M&A Practice Exam Questions and
Correct Answers
Consolidation ✅when a company joins another and becomes 1
merger of equals ✅two companies have an arrangement to share the post merger
entity in an equal way. Usually governance plays a large role.
equal number of board members
CEO of acquiring company can before chairman of the target company
Horizontal Mergers ✅two firms that operate within the same market space merge
economies of scale reduces costs
market share/power increased
usual sources of synergy ✅gaining market power and economies of scale. need to
keep in mind antitrust laws
vertical mergers ✅2 companies on the same supply chain merge. EX when a company
buys its supplier
cost saving by eliminating anti trust before merger
Pure Conglomerates ✅neither horizontal nor vertical the companies are completely
unrelated
Some macro-economic reasons behind takeovers ✅1) deregulation
2) global competition and markets
3) Financial Innovation and financial markets
4) changes in tech and industry conditions
5) sustainable competitive advantage
How can a public company take control of another public company (3 ways) ✅1) by
completing a statutory merger
2) by making a tender offer for the voting common stock of the target
3) by purchasing the assets of the target company
Stages of successful acquisition ✅ID suitable target
valuation and restructuring
, integration/rationalization of process/products
What are collars? ✅ways to hedge against the price fluctuation in the long run
creates a ceiling and a floor on the value of the shares offered to complete a
transaction, by creating a price rang the collar assuages shareholders (from both
companies) fears regarding potential fluctuations in the acquiring co's share price while
the transaction awaits shareholder approval
Lock up options ✅company is bidding for another company but wants to make sure
that if another company acquires the they still want to be able to make money after the
transaction
Spinoffs ✅firm distributes new shares for a particular division
no cash inflow into the firm and the shareholders do not have to pay to get those shares
can create value from conglomerate discount without spinoffs
Split off ✅Original shareholders will get new shares but in order to get those new
shares they will have to part with older shares
Impact of High Leverage ✅lottery ticket -- common stock is a call option on the total
firm. this is very similar to black scholes. The call option value will increase if the
volatility increases
Sources of Value in an LBO (3) ✅improved operating performance (EBITDA)
tax shields are available because if increased amount o debt
market valuation of multiples have changed at the LBO exit in the future
what is gained by giving equity ownership to debt holders ✅debt holder will want to
see the company do well instead of just trying to get their money back+interest
What kind of LBO gives the minimum and maximum return for the investor ✅Lowest --
Chapter 11
Highest -- IPO
Take over Defense (Pre-offer) ✅Charter amendments
dual class recapitalization
poison pills
Correct Answers
Consolidation ✅when a company joins another and becomes 1
merger of equals ✅two companies have an arrangement to share the post merger
entity in an equal way. Usually governance plays a large role.
equal number of board members
CEO of acquiring company can before chairman of the target company
Horizontal Mergers ✅two firms that operate within the same market space merge
economies of scale reduces costs
market share/power increased
usual sources of synergy ✅gaining market power and economies of scale. need to
keep in mind antitrust laws
vertical mergers ✅2 companies on the same supply chain merge. EX when a company
buys its supplier
cost saving by eliminating anti trust before merger
Pure Conglomerates ✅neither horizontal nor vertical the companies are completely
unrelated
Some macro-economic reasons behind takeovers ✅1) deregulation
2) global competition and markets
3) Financial Innovation and financial markets
4) changes in tech and industry conditions
5) sustainable competitive advantage
How can a public company take control of another public company (3 ways) ✅1) by
completing a statutory merger
2) by making a tender offer for the voting common stock of the target
3) by purchasing the assets of the target company
Stages of successful acquisition ✅ID suitable target
valuation and restructuring
, integration/rationalization of process/products
What are collars? ✅ways to hedge against the price fluctuation in the long run
creates a ceiling and a floor on the value of the shares offered to complete a
transaction, by creating a price rang the collar assuages shareholders (from both
companies) fears regarding potential fluctuations in the acquiring co's share price while
the transaction awaits shareholder approval
Lock up options ✅company is bidding for another company but wants to make sure
that if another company acquires the they still want to be able to make money after the
transaction
Spinoffs ✅firm distributes new shares for a particular division
no cash inflow into the firm and the shareholders do not have to pay to get those shares
can create value from conglomerate discount without spinoffs
Split off ✅Original shareholders will get new shares but in order to get those new
shares they will have to part with older shares
Impact of High Leverage ✅lottery ticket -- common stock is a call option on the total
firm. this is very similar to black scholes. The call option value will increase if the
volatility increases
Sources of Value in an LBO (3) ✅improved operating performance (EBITDA)
tax shields are available because if increased amount o debt
market valuation of multiples have changed at the LBO exit in the future
what is gained by giving equity ownership to debt holders ✅debt holder will want to
see the company do well instead of just trying to get their money back+interest
What kind of LBO gives the minimum and maximum return for the investor ✅Lowest --
Chapter 11
Highest -- IPO
Take over Defense (Pre-offer) ✅Charter amendments
dual class recapitalization
poison pills
