MACS CASE STUDY

Question 1

Real estate due diligence

Answer 1

1. does seller own asset? if not who does
2. Is it freehold/ under a lease
3. do they have the right to sell
4. 3P rights affecting the property
   a. easement - right of way
   b. restrictive covenant - right to build
   c. subject to security
5. whether seller complied with regulation in the past - e.g. did they get planning permission before/ regulatory clearance -> if not need indemnity in case later sued
6. intended use of buyer

Question 2

IP due diligence

Answer 2

1. trademark
2. copyright
3. patent

trying to get exclusive right
ensure seller owns IP rights
ensure seller did not accidentally give up their rights e.g. within supplier agreement

● Buyer’s concern: that it acquires IP rights necessary
○ There are no challenges to the purchased/licensed IP
○ Free of third party rights
○ Territorial limits etc.

Question 3

copyright

Answer 3

protects artistic, musical, literary and dramatic work recorded in some form

does not need to be registered - arises upon creation and generally last throughout creator’s lifetime plus 70 years after death

Question 4

patents

Answer 4

protect inventions that have application that are new unique and non-obvious

offer holder exclusive rights for 20 years

Question 5

trademark

Answer 5

protect words, signs and symbols capable of graphic representation

perpetual protection if in use and registration renewed every 10 years

Question 6

employment due diligence

Answer 6

1. review key contracts with employees - retaining key employees
   - change of control clauses
   - look out for non-compete provisions: ensure CEO cannot quit immediately due to change of control clause and set up competing hotels
   IF they exist - convince them to waive rights by incentivising them -> bonus tied to targets - offer share option
2. look at any outstanding claims from employees
3. look at employee benefits
   ○ Might find out that the benefit programs are excessive or pensions are underfunded
4. gender ratio

Question 7

SWOT Analysis

Answer 7

Strengths
1. customer base
2. use of tech
3. increase in revenue
4. impressive empoyee
5. valuable IPs
6. new initiatives launches

Weaknesses
1. decline in profits
2. faulty products
3. tarnished rep
4. unsustainable biz model

Opportunities
1. expansion plans
2. use of tech
3. influx of customers

Threats
1. litigation costs
2. global recession
3. diminishing industry practice
4. evasive gov regulations and market saturation

Question 8

if company planing on entering new market what information would you need on 1) the company 2) the company’s product 3) customers 4) competitors/ market

Answer 8

1) company
- the current financial situ - entering new market = costly venture - ensure firm enjoying healthy profits and not taken up so much debt that unable to secure additional finance
- key strengths and weaknesses
- USP -> to understand whether client well poised to enter new market

2) product
- in what way is the product superior to others available
- what stage of product life cycle? - length of time product introduced and removed from market

3) customers
- key customer segment in market - the size of each segment
- if they are price-sensitive

4) competitors/ markets
- growth rates of alternative battery segments
- key players and their relative market shares
- legal environment in new jurisdiction

Question 9

LLP - limited liability partnership

Answer 9

allows partners to limit financial risk to the amount of money they invest in their firm

Question 10

PLC - public limited company

Answer 10

listed on stock exchange

Question 11

IPO - initial public offering

Answer 11

offering shares in your company to the general public for the first time - going public

NOTE: Company has to be large enough to attract investment and capable of complying with regulations

Question 12

2 types of markets on the London Stock exchange

Answer 12

1. Main market
   a. for larger more developed companies
   b. wider pool of investors
   c. reputational value from adhering to higher regulatory standards
2. AIM
   a. smaller growing companies
   b. lighter regulation

Question 13

Pros and cons of public listed company

Answer 13

ADV
1. increase capital through larger pool of investors
2. reputational prestige - adhering to strict regulation
3. banks lend on more favourable terms

DISADV
1. VOLATILITY OF MARKET
2. Prestige allows for more scrutiny
3. transparency involved from publishing financial info regularly

Question 14

stages of a contract

Answer 14

1. offer
2. acceptance
   - does not occur if specifies qualifications/ conditions or counter-offers or time limit expires
3. consideration
4. intention

Question 15

warranties

Answer 15

statement of existing fact

Question 16

undertakings

Answer 16

promise to take certain action in the future

Question 17

condition precedent

Answer 17

a condition that needs to be fulfilled before contract comes into force e.g. regulatory clearance

Question 18

security

Answer 18

form of protection afforded to lenders by the buyers entitling the lender to take control of some or all of the borrower’s assets

if the borrower fails to repay the agreed loan - lender can sell the assets to repay themselves = enforcing its security

