Answer 5

Vertical: two companies with different functions in the value chain
Horizontal: the companies with the same market

Question 6

How is forward integration different from backward integration

Answer 6

Foward: the company purchased works near the final phases of the value chain
Backward: the company purchased works as a supplier or manufacturer of parts or components of a product

Question 7

What is purchase price allocation (PPA)?

Answer 7

A practice in which the acquirer allocates the purchase price into the assets and liabilities of the target company acquired

Question 8

Contrast asset sales vs. stock sales vs. 338(h)(10) election.

Answer 8

Asset Sales - the buyer owns the company because everything that makes the seller’s equity hold belongs now to the buyer
Stock Sales - The buyer owns shares
338(h)(10) Election - Acquisition of corporate subsidiaries. Legally treated as a stock sale by treated as an asset sale for tax purposes