FIN 461 Exam 2:
Questions and
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Answers All
Correct Updated TU
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Version!!
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M&A Waves - ANSWER 1. Liquidity: when interest rates are low, stock prices are
high. When there is a lot of liquidity in the market, firms are more likely to make
acquisitions.
JP
2. Technological disruption: facilitates more M&A flow because there's more of a need
for inorganic growth quick.
3. Deregulation: taking regulations out of an industry and allowing them to operate more
freely.
4. Price shock: in the financial crisis, oil prices spiked very high, and then ultimately fell
from $150 --> $30 within a couple of months. Some companies will be efficient enough
to operate at new price, and the one that can remain efficient will acquire companies
that cannot operate at this level.
,M&A Motives: why do firms engage in acquisitions? - ANSWER Most common
motives:
- synergies
- diversification
Other motives:
- strategic
- hubris
- managerialism
- tax considerations
- buying undervalued/selling overvalued assets
A
- market power
- mismanagement
VI
Synergies - ANSWER Putting two companies together that operate similarly.
Operational synergies - ANSWER Focus on revenue and cost.
TU
1. Cost savings: we know exactly what we need to do to save costs, so it is more
valuable than revenue enhancements. Customers drive revenue enhancements,
whereas we drive cost savings.
2. Revenue enhancements: sell more by putting the two companies together through
things like cross-selling and bundling.
IS
3. Process Involvements
Financial synergies - ANSWER Lowers cost of capital.
4. Financial engineering: by putting two companies together, lenders will view them as
M
less risky as a combined entity -- more willing to give more money.
5. Tax benefits
O
Diversification - ANSWER reduce risk and improve risk-return relationship of
portfolio
A
Finance research suggests that diversification may destroy value. Why is this? -
ANSWER 1. Inefficient internal capital markets: shareholders want firm to use extra
N
funds generated to invest in a profitable venture, not use money to subsidize a weak
business.
2. Reduced managerial accountability/greater entrenchment
JP
3. Loss of focus
4. Incentive problems --> giving CEO of GE stock options when he is solely in control of
GE health. We are giving him power when he ultimately has no say in things like GE
energy and other sectors of the company.
Main players in M&A and their roles. - ANSWER 1. Acquirers: strategic vs financial,
they buy the target.
2. Target: sell themselves to buyer.
3. Investment Banks: advise of the transaction.
4. Lawyers: advise on the transaction.
, 5. Accountants: provide accounting advice and investigate tax issues.
6. Proxy solicitors: control shareholder vote.
7. Institutional investors: react to transaction.
8. Hedge funds and private equity funds: hedge funds often jump into M&A transactions
which can be unsuccessful. Private equity funds finance a large part of their
transactions with debt and have a sponsor to finance the equity portion.
9. M&A arbitrageurs: a strategy typically used by hedge funds. Simultaneously buy and
sell the stock of the acquirer and target to create a "riskless" profit. Target usually sold
at a lower price compared to acquisition price.
A
Recent M&A trends. - ANSWER 1. SPACS (Special Purpose Acquisition
Corporation): do not have commercial operations, undertakes an IPO to raise capital for
the purpose of acquiring another company. EX = Draft Kings.
VI
2. ESG
- Partner selection
- Deal financing
TU
- Market reaction
- Governance / integration
- Due diligence
M&A Strategies - ANSWER Two strategies = strategic and financial.
IS
1. Strategic: focuses on strategies such as synergies -- buying a similar operating
company.
2. Financial: for investment purposes -- private equity funds and LBOs try to generate
revenue for their firms and investors to create value.
M
3. Horizontal integration: acquiring a company at the same level in the supply chain.
This is driven by economies of scale and scope to get bigger and stronger.
4. Vertical integration: acquiring a company at a different level of the supply chain in
O
order to have more control over it.
- Backward integration = moving upstream to purchase the suppliers.
- Forward integration = moving downstream to purchase the customer.
A
5. Conglomeration: driven by desire to diversify, putting two businesses together that
are seemingly unrelated.
N
6. LBO: utilizing debt to purchase a company. Usually 60/70% debt and 30/40% equity.
Equity portion comes from a financial sponsor. Private equity companies can generate a
large return (25-30%) which allows them to buy things they couldn't write a check for
JP
otherwise.
Why is leverage key in LBOs? - ANSWER - enables sponsor generate a large return
that you couldn't achieve without leverage.
- less risky for financial sponsor because they don't have to give as much money.
- tax savings due to tax deductibility of interest payments.
- some argue leverage improves firm governance.