Question 19

two types of security

Answer 19

1. fixed charge: if agreed loan not repaid - fixed charge gives lender legal right to claim and sell secured assets in order to recover funds
   - ADV - higher priority to lender of being repaid
   DISADV - borrower cannot sell assets subject to fixed charge without lender’s consent (e.g. does not involve stocks - since biz need to be able to freely sell to generate profit)
2. floating charge
   if agreed loan not repaid - floating charge gives lender legal right to claim and sell secured assets to recover funds
   BUT borrower can freely sell until floating charge crystallises
   - e.g. borrower becomes insolvent/ failing to make interest payment to lender on time

ADV to buyer - more suitable for assets that would be impractical for buyer to relinquish control on
DISADV to lender - less protection and lower priority since floating charge holders will not be repaid in event of insolvency until other parties fully repaid

Question 20

what does a biz do when it makes profit

Answer 20

1. reinvest money back into biz
2. issue dividend payments to shareholders

Question 21

minimising cost strategies x6

Answer 21

1. entering into long term contracts
   - more likely to get more favourable terms e.g. from supplier
2. outsourcing
   - hiring 3p specialists
   - e.g. in jurisdiction where costs lower
   - e.g.
3. offshoring
   - shifting biz process abroad to countries where costs are lower
4. maximising EoS
5. utilising derivatives
   e.g. futures agreement / options agreement
6. integrating into the supply chain
   - e.g. acquiring multiple stages of the supply chain like buying your supplier avoids paying additional profit margin -> decrease cost

Question 22

organic internal growth strategies to expand a business x6

Answer 22

1. franchising
2. licensing
3. effective marketing and branding
4. diversifying biz range of products and services
5. expanding biz presence in existing markets e.g. opening new stores/ e-commerce
6. entering new markets e.g. exporting

Question 23

adv and disadv of exporting

Answer 23

allow biz to expand operations w/o committing to direct investment

distribution costs
taxes hindering cost control
currency value fluctuations
lacking biz knowledge and access to resources to distribute

Question 24

franchising definition and pros and cons

Answer 24

when biz sell right to others to set up identical biz under the same name

pro: rapid expansion boosting brand exposure and customer base without funding

con: difficult to control franchisee from acting in a manner that damages the brand

Question 25

licensing definition and pros and cons

Answer 25

business permitting another to use an element of its biz in exchange for a royalty

adv”: if biz lacks capabilities to commercialise a product but develoepd tech - licensing provide source of revenue

disadv: if tech embedded into product licensor may generate little brand recognition/ customer loyalty
risk that licensee expropriate tech and emerge as competitor

Question 26

joint venture definittion and pros and cons

Answer 26

2 or more biz agree to pool resources to work on specific task

pros: synergies - sharing of resources to reduce cost
leveraging greater purchasing power to nego favourable prices from supplier
sharing knowledge/ expertise to improve product or service offerings

Resources you would seek to gain from joint venture
1. Assets e.g. machinery
2. Distribution network and supply chain
3. IP rights

cons:
1. liability for other biz mistake - share both profits and liabiltiies
2. incompatibility of goals

Question 27

7 advantages of external growth

Answer 27

1. rapid expansion
2. access to expertise and complementary resources
   - boost capabilities from physical/ financial/ technical resources
   - complementary skills/ networks
   - circumvent barriers to entry
3. EOS -> reduced costs
   - nego favourable price with suppliers
   - making duplicate employees redundant/ duplicate real estate
   - better utilising existing resources to full capacity
   - if integrating into supply chain
4. geographical expansion (if acquiring in another jurisdiction)
   - in-depth understanding of local market
   - supply chain relationships
5. diversification of product/ service range
   - attract new customers and generate additional sales from existing customers
6. reputation
7. reduce competition in market
   - increase biz market share and purchasing power

Question 28

3 disadv of external growth

Answer 28

1. costly to acquire biz - esp if paying premium
2. time consuming - dd process
3. complex - difficult to operationally and culturally integrate 2 sep biz, and challenging to maintain internal communication

Question 29

private equity firms 3 steps

Answer 29

invest in more mature biz with high growth potential (not listed on stock exchange, or public companies with intention of taking them private)
- pool money from external investors i.e. fund and use the fund and money borrowed from lenders to finance their acquisition

work with biz to increase value of company over 3-7 yrs

exit - sell biz for profit

Question 30

strategies private equity firms use to increase the value of target biz x6

Answer 30

improve operational efficiencies

cutting cost

improve synergies and eos

driving greater revenue

divesting less profitable elements of biz

improving capital and cash flow

bolt on acquisitions

Question 31

venture capital firms

Answer 31

invest in earlier stage biz and work with them to increase value of biz and then sell for profit

