MA 1 - MA Basics
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What does company B acquire when it purchases shares of target company C?

  • 100% ownership including all assets and liabilities of target company C (correct)
  • A minority stake along with some assets of the target company
  • Exclusively the liabilities of target company C
  • Only the business operations of target company C

What is a common reason why a buyer may choose to acquire specific assets instead of shares in a company?

  • To have full control over the target company's corporate structure
  • To gain more shares in the target company
  • To avoid taking on unwanted liabilities (correct)
  • To ensure they acquire the company's debts

Which of the following questions is NOT relevant when determining the acquisition structure?

  • What is the target's corporate structure?
  • What are the consents and approvals required?
  • What is the target company’s market share? (correct)
  • Does the buyer want all, none, or some liabilities?

Why is it important to determine the acquisition structure at an early stage of the transaction?

<p>It impacts the mechanical and documentation process of the transaction. (A)</p> Signup and view all the answers

In an acquisition where a buyer acquires a business rather than shares, what remains unchanged?

<p>The shareholder structure of the target company (D)</p> Signup and view all the answers

What is one potential consequence of structuring an acquisition as a sale of shares?

<p>The buyer automatically assumes all liabilities of the target company. (A)</p> Signup and view all the answers

Which factor is least likely to influence the decision between a sale of assets versus a sale of shares?

<p>The social reputation of the target company's executives (D)</p> Signup and view all the answers

What is a key reason a business acquisition might experience disruption compared to a share acquisition?

<p>In a business acquisition, multiple assets are involved. (A)</p> Signup and view all the answers

Why might a client prefer a share acquisition over a business acquisition?

<p>Share acquisitions typically execute and complete faster. (A)</p> Signup and view all the answers

In a share sale method, who receives the proceeds from the acquisition?

<p>The selling shareholder receives the consideration directly. (D)</p> Signup and view all the answers

What step must a target company take if it wishes to distribute acquisition proceeds to its shareholders?

<p>Undertake a capital reduction process. (B)</p> Signup and view all the answers

What is a critical outcome for minority shareholders in a business acquisition scenario?

<p>They can be compelled to sell if majority shareholders agree. (B)</p> Signup and view all the answers

Which is true if Target Company C is partially owned and wishes to sell?

<p>Minority shareholders can block the sale unless previously agreed rights exist. (C)</p> Signup and view all the answers

Which of the following factors is most likely to extend the timeline of a business acquisition?

<p>Complications involving multiple asset transfers. (A)</p> Signup and view all the answers

What type of acquisition typically leads to quicker execution and completion?

<p>Share acquisitions. (B)</p> Signup and view all the answers

What primary consideration may affect the decision-making process regarding the distribution of sale proceeds?

<p>The potential for regulatory compliance in capital maintenance. (B)</p> Signup and view all the answers

Which method is NOT typically associated with a share acquisition scenario?

<p>Asset liquidation prior to acquisition completion. (B)</p> Signup and view all the answers

What is a significant advantage for a buyer in a business sale concerning the assets?

<p>The buyer can cherry pick specific lines of business they are interested in. (D)</p> Signup and view all the answers

What might deter a buyer from purchasing the shares of a target company?

<p>Potential liabilities associated with the other line of business. (B)</p> Signup and view all the answers

Which of the following statements is true regarding the transfer of assets in a business acquisition?

<p>Not all assets, liabilities, and contracts need to be transferred in an acquisition. (B)</p> Signup and view all the answers

What is a main challenge that could arise from the transfer of assets, liabilities, and contracts?

<p>There is a risk of counterparties renegotiating contracts. (B)</p> Signup and view all the answers

In the context of a business sale, what could a buyer avoid by structuring the acquisition as a purchase of a specified asset?

<p>Taking on all tax liabilities connected to the target company. (A)</p> Signup and view all the answers

What does the term 'execution risk' refer to in the context of transferring contracts during a business acquisition?

<p>The risk that counterparties may refuse to transfer agreements. (D)</p> Signup and view all the answers

Why is a business transfer by selling only a specific line of business considered more suitable for a buyer interested in one segment?

<p>It restricts the buyer's exposure to non-viable parts of the business. (B)</p> Signup and view all the answers

What could potentially complicate the acquisition process regarding assets in a business sale?

<p>The need for extensive documentation for each asset. (C)</p> Signup and view all the answers

Which of the following best describes a buyer's intent when acquiring a specific business segment?

<p>To focus solely on the profitable aspects of the business. (D)</p> Signup and view all the answers

What is a common pricing mechanism in a share deal?

<p>Lock-to-box mechanism (C)</p> Signup and view all the answers

Earn-out payments are typically structured to be paid based on what?

<p>Achievement of predetermined financial milestones (B)</p> Signup and view all the answers

When determining the amount of consideration to be paid, buyers often consider which aspect of the target business?

<p>Potential future upside (B)</p> Signup and view all the answers

What typically triggers post-purchase price adjustments?

