Mergers & Acquisitions- Conceptual
Questions and Correct Answers
Who normally pays a higher price to merge - strategic or financial buyer? ✅strategic
buyer (because of the synergies)
What is a disadvantage of a cash offer instead of a stock swap? ✅you need to pay
taxes on the cash received
What is a pro and con of a stock swap over a cash offer? ✅Pros: you would still own
some of the company you just sold
Cons: depends on market performance
Possible steps to block a hostile takeover (3) ✅- Include in your shareholder rights
plan a clause that gives existing shareholders the right to purchase more shares at a
discount in the event of a takeover
- Turn around and try to acquire the company that is trying to takeover
- Take the offer from a friendly takeover (if there is any)
What do investors and analysts focus on to look at whether the return on investment of
a merger/acquisition is? ✅they look at Earnings Per Share and how that changes as a
result of the acquisition in the near-term (next 1-2 years)
Fuzzy reasons are much more common in __________ industries such as ____ and
____, and much less common in old-school ______ industries like ______. ✅research
& development-driven, technology, biotech, asset-based, manufacturing
What's the cheapest option to pay for an M&A (the one buyers generally prefer to pay
with)? ✅Cash, since interest rate on cash is lower than the interest rate on debt and
the cost of issuing equity
When you combine the buy and seller's income statements, what Tax Rate do you
multiply the Combined Pre-Tax Income by to get the Combined Net Income? ✅(1 -
Buyer's Tax Rate)
What goes into the new share count of the combined companies? ✅new shares issued
in deal, buyer's shares outstanding (seller's shares outstanding are all wiped out in the
acquisition and go away completely)
If a buyer pays more for a seller, the deal will be more ______ (dilutive/accretive),
assuming that the mix of cash/stock/debt stays the same. ✅dilutive
, A deal will generally be ______ (dilutive/accretive) if the amount of extra Pre-Tax
Income the seller contributes is not enough to offset the foregone interest on cash, the
cash paid on Debt, and the effects of issuing shares. ✅dilutive
Why would sellers tend to prefer cash instead of equity for payment method?
✅because the buyer's share price might plummet immediately after the deal is
announced, reducing the purchase price
If a company needs to use debt to pay for the merger, what will it look at to assess how
much it can reasonably use? (3) ✅percentages of debt used in recent similar deals,
Leverage Ratio, and ability to meet the debt's interest payments
If a company needs to use stock to pay for the merger, what will it look at to assess how
much it can reasonably use? (2) ✅how much ownership it'd give up, how much the
payment would dilute existing shareholders (all affected by share price)
In an _______ deal, if the seller has a higher P/E than the buyer, the deal will be
______ (almost 100% certain). If the buyer has a higher P/E, it will theoretically be
_____, though that is only if they have the same _____, no _____ paid, and no other
acquisition effects. ✅all-stock, dilutive, accretive, tax rates, premium
To determine whether a deal is accretive or dilutive, simply calculate the weighted "cost"
for the buyer (cost of Cash, Debt, Stock) and compare it to the _____. If the Buyer's
Cost exceeds the ________, it's _____. Otherwise, it's _____. ✅Yield of the Seller,
Seller's Yield, dilutive, accretive.