• invest in greater range of biz
• invest in small equity stakes

Question 32

change of control clause

Answer 32

enable parties that are contracted with biz to terminate contract without incurring liability for breach of contract if biz acquired by 3P

Question 33

non-solicitation clause

Answer 33

buyer may require seller to sign non-solicitation clause - S not to approach and e.g. attempt to poach certain key employees for certain period of time

Question 34

Adding an Earn-out provision in the Sale and Purchase Agreement

Answer 34

Earn-out: mechanism that can entitle a seller to further consideration following a sale, depending on target’s future performance during the “earn-out” period

I.e. final amxount payable can be contingent on target’s performance post-acquisition

Note: sellers unlikely to accept earn-outs unless can continue to exert some level of influence over target’s performance during earn-out period

Note: if S also founder of biz - may simply refuse to stay on, esp if looking for clean break post-acquisition and want all money up front

Question 35

Share sale: adv and disadv

Answer 35

purchaser buying all or a controlling stake in another’s company

Purchaser acquires all/ portion of target company itself (but indirectly own target’s assets/ liabilities by virtue of ownership of target’s shares)

ADV:
1. easier to gain full control over company, including human capital, tangible (e.g. machinery) and intangible (e.g. biz rs, IP) assets
2. buying biz rather than specific assets more likely to result in biz continuity post-acquisition
All resources needed to operate target + assets in place already

DISADV:
1. difficult for buyers to persuade sufficient proportion of shareholders to agree to sale
2. purchasers take on target’s existing liabilities and obligations

Question 36

Asset sale - adv and disadv

Answer 36

purchaser buying specific assets owned by another company

ADV:
1. cherry picking assets it wants or needs
2. less subjective as no need to consider intangible assets e.g. customer loyalty
3. Due diligence: quicker and easier in relation to specific assets than entire company
4. lower risk of purchaser taking on unforeseen liabilities, only acquire liabilities linked to assets it is acquiring

DISADV:
1. no benefit of employees/ internal knowledge/ processes -> maybe not efficient and effective utilisation of assets
2. Seller may refuse because want clean break

Question 37

Financing a deal: Raising capital for biz - 3 STAGES

Answer 37

Early stages biz may -> start-up biz
1. Using savings/ cash reserves
2. Borrow from or sell equity to friends and family
3. Rely on small loans (e.g. overdrafts and credit cards)
Note: cash flow more important than profit at the start

As biz grows…scale-up biz
1. Angel investors - high net worth indv - tend to offer mentorship and advice
2. If need more money than angel investors: venture capital firms
3. If already generating revenue, and confident can repay loan -> larger biz loans

Larger mature biz …
1. Syndicated loan: pool of lender sharing risk and reward
2. Capital markets to raise capital - by way of issuing bonds or selling shares to the public

Question 38

Cash as method of financing adv and disadv

Biz may keep cash reserve to ensure it will not run into cash flow issues if experience sudden drop in revenue

Answer 38

ADV of Cash
1. Control: retain full ownership and control of biz and assets
2. Cost savings: no interest payments/ dividends - no obligation to repay
3. Quicker and cheaper to arrange: cash accessible immediately w/o administration fees

DISADV of Cash
1. May lack sufficient cash reserves: most biz lack cash needed to finance investment and maintain cash flow

Question 39

Loans as method of financing adv and disadv

Answer 39

A loan is a form of debt but, more specifically, is an agreement in which one party lends money to another.

ADV:
1. Not giving away ownership

2. Can be Tax-efficient - If company paying interest on loan - the interest payment can be offset against the profits -> reduce its total profit figure -> reduces corporate tax liability
3. Cost savings: borrower may only make interest payments reflecting actual capital in use (i.e. money drawn out of bank account)
   Interest payments are tax-deductible - lower biz profit figure and corporate tax liability
4. Easy to arrange: small loans quicker and cheaper than bond/ share issues
   But large syndicated loans - may be costly and complicated
5. Guaranteed access to funds: once loan approved -> usually guaranteed full amount (lump sum/ tranches)
   If tranches - banks ensuring capital not spent recklessly/ other purposes
   May need to reach certain targets/ provide evidence on how used funds to access future tranches

DISADV:
1. Obligation to repay

2. Risk of insolvency
3. Security from B to L: lender could seize and sell secured assets to retrieve money
   May restrict B’s ability to use relevant assets
   B that lacks valuable asset may struggle to secure loans as inability to offer sufficient collateral
4. Costs: interest payments may be substantial
   Dependent on B’s credit rating and state of economy
5. Repayable on demand: especially overdrafts - repayable on demand -> causing cash-flow issues if earlier than expected

