Deck 15: Mergers and Acquisitions

Question 1

Which of the following is another term for a "going private" transaction?

A) Acquisition
B) Initial public offering
C) Merger
D) Issuer bid

Answer 1

D

Question 2

Use the following statements to answer the question:
I)A merger is the combination of two companies into a new entity.
II)An amalgamation is the exchange of shares in the old companies for shares in the new entity.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Answer 2

A

Question 3

Moose Travel Inc.(MT)owns 53% of Prairies Airways Inc.(PA)and wishes to make an issuer bid.From what fraction of the PA shareholders does MT require approval for this deal to be successful?

A) 12%
B) 10% plus a majority of the minority
C) 14% plus a majority of the minority
D) 47%

Answer 3

C

Question 4

Securities legislation is a:

A) Federal responsibility.
B) Provincial responsibility.
C) National responsibility.
D) Both federal and provincial responsibility.

Question 5

Which of the following is a side effect of the Free Trade Agreement (FTA)?

A) U.S. firms no longer wanted to acquire or merge with Canadian companies.
B) Canadian firms increased the public float held by Canadian investors.
C) U.S. multinationals began buying out the Canadian minority shareholders.
D) All of the above.

Question 6

Which of the acquisitions below would be considered a horizontal merger for Mercedes Benz (automobile manufacturer)?

A) Firestone (tire manufacturer)
B) BMW (a competitor)
C) Corning Glass (glass manufacturer)
D) RBC (bank)

Question 7

The fraction of shareholders required to approve an amalgamation agreement (assuming no disputes)is at least:

A) 20%
B) 50.01%
C) 66.67%
D) 75%

Question 8

What is the key difference between a merger and an acquisition?

A) The target firm ceases to exist after a merger, but can continue on after an acquisition.
B) The target firm ceases to exist after an acquisition, but can continue on after a merger.
C) An acquisition requires the approval of both sets of shareholders from the two firms.
D) There is no difference between a merger and an acquisition.

Question 9

In terms of shareholder approval requirements,the main difference between a cash transaction and a share transaction is:

A) The approval of both sets of shareholders is often required for a cash transaction, but not for a share transaction.
B) The approval of both sets of shareholders is often required for a share transaction, but not for a cash transaction.
C) No approval is required for share transactions where the deal value is less than 50% of the value of shares outstanding.
D) The approval of the acquiring firm's shareholders is required for a cash transaction.

Question 10

In Canada,what percentage of shares purchased by an investor is considered the early warning threshold signalling that the company is a possible target?

A) 5%
B) 10%
C) 25 %
D) 50 + 1%

Question 11

A fairness opinion is used most often when:

A) An unsolicited hostile tender offer is received from a potential acquirer who owns no stake in the target firm.
B) A controlling shareholder seeks approval for an amalgamation.
C) Determining whether the exchange ratio in a stock swap transaction is appropriate.
D) None of the above.

Question 12

In Canada,the early warning threshold is hit when an investor purchases what percent of shares?

A) 5%
B) 10%
C) 25%
D) 33.33%

Question 13

Which of the following best defines an acquisition?

A) Two firms combining to form a completely new firm.
B) One firm purchases goods from another firm.
C) One firm completely absorbing another firm.
D) All of the above.

Question 14

Once an investor has purchased 20% of the outstanding shares of a firm,which of the following is NOT allowed?

A) Open market share purchase with a takeover bid.
B) Open market sale of the stake.
C) Open market share purchase without a takeover bid.
D) A hostile takeover bid.

Question 15

The Canadian term for a merger process is called a(n):

A) Amendment
B) Combination
C) Amalgamation
D) Joint venture

Question 16

A minority squeeze-out occurs when:

A) Minority shareholders change the top management of the firm.
B) When an acquirer owns 90% of the shares, the minority of the shareholders are forced to sell their shares for the takeover price.
C) A small minority of shareholders frustrate a fair bid that has already been accepted by a majority of shareholders.
D) All of the above.

Question 17

In contrast to the question above,in the U.S.what percentage of shares purchased by an investor is considered the early warning threshold signalling that the company is a possible target?

