1. Which financing source would be best suited to fund a target's working capital requirements?
A) mezzanine debt
B) term loan
C) revolving credit facility
D) sale leaseback
2. Rank, from lowest to highest, each of the following companies in terms of its likely beta. Use a scale from 1 to 3, with 1 being the lowest and 3 being the highest
A) Campbell Soup (packaged foods)
B) Joy Global (mining equipment manufacturer)
C) 3M Corporation (diversified consumer and industrial products company)
3. List at least two positive drivers associated with a favorable M&A transaction.
4. What are some negative drivers of unfavorable M&A transactions?
5. Provide three examples of non-financial factors that would enhance or detract from a company's valuation.
6. What is an earn-out?
7. A regulated utility company is considering diversifying into non-regulated service sectors.
In evaluating an acquisition investment, which is the best discount rate to apply to projected cash flows?
A) cost of acquirer's capital (regulated energy utility)
B) cost of target's capital (or companies in that industry)
C) cost of the funding source's capital (debt, equity, or a blend used to support a specific transaction)
8. The board of a fast-growing retailer has received an unsolicited offer of $425 million for 100% of the outstanding equity.
The company currently has $30 million of EBITDA, no debt, and $25 million in cash. Based solely on value, should the board consider the offer or reject it as insufficient for detailed review? Why or why not?
9. List at least three types of screening criteria used to evaluate potential targets in the acquisition search phase
10. Rank, from lowest to highest, the following synergies in order of execution risk. Use a scale from 1 to 3, with 1 being the lowest and 3 being the highest
A) elimination of target company's CFO and related staff
B) using the acquirer's sales channel to sell the target's products
C) closure of the target's distribution warehouse
11. Obtaining facts is the main objective of due diligence.
A) True
B) False
12. Solve for equity value using the following data:
• enterprise value = $132.0 MM
• total debt = $20.0 MM
• cash = $12.0 MM
• EBITDA = $22.0 MM
13. Solve for EBITDA multiple value using the following data:
• enterprise value = $132.0 MM
• total debt = $20.0 MM
• cash = $12.0 MM
• EBITDA = $22.0 MM
14. In what deal situations might an earn-out be especially useful?
15. Generally, a high interest-rate environment and a higher cost of borrowing would have what effect on an acquisition purchase price for a private equity buyer?
A) increase purchase price
B) decrease purchase price
C) have no effect on purchase price
16. In valuing the synergy described below, determine whether you would use a discount rate equal to, greater than, or less than the target's WACC. (Assume the acquirer is in the same segment as the target.)
The French government wants to promote the merger of two companies and guarantees a yearly annuity if the two agree to merge.
A) equal to WACC
B) greater than WACC
C) less than WACC
17. In valuing the synergy described below, determine whether you would use a discount rate equal to, greater than, or less than the target's WACC. (Assume the acquirer is in the same segment as the target.)
PepsiCo management believed that, by acquiring Quaker Oats, they would be able to improve operating income growth from 8% to 10% through revenue enhancements and cost savings.
A) equal to WACC
B) greater than WACC
C) less than WACC
18. In valuing the synergy described below, determine whether you would use a discount rate equal to, greater than, or less than the target's WACC. (Assume the acquirer is in the same segment as the target.)
During the proposed merger between Hewlett-Packard and Compaq in 2002, the CFO of HP announced that $2.5 billion in cost synergies were expected from the Compaq acquisition. Most of the cost synergies would come from layoffs and organizational restructurings.
A) equal to WACC
B) greater than WACC
C) less than WACC
19. In valuing the synergy described below, determine whether you would use a discount rate equal to, greater than, or less than the target's WACC. (Assume the acquirer is in the same segment as the target.)
Among the main arguments for the AOL Time Warner merger was the potential revenue enhancement to be gained from merging broadband delivery (AOL) with content (Time Warner). In combining these offerings, both companies expected to achieve far greater market penetration.