What are the acquisition effects on PP&E and Fixed Assets? ✅You may write-up the
values of these Assets because market values might be higher than book values
What are the acquisition effects on Deferred Tax Liabilities? ✅Write off the seller's
existing Deferred Tax Liabilities and then create new ones based on Buyer's Tax Rate *
(PP&E and Fixed Asset Write-Up + Newly Created Intangibles)
What are the acquisition effects on Transaction and Financing Fees? ✅You deduct
legal and advisory fees from Cash and Retained Earnings at the time of the transaction,
but you capitalize financing fees and then amortize them until they're paid up
What are the acquisition effects on Deferred Tax Assets? ✅Usually write them off
completely depending on the seller's tax situation
What are the acquisition effects on Inter-Company Accounts Receivable and Accounts
Payable? ✅eliminate any unpaid transactions between the two companies (since they
no longer owe each other anything once they become one company)
Questions and Correct Answers
Who normally pays a higher price to merge - strategic or financial buyer? ✅strategic
buyer (because of the synergies)
What is a disadvantage of a cash offer instead of a stock swap? ✅you need to pay
taxes on the cash received
What is a pro and con of a stock swap over a cash offer? ✅Pros: you would still own
some of the company you just sold
Cons: depends on market performance
Possible steps to block a hostile takeover (3) ✅- Include in your shareholder rights
plan a clause that gives existing shareholders the right to purchase more shares at a
discount in the event of a takeover
- Turn around and try to acquire the company that is trying to takeover
- Take the offer from a friendly takeover (if there is any)
What do investors and analysts focus on to look at whether the return on investment of
a merger/acquisition is? ✅they look at Earnings Per Share and how that changes as a
result of the acquisition in the near-term (next 1-2 years)
Fuzzy reasons are much more common in __________ industries such as ____ and
____, and much less common in old-school ______ industries like ______. ✅research
& development-driven, technology, biotech, asset-based, manufacturing
What's the cheapest option to pay for an M&A (the one buyers generally prefer to pay
with)? ✅Cash, since interest rate on cash is lower than the interest rate on debt and
the cost of issuing equity
When you combine the buy and seller's income statements, what Tax Rate do you
multiply the Combined Pre-Tax Income by to get the Combined Net Income? ✅(1 -
Buyer's Tax Rate)
What goes into the new share count of the combined companies? ✅new shares issued
in deal, buyer's shares outstanding (seller's shares outstanding are all wiped out in the
acquisition and go away completely)
If a buyer pays more for a seller, the deal will be more ______ (dilutive/accretive),
assuming that the mix of cash/stock/debt stays the same. ✅dilutive
, A deal will generally be ______ (dilutive/accretive) if the amount of extra Pre-Tax
Income the seller contributes is not enough to offset the foregone interest on cash, the
cash paid on Debt, and the effects of issuing shares. ✅dilutive
Why would sellers tend to prefer cash instead of equity for payment method?
✅because the buyer's share price might plummet immediately after the deal is
announced, reducing the purchase price
If a company needs to use debt to pay for the merger, what will it look at to assess how
much it can reasonably use? (3) ✅percentages of debt used in recent similar deals,
Leverage Ratio, and ability to meet the debt's interest payments
If a company needs to use stock to pay for the merger, what will it look at to assess how
much it can reasonably use? (2) ✅how much ownership it'd give up, how much the
payment would dilute existing shareholders (all affected by share price)
In an _______ deal, if the seller has a higher P/E than the buyer, the deal will be
______ (almost 100% certain). If the buyer has a higher P/E, it will theoretically be
_____, though that is only if they have the same _____, no _____ paid, and no other
acquisition effects. ✅all-stock, dilutive, accretive, tax rates, premium
To determine whether a deal is accretive or dilutive, simply calculate the weighted "cost"
for the buyer (cost of Cash, Debt, Stock) and compare it to the _____. If the Buyer's
Cost exceeds the ________, it's _____. Otherwise, it's _____. ✅Yield of the Seller,
Seller's Yield, dilutive, accretive.
What are the acquisition effects on PP&E and Fixed Assets? ✅You may write-up the
values of these Assets because market values might be higher than book values
What are the acquisition effects on Deferred Tax Liabilities? ✅Write off the seller's
existing Deferred Tax Liabilities and then create new ones based on Buyer's Tax Rate *
(PP&E and Fixed Asset Write-Up + Newly Created Intangibles)
What are the acquisition effects on Transaction and Financing Fees? ✅You deduct
legal and advisory fees from Cash and Retained Earnings at the time of the transaction,
but you capitalize financing fees and then amortize them until they're paid up
What are the acquisition effects on Deferred Tax Assets? ✅Usually write them off
completely depending on the seller's tax situation
What are the acquisition effects on Inter-Company Accounts Receivable and Accounts
Payable? ✅eliminate any unpaid transactions between the two companies (since they
no longer owe each other anything once they become one company)