A) 5%
B) 10%
C) 25 %
D) 50 + 1%

Question 18

Use the following statements to answer the question:
I)The holdup problem consists of small shareholders asking for an excessive price to tender their shares in case of amalgamation.
II)Sweetening the deal results in increasing the price for the remaining shares to encourage the holders to sell their shares.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 19

When a firm's management decides to take on significant debt in order to take the firm private it is called a:

A) Circular bid
B) Tender bid
C) Management buy-out (MBO)
D) Hostile takeover

Question 20

An issuer bid occurs when:
I)An acquirer owns a majority stake of a target firm and wishes to acquire the remainder.
II)A potential acquirer with no stake in the target firm makes an offer for 50% of the shares.
III)An acquirer who owns a majority stake in the target recommends new management be put in place.
IV)An acquirer wishes to reverse its purchase of the target firm.

A) I only
B) I and II
C) II and III
D) IV only

Question 21

Which one of the following is an example of a poison pill?

A) A firm that sells its efficient business division because it interests the acquirer.
B) A firm that pays all its cash as dividends to existing shareholders because it interests the acquirer.
C) A firm that opens talks with another potential acquirer.
D) A firm that distributes new shares to the existing shareholders at a discount in the event of a takeover.

Question 22

When an acquiring firm bypasses current management and makes a direct offer to purchase shares from the shareholders,it is termed a:

A) Leveraged buy-out
B) Hostile takeover
C) Tender offer
D) Corporate buy-out

Question 23

Which of the following is FALSE about the friendly acquisition process?

A) A friendly acquisition involves estimating the value of the firm using information provided by the firm.
B) The due diligence process is the investigating of the correctness of information provided by the target.
C) The no-shop clause prohibits the acquiring firm to look into other target firms.
D) The confidentiality agreement prohibits the disclosure of private information about the target firm.

Question 24

Use the following statements to answer this question:
I)Each province is responsible for the mergers and acquisitions within its own jurisdiction.
II)The Ontario Securities Commission regulates most of the public deals in Canada.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 25

A firm decides to defend itself from a hostile takeover.Management tries to solicit competing takeover bids from other firms.This defense involves the use of a:

A) Poison pill
B) White knight
C) Shareholders' rights plan
D) Tender offer

Question 26

Which of the following is NOT a purpose of a break fee?

A) To reward the original acquirer for generating a competing bid.
B) To compensate the original acquirer for the costs incurred in negotiations.
C) To signal the high value of the target firm to the original acquiring firm.
D) To reduce the probability that a potential acquirer will back out of negotiations.

Question 27

Use the following statements to answer this question:
I)A letter of intent is a preliminary sale agreement.
II)The break fee is the amount paid for the due diligence process.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 28

Use the following statements to answer this question:
I)The friendly acquisition process involves investigating only the value of the firm using public information,not confidential information.
II)The data room provides specific information about the acquiring firm's valuation process.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 29

______ involve issuing special securities that entitle the holders to unusual rights and privileges if the issuing firm becomes the subject of a takeover bid.

A) Poison pills
B) Tender offers
C) White knights
D) Legal barriers

Question 30

A no-shop clause is a promise from:

A) A potential acquirer to seek possible alternative target firms in order to reduce the bid price.
B) A potential target not to seek another buyer, thus demonstrating its commitment to completing the transaction.
C) A potential acquirer to make a firm offer, thus requiring the target firm not to seek other potential acquirers.
D) None of the above.

Question 31

In the U.S.the threshold of early warning is:

A) 5%
B) 10%
C) 20%
D) 30%

Question 32

A large amount of trading following a hostile tender offer is a good sign for the acquirer because:

A) The shares are moving from regular investors into the hands of arbitrageurs.
B) A competing offer is likely.
C) The acquirer will pay a lower premium for the shares.
D) A large amount of trading is a bad sign for the acquirer.

Question 33

Which of the following best describes a no-shop clause?

A) The target firm agrees not to find another buyer, demonstrating its commitment to completing the transaction.
B) The acquiring firm agrees not to find another target, demonstrating its commitment to completing the transaction.
C) Once a potential acquirer makes an offer; no other buyers can make a bid for the target firm.
D) All of the above.

Question 34

Arbitrageurs predict what happens in takeovers and attempt to earn profits by:

A) Buying target firm shares after the tender offer announcement and selling the shares later for a higher premium.
B) Selling acquiring firm shares before the tender offer announcement and buying the shares later at a lower price.
C) Charging commissions for their advice to target and acquiring firms.
D) None of the above.