A) equal to WACC
B) greater than WACC
C) less than WACC
20. Define goodwill in the context of purchase accounting arising from an acquisition transaction-what does goodwill represent on the balance sheet?
21. List three general forms of payment/consideration.
22. Rank the following securities by their priority in the capital structure in liquidation/distribution.
Use a scale from 1 to 4, with 1 being the lowest and 4 being the highest
A) preferred equity
B) secured senior bank debt
C) trade payables
D) common equity
23. From a tax standpoint, which alternative is more desirable to the seller, the sale of a company's assets or the sale of its stock? Explain.
24. Besides a purchase price reduction, what are some tools or options a buyer can employ to reduce its cash investment in an acquisition?
25. Explain how issuing equity to fund an acquisition might send negative signals to the markets.
26. What are working capital adjustment mechanisms, and what key functions do they have in an acquisition?
27. A Letter of Intent represents a binding agreement.
A) True
B) False
28. What two conditions are necessary for a merger to have an anticompetitive effect?
29. What is a Hart-Scott-Rodino filing?
30. Dynamic Technology, Inc. has an enterprise value of $35.0 million, $6.0 million in debt, and $3.0 million in cash.
Based on the equity ownership below, what is the value of advent investors' equity (in $MM)?
Ownership:
• management: 5%
• public: 70%
• advent: 25%
31. Dynamic Technology, Inc. has an enterprise value of $35.00 million, $6.00 million in debt, and $3.00 million in cash.
Based on the equity ownership below, what is the value of insider ownership of Dynamic Technology (in $MM)?
Ownership:
• management: 5%
• public: 70%
• advent: 25%
A) $1.60 MM
B) $1.75 MM
C) $9.60 MM
32. Define a vertical acquisition and provide an example.
33. What is a confidentiality agreement?
34. What is the purpose of an exclusivity agreement?
35. List three types of information a Letter of Intent usually contains.
36. Companies often have what is called a shareholder rights agreement. What is this, and what is its purpose?
37. What are three main advantages of using auctions for a company sale?
38. What does the Winner's Curse refer to in an M&A auction?
39. What are some weaknesses or difficulties of the Discounted Cash Flow methodology for valuation?
40. What are some weaknesses of using public comparables in valuation?
41. List three reasons a company might acquire another company.
42. List three reasons a company might not want to use its maximum debt capacity to reduce its WACC.
43. List three means of value creation that an acquisition might provide the acquiring company.
44. Provide three metrics a company might apply to measure an acquisition's success or failure.
45. Why might it be difficult to value a company experiencing financial distress?
46. Why is the support of suppliers more important than the support of lenders to a company experiencing financial distress?
47. Why would equity investors and their representatives on the board of directors become less risk-adverse during periods of significant financial or operational distress?
48. Why are liquidation values for most companies today so low relative to their market capitalization?
49. Under what circumstances might a seller desire less upfront consideration and more contingent consideration?
50. An acquisition target has a long-standing practice of providing well above market benefits, including a gold-plated health care plan, company cars, and paid vacations. Would this be properly considered an add-back for the purposes of an acquisition valuation? Why or why not?
51. Which of the following is typically the most important economy or synergy sought from M&A activity?
A) economies of scope from applying existing resources to new uses at little additional cost
B) revenue and marketing synergies from new, enhanced, or more efficient distribution
C) economies of scale from organizational learning
D) economies of scale from doing away with duplicate functions between the two firms
52. Despite having no obvious acquisition synergies, financial acquirers have developed a favorable track record in M&A. What are two main drivers of financial success for private equity investors?
53. Pear Computing (NASDAQ: PEAR) has a per-share price of $24.50, with $210 million shares outstanding.
Pear has $450 million in debt outstanding and $150 million in cash. What is the enterprise value of PEAR (in $MM)?
A) $5,445 MM
B) $5,595 MM
C) $5,745 MM