Question 40

Bond issue:

Answer 40

1. Bond issued
   Company issues bonds to investors through debt capital markets in exchange for cash
2. Regular coupon payments
   Why do investors buy bonds? On top of the lump sum payment at end -> entitles investors to coupon payments (interest) over predetermined period
3. Bond matures -> lump sum payment of initial investment
   At end: bonds mature and each investor entitled to receive back the full principal amount (their initial investment) - like IOU

Note: bonds are tradable -> investors can sell bond to other investors to recoup some/ all principal amount before bonds mature
Unlike most loans, investors not locked into investment for LT

Question 41

ADV AND DISADV OF BONDS

Answer 41

ADV:
1. Control: bond issuers do not need to offer ownership stake / security over assets
- Bondholders rarely try to influence

2. Access to large sums of money: selling bonds through capital markets = access to wide pool of investors -> easier to raise large amounts of capital

DISADV
1. May lack sufficient demand: if company has low credit rating/ low profile - may struggle to sell enough bonds to raise all capital needed
- To stimulate demand - companies sometimes offer bonds with higher returns - high yield/ junk bonds

2. Costly to arrange: unsuitable for small capital raises
3. Obligation to make coupon payments and repay original investment

Question 42

adv and disadv of equity

Answer 42

ADV:
Potential to raise significant amounts of money
Generally no obligation to pay dividends
Unlike bonds which has fixed obligation
No need to grant securty
Complementary skills: some investors e.g. biz angels/ priv equity firms - may contribute skills/ experience/ expertise/ network
Profile: listing on stock exchange enhance company’s profile - increase access to market for additional capital + nego favourable terms with suppliers/ creditors

DISADV:
Giving away ownership and control
Costs: more shareholders/ size of shareholding = more profits to be shared (and risk)
Splitting dividend pot between more people (dividend payments are discretionary subject to limited exceptions)
Splitting proceeds of future sale of biz
Vulnerable to hostile takeover - can do little to prevent if shareholders sell shares to prospective acquirer
Administration: share sales time consuming, complicated, costly
Listing on stock exchange = subject to continuous onerous disclosure req
Demand-led: insufficient demand = failure to raise all capital

Question 43

SPVs

Answer 43

a legal entity that allows multiple investors to pool their capital and make an investment in a single company

used for e.g. acquisition/ financing of project

isolates financial risk - legal status separate from parent company makes its obligations secure even if parent company goes bankrupt

Question 44

NOTE: when presented with a target company’s liabilities (e.g. unpaid debts), it is important to mention that such liabilities can be curbed by the inclusion of a condition precedent in the initial acquisition agreement.

Answer 44

1. A condition precedent may lack contractual force if it is vague, so if mentioned it is important to ensure that the wording is sufficiently certain.
2. specify a deadline for when the condition precedent is to be satisfied
3. consider what should happen if the deadline is not reached;
4. whether the condition precedent has to be satisfied absolutely or will be qualified by an obligation on the party in question to use best or reasonable endeavours to satisfy it;
5. Consider whether the party who is to satisfy the condition precedent needs to produce to the other party evidence of the steps it is taking to satisfy it;
6. If the condition precedent is not satisfied by the specified time consider whether the party who has the benefit of the condition should be able to extend the period for it to be satisfied or waive the requirement for it to be satisfied; and
7. If the condition precedent is not satisfied, should the agreement terminate and if so should any parts of the agreement survive the termination?
8. consider whether any of the parties are to bear the costs of the others in the event of termination.

Question 45

INDEMNITY IMPORTANCE

Answer 45

an indemnity clause can provide added security for the buying company against unforeseen/expected events.

Buying another company means acquiring the target’s liabilities
- An indemnity can be included in the initial acquisition agreement that stipulates that the target company’s shareholders can reimburse the buyer for any costs arising from an outstanding litigation e.g. unfair dismissal claim brought by the dissatisfied employee.

• Inclusion of an indemnity clause in an acquisition agreement can help mitigate the risks that the buying company may be exposed to.
• However, applicants should consider whether or not the issue in question is worthy of an indemnity or if it is so severe that even with an indemnity the proposed M&A deal remains unattractive.

Question 46

Warranty in M&As

Answer 46

Assurances or promises in a contract that outline the current state of the target company.

buying company could request a full list of warrants from the target company.

Typically, these warrants detail the target company’s liabilities;

Thus, a breach of warranty may entitle the buying company to a remedy for breach of contract.

In finance documents, such a breach also constitutes an event of default – a lender/creditor’s right to demand immediate and full repayment of a debt or obligation.