Question 35

Which of the following is not one of the benefits of obtaining a toehold?

A) Acquiring shares at the market price requires no premium.
B) A toehold reduces the number of shares needed to be purchased in a later takeover bid.
C) A toehold eliminates competition from other potential acquirers.
D) A toehold can increase the probability of success of a later takeover.

Question 36

Which of the following is a document describing a target firm's important characteristics to potential acquirers?

A) Letter of intent
B) Offering memorandum
C) Prospectus
D) Break form

Question 37

Place the following acquisition steps in chronological order,starting with the earliest:
I)Sign letter of intent
II)Final sale agreement
III)Ratification
IV)Main due diligence
V)Confidentiality agreement

A) V, I, IV, II, and III
B) IV, I, III, V, and II
C) II, III, IV, V, and I
D) V, IV, I, II, and III

Question 38

Why is the two-part tender offer illegal in Canada?

A) Because it discriminates between shareholders.
B) Because shareholders are not consulted in the deal.
C) Because the price is not fair.
D) Because it creates a rush to sell at the higher price.

Question 39

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:

A) Golden parachute
B) White knight
C) Poison pill
D) LBO (Leveraged buy-out)

Question 40

Which of the following is NOT a reason why a takeover can be exempted from the Ontario Securities Act?

A) There is limited involvement by shareholders in Ontario.
B) The firm being taken over is private.
C) The acquirer is buying shares from fewer than five shareholders and paying a premium of less than 50 percent over the market price.
D) No more than 5 percent of the shares are purchased through the exchange over a one-year period.

Question 41

Which one of the following is an example of economies of scope?

A) Acquiring a firm to improve bargaining power in price negotiations
B) Acquiring a firm to gain access to foreign markets
C) Acquiring a firm to improve the production process
D) Acquiring a firm to reduce the overall cost of production

Question 42

A merger that allows a firm to access a cheaper way of financing its projects is:

A) Financial economies of scope
B) Financial economies of scale
C) Financing synergy
D) Tax benefits

Question 43

Which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may:
I)Sell attractive assets
II)Issue additional voting shares to dilute voting power
III)Assume a heavy debt burden

A) III only
B) I and II
C) II and III
D) I, II, and III

Question 44

What is the main difference between the U.S.and Canada in terms of the use of poison pills?

A) In Canada, poison pills are illegal.
B) In the U.S., poison pills cannot be challenged in court.
C) In Canada, courts always dismiss the usage of poison pills.
D) In Canada, poison pills are used to delay the acquisition in case of the existence of another bidder; they cannot be used to frustrate a bid the way they are in the U.S.

Question 45

Which of the following represent possible source(s)of increased value when a merger or acquisition takes place?

A) Improved management
B) Tax considerations
C) Improved financing
D) All of the above.

Question 46

In Canada,which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may:
I)Change the company by-laws so that the successful bidder may be prevented from quickly replacing the existing board of directors.
II)Attempt to buy the shares of the pursuing firm.
III)Argue through the courts that the takeover violates the substance or procedures set out in an applicable statute.
IV)Issue additional voting shares to dilute earnings per share.

A) I and III
B) II, III, and IV
C) I, II, and III
D) I, III, and IV

Question 47

Which of the following is NOT true?

A) The beneficiaries of a tender offer are normally the shareholders of the target firm.
B) When management acts on its own authority, it does so mainly to further its own interests.
C) When payment for an acquisition is made through the issuance of securities, the value of these new shares is a concern.
D) Mergers tend to decrease during periods of soaring stock prices.

Question 48

Notre Dame Alliance Inc.(NDA)is worth $3 billion and wants to take over Vancouver Company Inc.(VC),which is worth $1.5 billion.NDA expects the deal to result in $0.5 billion in synergies.Supposing a bidding war arises and NDA ends up paying $2 billion in a stock swap for VC,and then finds there are no synergies,how much have NDA shareholders gained or lost on the deal?
a) NDA shareholders lose $0.33 billion on this deal.
b) NDA shareholders lose $0.3 billion on this deal.
c) NDA shareholders lose $0.5 billion on this deal.
d) None of the above.