<p>Shortfall or excess in working capital (B)</p> Signup and view all the answers

Which valuation method is commonly used to determine consideration in a private M&A transaction?

<p>Multiple of net asset value (C)</p> Signup and view all the answers

In the context of business acquisitions, what is a significant risk tied to projections of future business performance?

<p>Future performance is inherently uncertain (B)</p> Signup and view all the answers

What is typically NOT included in determining the fixed amount of consideration paid in a deal?

<p>Post-completion adjustments for cash flow (C)</p> Signup and view all the answers

Why do sellers price in the potential upside of their business in a transaction?

<p>To enhance buyer interest by showing potential growth (B)</p> Signup and view all the answers

What is the simplest pricing mechanism discussed in business transactions?

<p>Single fixed consideration amount (B)</p> Signup and view all the answers

What impacts the buyer's willingness to pay for projected future earnings?

<p>Agreement on specific financial milestones (D)</p> Signup and view all the answers

What is the primary reason termination rights for breach are usually only granted?

<p>Breach must be very material or lead to a substantive adverse outcome. (C)</p> Signup and view all the answers

Which aspect is least likely to influence the negotiations of warranties in a sale and purchase agreement (SPA)?

<p>Statutory protections benefiting the buyer. (B)</p> Signup and view all the answers

What is the dual purpose of including warranties in a SPA?

<p>To engineer discovery and apportion risk. (A)</p> Signup and view all the answers

As a buyer's lawyer, what should you focus on regarding warranties?

<p>Creating a detailed and tailored first draft of warranties. (C)</p> Signup and view all the answers

Why might a buyer expect to pay a lower price regarding warranties?

<p>If the purchaser assumes risks for pre-closing issues. (C)</p> Signup and view all the answers

Flashcards

Share Acquisition

Company B buys all the shares of company C, becoming the sole owner.

Asset Acquisition

Company B buys specific assets or business units from company C, without changing ownership of company C.

Target Company Liabilities

The debts and potential future obligations of the target company.

Acquisition Method

Choice between acquiring shares or assets of a target company.

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Client Objectives

The goals of the acquiring company in the acquisition process.

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Target Company Structure

The legal structure and organization of the target company.

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Consents and Approvals

Needed permissions or approvals for completion of acquisition transaction.

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Business Sale Cherry Picking

A buyer in a business sale can choose which parts of the target company to acquire, avoiding unwanted liabilities or entire unrelated businesses

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Business Transfer

Transferring a specific part of the target company's business (like a ship repair business), instead of the whole company.

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Post-Acquisition Ownership

After the acquisition, ownership of the target company's remaining business segments are typically maintained by original owner (and sometimes with buyer owning acquired segments).

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Avoiding Liabilities

Method of acquiring unwanted liability or contracts from the transaction.

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Complex Asset Transfer

A large number of assets, liabilities, and contracts need to be moved during a complete business acquisition, potentially causing problems and contract issues with counterparties.

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Execution Risk in Acquisition

The risk that transferring contracts or assets may lead to counterparties renegotiating or rejecting the transfer.

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Target Company Assets

Includes owned real estate, short-term agreements, stock, receivables, intellectual property, customer & supplier contracts, employees, and shares in other entities along with plant and machinery.

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Contract Renegotiation Risk

The inherent risk of counterparties to acquired contracts renegotiating terms or potentially rejecting a transfer, which affects the sale itself.

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Cherry Picking in a Purchase

Buyers can choose which parts of a company (or business segment) are most valuable while avoiding unwanted obligations or parts of a company.

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Termination Rights

Conditions in an agreement allowing a party to end the deal if the other party fails to meet specific obligations.

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Material Breach

A significant violation of an agreement that justifies terminating the deal.

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Caveat Emptor

Latin phrase meaning 'buyer beware'; the buyer is responsible for checking the quality of what they're buying.

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Warranties

Statements made by the seller promising the truthfulness of information about the company being sold.

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Purpose of Warranties

Warranties are used for due diligence, risk allocation between buyer and seller, and can affect the purchase price.

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Share Acquisition Timeline

Share acquisitions are generally faster to complete compared to asset acquisitions due to fewer transfer processes.

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Share Acquisition Proceeds

In a share acquisition, the purchase price goes directly to the shareholders of the target company.

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Asset Acquisition Proceeds

In an asset acquisition, the purchase price goes to the target company itself.

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Upstreaming Proceeds

When an asset acquisition occurs, the target company may need to distribute the proceeds to its shareholders through dividends or capital reduction.

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Minority Shareholder Rights

Minority shareholders in a target company have the right to refuse a share acquisition unless there's a prior agreement.

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Board of Directors' Power

In an asset acquisition, the board of directors of the target company can decide whether to proceed with the sale.

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Disposal of Assets

Selling a significant portion of a company's assets (e.g., majority) might require special approval or consent.

