Mergers and Acquisitions Quiz

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Questions and Answers

What occurs during a merger?

One firm acquires the assets of another.

A firm buys another firm's shares.

Two firms merge to form a new entity.

All but one firm ceases to exist legally. (correct)

What is a key characteristic of a consolidation?

Only one firm survives legally.

It involves acquiring minority stakes.

A new company is formed from two or more firms. (correct)

Both firms operate independently after the consolidation.

Which statement best describes a stock sale?

The acquisition of shares from the current owner. (correct)

Only assets are acquired, not shares.

It results in the formation of a new corporate entity.

The purchase of individual assets and liabilities.

What distinguishes an asset sale from a stock sale?

In an asset sale, individual assets and liabilities are purchased. Signup and view all the answers

Which of the following accurately defines acquisitions?

They can occur without acquiring total share control. Signup and view all the answers

What typically happens during a share buyback?

The company repurchases its own shares from shareholders. Signup and view all the answers

What is an outcome of a merger or consolidation?

One or more firms may dissolve entirely. Signup and view all the answers

Which of the following statements about mergers is incorrect?

Mergers always involve businesses of equal size. Signup and view all the answers

What is the primary focus of operational restructuring in M&A?

Changes in a firm’s asset structure Signup and view all the answers

Which type of restructuring involves changes in a firm’s capital structure?

Financial restructuring Signup and view all the answers

What is a merger commonly categorized as within corporate restructuring?

Operational restructuring Signup and view all the answers

Which of the following is NOT considered part of operational restructuring?

Share repurchase Signup and view all the answers

What does the term 'divestiture' refer to in the context of M&A?

Sale or disposal of a subsidiary Signup and view all the answers

Which term best describes a 'hostile takeover'?

Acquisition against the wishes of the target company Signup and view all the answers

In M&A, what is a strategic alliance primarily designed to achieve?

Cooperation between firms without merging Signup and view all the answers

What type of M&A activity involves a firm's management buying out the majority stake?

Leveraged buyout Signup and view all the answers

What distinguishes a friendly takeover from a hostile takeover?

The agreement of the target corporation's board of directors Signup and view all the answers

Which method is commonly used to execute a hostile takeover?

Tender offer to shareholders Signup and view all the answers

What is the purpose of a proxy fight in a hostile takeover?

To persuade shareholders to change management Signup and view all the answers

What is a key characteristic of a hostile takeover?

It is pursued without the consent of the target firm's board Signup and view all the answers

In what way can an acquiring corporation offer a premium to shareholders during a tender offer?

By setting the purchase price above the current market price Signup and view all the answers

What was a significant aspect of the P&G and Mr. Peltz battle?

It highlighted the complexities of a hostile takeover Signup and view all the answers

Which of the following is NOT typically involved in a hostile takeover process?

Direct negotiations with the target's board Signup and view all the answers

What might an acquiring corporation do after launching a proxy fight?

Install new management if successful Signup and view all the answers

What percentage of all transactions are stock sales historically?

30% Signup and view all the answers

Which of the following is a tax benefit for buyers in stock sales?

Allocation of higher values for quickly depreciating assets Signup and view all the answers

What is a potential risk associated with asset sales?

Inheriting contingent liabilities Signup and view all the answers

Why might larger transactions result in more stock sales?

They have greater complexity and liability considerations Signup and view all the answers

What aspect of the buyer's viewpoint can lead to improved cash flow?

Allocating higher values on assets that depreciate quickly Signup and view all the answers

What tax implication arises from double taxation in asset sales?

The corporation is taxed before owners are taxed Signup and view all the answers

What complicates the transfer of certain assets in an asset sale?

Risk of assignability and third-party consent issues Signup and view all the answers

What is one of the disadvantages for sellers during an asset sale?

Higher ordinary income tax rates for certain assets Signup and view all the answers

What is the primary goal of horizontal M&A?

To achieve economies of scale Signup and view all the answers

Which acquisition is an example of vertical M&A?

eBay acquiring PayPal Signup and view all the answers

What is a common goal of conglomerates in M&A?

To lower operational risk Signup and view all the answers

What benefit does the acquisition of Whole Foods provide Amazon?

A bigger physical retail footprint Signup and view all the answers

What type of M&A is characterized by firms operating in different industries?

Conglomerate M&A Signup and view all the answers

Which of the following acquisitions is NOT an example of horizontal M&A?

Amazon acquiring Whole Foods Signup and view all the answers

Which aspect is highlighted as a pressure point for Whole Foods leading to its acquisition?

Activist investor interest Signup and view all the answers

What advantage does Amazon gain in the home market through the Whole Foods acquisition?