Question 49

Empirical evidence regarding merger gains shows that,on average:

A) Target firm shareholders experience a significant gain.
B) Acquiring firm shareholders experience a significant gain, while target firm shareholders gain nothing.
C) Target firm shareholders experience no gain, while acquiring firm shareholders lose.
D) None of the above.

Question 50

Use the following statements to answer this question:
I)The white knight is a strategy to avoid being acquired by another firm.
II)Selling the crown jewels can lead to a long-term decrease in the value of the firm.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 51

When conducting shareholder value at risk (SVAR)analysis for acquisitions,it is found that:

A) Acquirers using cash bear all of the risk of the acquisition, while the risk in acquisitions using share swaps is borne by both sets of shareholders.
B) Acquirers using stock swaps bear all of the risk of the acquisition, while the risk in acquisitions using cash is borne by both sets of shareholders.
C) The risk of an acquisition is always borne equally between the acquiring firm and target firm shareholders.
D) None of the above.

Question 52

Which of the following is NOT an example of economies of scale?

A) Reducing capacity
B) Geographic roll-up
C) Spreading fixed costs
D) Complementary strengths

Question 53

If an automobile manufacturer and a steelworks producer decided to merge,it would be an example of a:

A) Horizontal merger
B) Vertical merger
C) Conglomerate merger
D) None of the above

Question 54

Which one of the following is an example of complementary strengths?

A) A marketing-oriented firm acquires a production-oriented firm
B) Acquiring a firm to gain access to foreign markets
C) Acquiring a firm to improve the production process
D) Acquiring a firm to reduce the overall cost of production

Question 55

Synergies,which are due to capturing increased value as a result of a merger,could occur due to which of the following?

A) Access to more and better debt financing
B) Reduction in costs due to overlap of job functions (e.g., layoffs)
C) Increased tax losses transferred from target firm
D) All of the above.

Question 56

Which of the following is a motivation for vertical integration?

A) Acquiring a larger customer base
B) Reducing variable costs through economies of scale
C) Eliminating a significant competitor
D) Acquiring a cheaper source of raw materials

Question 57

Which of the following statements is true?

A) When a firm's assets are acquired, the liabilities are transferred to the vendor.
B) The purchase of a target company's shares as a method of acquiring a firm's assets is attractive when the target company has contingent liabilities outstanding.
C) With an acquisition, both assets and liabilities are taken over by the new parent.
D) The purchase of shares must take place soon after the announcement of the intent to merge, thereby minimizing the premium over current market price that has to be paid.

Question 58

If the target and acquirer have initial values of $100 million and $150 million,respectively,and the combined firm is worth $400 million,then the synergy value is:
a) $50 million
b) $400 million
c) $150 million
d) $100 million

Question 59

Notre Dame Alliance Inc.(NDA)is worth $3 billion and wants to take over Vancouver Company Inc.(VC),which is worth $1.5 billion.NDA expects the deal to result in $0.5 billion in synergies.Supposing a bidding war arises and NDA ends up paying $2 billion in cash for VC,and then finds there are no synergies,how much has NDA gained or lost on the deal?
a) NDA gains nothing and loses nothing on this deal.
b) NDA loses $0.5 billion on this deal.
c) NDA loses $1 billion on this deal.
d) None of the above.

Question 60

Use the following statements to answer this question:
I)Managers may abuse their position and increase the size of the company through acquisitions.
II)It is usually good news for shareholders when their firm is targeted.

A) I is correct and II is correct.
B) I is incorrect and II is incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 61

An acquiring firm can increase its earnings per share (EPS)by:

A) Acquiring a firm with a lower P/E ratio than its own P/E ratio.
B) Acquiring a firm with a higher P/E ratio than its own P/E ratio.
C) Acquiring a firm with a higher leverage ratio than its own leverage ratio.
D) Acquiring a firm with a lower leverage ratio than its own leverage ratio.

Question 62

A firm is evaluated using the liquidation valuation.Which one of the following would increase the value of the firm?

A) High level of unrecoverable accounts receivable
B) Amortization technique undervalues tangible assets
C) Debt capacity of the firm is maximized
D) Bankruptcy of major firm clients

Question 63

Goodwill is an:

A) estimate of the excess of the purchase price over a target firm's equity.
B) the difference between target firm's book value of assets over the book value of debt.
C) increase due to collective synergies.
D) increase in the target's stock price when a possible acquisition is announced.