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Share Acquisition Disruption

Share acquisitions generally cause less business disruption than asset acquisitions as the underlying business operations remain intact.

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Acquisition Timeline Considerations

When speed is a priority, a share acquisition is often more suitable than an asset acquisition, which involves more steps.

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Target Company's Intention

The target company's plans for the purchase price (e.g., reinvestment, shareholder distribution) influences the choice of acquisition method.

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Fixed Consideration

A single, predetermined amount paid by the buyer to the seller for the target company's shares or business.

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Lock-to-Box Mechanism

A pricing method where the final purchase price is determined based on a specified set of financial metrics of the target company at the closing date.

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Earn-Out Payments

Payments made to the seller after the acquisition completion, contingent on the target company meeting agreed upon financial milestones.

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Multiple of Net Asset Value (NAV)

A valuation method used to determine the purchase price based on the target company's net assets multiplied by a specific factor.

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Multiple of Enterprise Value

A valuation method used to determine the purchase price based on the target company's enterprise value multiplied by a specific factor.

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Post-Purchase Price Adjustments

Changes made to the purchase price after completion, based on differences between pre-agreed financial targets and actual values at that time.

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Working Capital Adjustment

A post-completion adjustment to reflect the difference between the target company's actual working capital at closing and the pre-agreed amount.

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Cash Adjustment

A post-completion adjustment to the purchase price based on the difference between the target company's actual cash at completion and the pre-agreed amount.

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Debt Adjustment

A post-completion adjustment to the purchase price based on the difference between the target company's actual debt at completion and the pre-agreed amount.

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Why are earn-out payments used?

Earn-out payments are used to align the interests of the buyer and seller, motivating the seller to achieve agreed upon financial targets.

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Study Notes

Acquisitions Methods

  • Two common methods exist: purchasing target company shares or assets directly.
  • Acquisition method depends on client objectives and factors like assets, liabilities, and corporate structure.

M&A Process

  • Confidentiality agreements and due diligence important for protecting information and assessing target company's legal, financial, and operational state.
  • Warranties and indemnities used to allocate risk between buyer and seller. Liability limitations negotiated.
  • Completion involves share or asset transfer, ancillary agreements, and updated member registers.

Mergers and Acquisitions (M&A) for Private Companies

  • Two common acquisition methods: shares acquisition and business acquisition.
  • Share Acquisition: Buyer acquires shares from shareholders; target company structure remains the same.
  • Business Acquisition: Buyer acquires assets or business directly from target company. No change to the ownership structure of the target company. Potential benefits: avoids target liabilities and allows for selective acquisition; increased legal and operational complications.

Pre-acquisition Stages

  • Identifying a target company.
  • Initial commercial terms negotiation (why, price, consideration).
  • Confidentiality agreement and letter of intent/memorandum of understanding (MOU).
  • Due diligence (fact-finding exercise on the target company).
  • Sale and Purchase Agreement (S&PA).
  • Consideration (purchase price): based on financial modeling and initial agreement.

Key Provisions in S&PA

  • Contains the legally binding agreement to sell (or buy in case of the target company) the target company.
  • Accompanied by a disclosure letter or schedule explaining the target’s situation that needs to be read together with the S&PA.
  • Conditions precedent (CP), such as regulatory approvals or fulfillment of financial targets to trigger completion of the transaction.
  • Split signing and completion: Completion is staggered, dependent on CPs.
  • Termination rights, and breaches of warranties or covenants.
  • Warranties for seller against any breaches.

Consideration Structure

  • Typically, a fixed consideration amount.
  • Potential Upside: can be factored in through earn-out payments after completion
  • Post-completion adjustments (e.g., for shortfall/excess in working capital), which occur after the completion date.
  • Time Limit: for claims against the seller for liabilities, breaches of warranties, etc.
    • Six years for contractual claims
    • 18-36 months for warranties.

Employee Transfers

  • If shares are acquired, the employment terms of the target company employees typically remain unchanged when the sale is completed.
  • If business is acquired, employees need to be transferred to the buyer.
  • Section 18A of Employment Act (Singapore) specifies provisions for transfer.

Confidentiality Agreements (CAs)

  • Negotiated to protect information.
  • Clauses stipulate permitted use, duration, and return/destruction of information.

Other

  • Due Diligence: assessing, financial, operational, and legal aspects to reduce acquisition risks.
  • Conditions precedent (CPs): acts of completion required to trigger the acquisition.
  • Non-solicitation covenants for preventing potential buyers to poach key personnel.
  • Consideration structure specifics, which includes fixed and variable amounts, and how payment is structured regarding the circumstances of the parties.

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Related Documents

M&A Basics PDF

Description

This quiz explores the methods and processes involved in mergers and acquisitions, focusing on both share and asset acquisition techniques. It highlights key factors such as confidentiality agreements, due diligence, and risk allocation. Test your understanding of M&A strategies to enhance your knowledge in corporate transactions.

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