Random Questions

Question 1

Representations and warranties

Answer 1

Guarantees that the seller gives about the business

Question 2

Indemnification clauses

Answer 2

Agreement to compensate other party for breach in representations and warranties or loss

Question 3

Remedies and limits

Answer 3

Indemnification clauses set out the remedies (typically cash or liquid assets) available to the buyer in the case of a breach and define the compensation period.

Question 4

When do you start to depreciate an asset?

Answer 4

IFRS: When the asset is available for use.
US GAAP: when asset is put to use (you started using it)
You don’t depreciate unfinished factory.

Question 5

When raising a fund what type of investors would you try to get first?

Answer 5

Start with anchor investors to jump-start fundraising - they would offer scale and brand but they usually require lower fees. To make the fund profitable get a long tail of smaller investors paying higher fees

Question 6

Operating leverage

Answer 6

Measure of company fixed costs as % of total costs. Contribution margin (sales minus variable expenses) / operating income = operating leverage. Or % change in operating income / % change in sales = op leverage. High operating leverage companies include companies with high R&D cost like pharmaceuticals or software developers.

Question 7

Should underfunded pensions be included in the purchase price in M&A?

Answer 7

No, they don’t cost buyer anything at the moment of acquisition

Question 8

Accretive/dilutive rules of thumb

Answer 8

Weighted average cost of acquisition > Seller’s yield (E/acquisition price) - accretive
100% stock: P/E Buyer > P/E Seller - Accretive

Question 9

How would you analyze a CIM?

Answer 9

1. Check financials and projections - if those fit investment mandate and how those historically changed (including margins) 2. Estimate FCF generation by EBITDA - Capex 3. Identify competitive differentiation (what’s the core value add proposition ) 4. Go through the CIM looking for other points (competition, industry dynamics, barriers to entry, growth potential and drivers (organic or inorganic), etc) and jott down questions for call with bankers

Question 10

Purchase price allocation what’s included

Answer 10

1. Asset write ups and write downs 2. Add intangible assets acquired in the acquisition such as trademarks, patents, customer relationships 3. DTA or DTL 4. Goodwill as a plug

Question 11

Could combined Op Income be lower if the seller has positive op income?

Answer 11

Yes, if there are few to no synergies and substantial asset write ups in the deal that add new D&A

Question 12

Is PIK interest tax deductible for shareholder loans?

Answer 12

Yes, PIK interest provides additional tax shield

Question 13

Cash sweep for debt

Answer 13

Requires you to use certain % of excess cash flow (in excess of mandatory debt pay down) to pay down principal

Question 14

Incurrence vs maintenance covenants

Answer 14

Incurrence covenants are associates with unsecured debt. Only takes effect when the company takes specified actions e.g takes additional debt or distributes dividends (eg all excess cash flows have to go to cover the debt) Might limit company’s ability to do acquisitions, increase capex or dividends etc. Maintenance covenants require a company to stick with a certain level of activity e.g. maintain certain EV/EBITDA level and it’s tested on a quarterly basis.