Question 64

When conducting discounted cash flow (DCF)valuation using free cash flow to equity,the appropriate discount rate is:

A) Weighted average cost of equity
B) Risk-adjusted cost of equity
C) Cost of debt
D) Risk-adjusted cost of debt

Question 65

The book value of current assets of the bidder is $25,000,the book value of current assets of the target is $3,500,and the fair market value of current assets of the target is $2,900.What is the book value of current assets post acquisition?
a) $25,000
b) $28,500
c) $27,900
d) $2,900

Question 66

The industry P/E ratio is estimated to be 15.35 in which a target company has sales of $5.5 million,earnings of $2.75 million,and cash flows to equity of $1.12 million.Based on these numbers,what is the valuation of the target company?
a) $17.192 million
b) $42.2125 million
c) $59.4045 million
d) $84.425 million

Question 67

Which of the following is NOT a limitation of the liquidation valuation approach?

A) It leads to imprecise estimates.
B) The resulting value estimates are not forward-looking.
C) The estimates change frequently and require constant updating.
D) All of these are limitations of the liquidation valuation approach.

Question 68

Define and distinguish between acquisitions and amalgamations.

Question 69

Which of the following is NOT one of the requirements for the determination of fair market value (FMV)?

A) Open and restricted markets
B) Informed and prudent parties
C) Arm's length transaction
D) Neither party is under compulsion to transact

Question 70

The valuation approach that uses ratios such as market-to-book (M/B),price-earnings (P/E),and price-to-cash flow (P/CF)is called:

A) Liquidation valuation
B) Discounted cash flow (DCF) valuation
C) Multiples valuation
D) All of the above

Question 71

The target company has sales of $2 million,earnings of $1 million,and cash flows to equity of $1.1 million.The industry P/E ratio is 16.5.What is the valuation of the target company?

A) $16.5 million
B) $33 million
C) $18.15 million
D) $10 million

Question 72

Goodwill is calculated as the excess of:

A) a target firm's purchase price over the FMV of its equity.
B) a target firm's book value of assets over the book value of debt.
C) the FMV of a target firm's equity over its purchase price.
D) the FMV of the acquiring firm's equity over the FMV of the target firm's equity.

Question 73

An acquirer has a book value for its current assets of $25,000 and market value of current assets of $200,000.The target has a book value for its current assets of $3,500 and market value of current assets of $7,200.What is the book value of current assets after acquisition?
a) $25,000
b) $28,500
c) $203,500
d) $207,200

Question 74

If a firm has significant free cash flows (FCF)it could likely:

A) become a takeover target
B) see a drop in stock price
C) have an excessively low debt/equity ratio
D) reinvest more in itself by reducing its dividend payouts (plowback)

Question 75

A management buy-out is defined as:

A) Severance payments made by an acquiring firm to target firm managers.
B) Firm shareholders paying off management so that it can be replaced.
C) A buy-out in which the purchasers are a firm's managers.
D) None of the above.

Question 76

The main difference between reactive and proactive valuation models is:

A) Reactive models determine what the value should be based on future values of cash flows and earnings while proactive models use general rules of thumb and the pricing of other securities.
B) Reactive models focus on management expectations while proactive models use analyst forecasts.
C) Proactive models determine what the value should be based on future values of cash flows and earnings while reactive models use general rules of thumb and the pricing of other securities.
D) Reactive models are very ad hoc while proactive models are precise.

Question 77

The information for Montreal Design Inc.(MD)is provided below.What is its P/E ratio?

a) 12x
b) 6.7x
c) 5.4x
d) 11.1x

Question 78

Beta Corporation and Gamma Ltd.are merging.

The basis for the merger will be a share-for-share exchange based on market prices,and the share value of the combined firm is expected to remain unchanged.What would the earnings per share and price-earnings ratio be after the merger?
a) 1.73 and 17.34
b) 1.35 and 22.22
c) 1.6 and 18.75
d) 2 and 15

Question 79

For acquisitions,which purchaser type values the resulting firm based on estimated cash flows as they are at present,with only minor adjustments?

A) Strategic investors
B) Financials
C) Passive investors
D) Managers

Question 80

Define synergy and explain what effect it can have on a merged company.