M&A Financing - ANSWER 1. Cash
2. Debt
Questions and
A
VI
Answers All
Correct Updated TU
IS
Version!!
M
O
A
N
M&A Waves - ANSWER 1. Liquidity: when interest rates are low, stock prices are
high. When there is a lot of liquidity in the market, firms are more likely to make
acquisitions.
JP
2. Technological disruption: facilitates more M&A flow because there's more of a need
for inorganic growth quick.
3. Deregulation: taking regulations out of an industry and allowing them to operate more
freely.
4. Price shock: in the financial crisis, oil prices spiked very high, and then ultimately fell
from $150 --> $30 within a couple of months. Some companies will be efficient enough
to operate at new price, and the one that can remain efficient will acquire companies
that cannot operate at this level.
,M&A Motives: why do firms engage in acquisitions? - ANSWER Most common
motives:
- synergies
- diversification
Other motives:
- strategic
- hubris
- managerialism
- tax considerations
- buying undervalued/selling overvalued assets
A
- market power
- mismanagement
VI
Synergies - ANSWER Putting two companies together that operate similarly.
Operational synergies - ANSWER Focus on revenue and cost.
TU
1. Cost savings: we know exactly what we need to do to save costs, so it is more
valuable than revenue enhancements. Customers drive revenue enhancements,
whereas we drive cost savings.
2. Revenue enhancements: sell more by putting the two companies together through
things like cross-selling and bundling.
IS
3. Process Involvements
Financial synergies - ANSWER Lowers cost of capital.
4. Financial engineering: by putting two companies together, lenders will view them as
M
less risky as a combined entity -- more willing to give more money.
5. Tax benefits
O
Diversification - ANSWER reduce risk and improve risk-return relationship of
portfolio
A
Finance research suggests that diversification may destroy value. Why is this? -
ANSWER 1. Inefficient internal capital markets: shareholders want firm to use extra
N
funds generated to invest in a profitable venture, not use money to subsidize a weak
business.
2. Reduced managerial accountability/greater entrenchment
JP
3. Loss of focus
4. Incentive problems --> giving CEO of GE stock options when he is solely in control of
GE health. We are giving him power when he ultimately has no say in things like GE
energy and other sectors of the company.
Main players in M&A and their roles. - ANSWER 1. Acquirers: strategic vs financial,
they buy the target.
2. Target: sell themselves to buyer.
3. Investment Banks: advise of the transaction.
4. Lawyers: advise on the transaction.
, 5. Accountants: provide accounting advice and investigate tax issues.
6. Proxy solicitors: control shareholder vote.
7. Institutional investors: react to transaction.
8. Hedge funds and private equity funds: hedge funds often jump into M&A transactions
which can be unsuccessful. Private equity funds finance a large part of their
transactions with debt and have a sponsor to finance the equity portion.
9. M&A arbitrageurs: a strategy typically used by hedge funds. Simultaneously buy and
sell the stock of the acquirer and target to create a "riskless" profit. Target usually sold
at a lower price compared to acquisition price.
A
Recent M&A trends. - ANSWER 1. SPACS (Special Purpose Acquisition
Corporation): do not have commercial operations, undertakes an IPO to raise capital for
the purpose of acquiring another company. EX = Draft Kings.
VI
2. ESG
- Partner selection
- Deal financing
TU
- Market reaction
- Governance / integration
- Due diligence
M&A Strategies - ANSWER Two strategies = strategic and financial.
IS
1. Strategic: focuses on strategies such as synergies -- buying a similar operating
company.
2. Financial: for investment purposes -- private equity funds and LBOs try to generate
revenue for their firms and investors to create value.
M
3. Horizontal integration: acquiring a company at the same level in the supply chain.
This is driven by economies of scale and scope to get bigger and stronger.
4. Vertical integration: acquiring a company at a different level of the supply chain in
O
order to have more control over it.
- Backward integration = moving upstream to purchase the suppliers.
- Forward integration = moving downstream to purchase the customer.
A
5. Conglomeration: driven by desire to diversify, putting two businesses together that
are seemingly unrelated.
N
6. LBO: utilizing debt to purchase a company. Usually 60/70% debt and 30/40% equity.
Equity portion comes from a financial sponsor. Private equity companies can generate a
large return (25-30%) which allows them to buy things they couldn't write a check for
JP
otherwise.
Why is leverage key in LBOs? - ANSWER - enables sponsor generate a large return
that you couldn't achieve without leverage.
- less risky for financial sponsor because they don't have to give as much money.
- tax savings due to tax deductibility of interest payments.
- some argue leverage improves firm governance.
M&A Financing - ANSWER 1. Cash
2. Debt