An enriched product catalogue Signup and view all the answers

What is the purpose of adjusting cash flows when estimating the enterprise value of a business?

To eliminate the effects of intercompany sales and parent company services. Signup and view all the answers

How should the cost of capital be defined in the context of estimating enterprise value?

As a proxy based on the cost of capital of similar industry firms. Signup and view all the answers

What action should take place if the estimated enterprise value is greater than the after-tax sale value (VS)?

Retain the business. Signup and view all the answers

What distinguishes a spin-off from a split-up in corporate restructuring?

A spin-off distributes shares of a subsidiary, while a split-up dissolves the parent company. Signup and view all the answers

Which of the following is a primary reason for reviewing a corporate portfolio during restructuring?

To identify and divest assets that are difficult to sell. Signup and view all the answers

What is commonly true about the cash flows adjusted for intercompany sales?

They represent the business as fully independent. Signup and view all the answers

What is NOT a factor to consider when determining the discount rate for calculating the enterprise value?

Historical stock price movements of the business. Signup and view all the answers

In the context of divestment, what does it mean if the estimated enterprise value is less than the after-tax sale value (VS)?

Divesting the business may be the better option. Signup and view all the answers

Study Notes

Key Definitions in M&A

Slides with "Food for Thoughts" are not required for the exam.
Mergers and consolidations are breakdowns of two or more firms.
A merger joins two (or more) firms, while all but one ceases to exist legally.
A consolidation joins two (or more) firms to form a new company.
Acquisitions involve one firm buying another's assets or shares (mergers are not based on a controlled percentage).
Asset sale: purchase of individual assets and liabilities.
Stock sale: purchase of company shares.
Stock sales are more common in larger transactions but vary based on company size.

Corporate Restructuring

Corporate restructuring is a significant business concept that is frequently applied.
Operational restructuring, focusing on firm assets, includes business combinations, sales, spin-offs, and downsizing.
Financial restructuring relates to changes in capital structure, for example, share repurchases.

Acquisitions: Stock Sale vs Asset Sale

Tax benefits for buyers when allocating assets: Depreciation of quickly-depreciating items (like equipment) is higher, lowering the value attributed to longer-depreciating items (such as goodwill).
Potential buyer liability reduction: Acquisition may help the buyer avoid liabilities (product liability, disputes).
Asset transfer difficulties: Legal ownership issues and third-party consent issues can cause difficulty.
Higher taxes for sellers: Intangible assets (such as goodwill) and assets that depreciate slowly are treated differently in taxes.
Double taxation of sellers: Buyers may tax assets, and the proceeds from the sale may be taxed again when leaving the corporation.

Acquisitions: Friendly vs Hostile Takeovers

A friendly takeover is when the acquiring corp takes over the target under agreement.
A hostile takeover is when the acquiring corp takes over the target without agreement.
Tender offers are the practice of corporations seeking to purchase outstanding target firm shares at a price higher than the current market price
Proxy fights: the acquiring corp attempts to convince shareholders to vote for management changes.

Case Study: P&G and Mr. Peltz Battle

P&G's organic sales growth has lagged behind peers.
Activist investor Nelson Peltz sought a board seat at P&G.
Peltz's efforts to gain a board seat were initially unsuccessful but ultimately prevailed.
The winning margin for Peltz's appointment was approximately 0.0016%
Lessons from the battle:
- A reasonable offer is more effective.
- Focus on long-term value aligns shareholders.
- Simple messaging resonates with retail investors.

The Economic Perspective of M&A

Horizontal M&A: Firms in the same industry, aiming to achieve economies of scale (e.g., Disney & Fox)
Vertical M&A: Firms in the same industry, but different supply chain stages, to achieve economic scope. (e.g.eBay & PayPal)
Conglomerates: Firms in different industries, lowering risk through diversification. (e.g., Amazon and Whole Foods)

Amazon Acquisition of Whole Foods

Reasons for Amazon's acquisition: Larger retail footprint, more fulfillment centers, improved deliveries for Amazon.
Benefits for Whole Foods: Reduced pressure from activist investors.

Other Restructuring Activities

Divestiture: Sale of a firm's assets, often resulting in external cash infusion. (e.g. product line, subsidy, or division)
Spin-off and split-up: Separation of activities into different firms (e.g. Motorola’s split).
Reasons for divestitures: Higher asset value for buyers, cash-flow needs, restructuring corporate portfolios.

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Description

Test your knowledge on the principles and practices of mergers and acquisitions. This quiz covers key concepts such as mergers, consolidations, asset sales, and divestitures. Challenge yourself to identify essential characteristics and outcomes of various M&A activities.