FIN 461 Exam 1 |123 Questions and Answers
Reasons M/A occurs in waves - -(1) Liquidity (Low interest Rates, high stock prices)
(2) Disruptive Technology
(3) Regulation / Deregulation
(4) Price Shock
-Why are regulated industries less competitive - -Set profit margins, lack of consumer care
-M/A Motives - -Synergies, Diversification, strategic, hubris, buy undervalued/sell over
valued, mismanagement, managerialism, market power
-Operational Synergies - -Cost savings, revenue enhancements, process involvements
-Financial Synergies - -Financial engineering, tax benefits
-How do synergies come about - -Shared know-how, shared tangible resources, pooled
negotiating power, coordinated strategies, vertical integration, combined business creation
-What kind of synergies are more reliable - -Cost synergies
-Why can diversification destroy value - -(1) Inefficient internal capital markets (lower
cost of capital to failing divisions)
(2) reduced managerial accountability / greater entrenchment
(3) loss of focus
(4) incentive problems
-What drives horizontal integration - -economies of scale and scope
-what drives vertical integration - -greater control over production and distribution, can
be forward or backward integration
-LBO - -Acquisition of a target using debt to finance a large portion of the purchase price
-What are the historical weights debt to equity for lbo? - -60-70% debt and 30-40% equity
-How does leverage play a role in an lbo? - -(1) Enables sponsor to achieve desired returns
(2) tax savings due to tax deductibility of interest payments
(3) some say it also improves firm governance
-Types of M/A financing - -Cash on hand
Debt financing
- revolving credit facility
- term loan
- bond / note
, - commercial paper
Equity financing
Contingent consideration (earnout)
-What is a contingent consideration / earnout - -Extra money is dished out to management
depending on how the target performs
-Accretive - -If earnings go up as a result of the transaction
-Dillutive - -If earnings go down as a result of the transaction
-Main players in an acquisition - -Acquirers, targets, investment banks, lawyers,
accountants, proxy solicitors, institutional investors, hedge and PE funds, M/A arbitrageurs
-What is a proxy solicitor - -Someone who tries to get shareholders to vote a certain way.
-What is a strategic acquirer - -An operating company
-What is a financial sponsor - -A financial firm like a PE firm
-What is a strategics strategy - -typically hold for a long term and have strategic motives
-What is a financial sponsors strategy - -Purchase companies short term for roughly 5
years and then sell
-What happens to targets returns when transaction is announced - -around transaction
date, abnormal returns of about 20% for target shareholders in a friendly deal, 30-35% in a
hostile deal
-Why does the stock price increase at announcement date - -usually a premium is paid
-How do M/A arbitrageurs make their money? - -They purchase stock of companies that
are part of deals they guess that will be allowed to commence
-What happens to the returns of the acquirer around announcement date? - -Around
announcement date, average bidder shareholders abnormal returns close to zero or
slightly negative, but is not indicative of the whole story
-In what situations do acquiring bidders receive positive returns? - -The target is mature
(I think), the target is small compared to the acquirer, and it is a cash transaction rather
than stock.
-When is it best to acquire? - -Early in an M/A wave because the best assets will be
available
Reasons M/A occurs in waves - -(1) Liquidity (Low interest Rates, high stock prices)
(2) Disruptive Technology
(3) Regulation / Deregulation
(4) Price Shock
-Why are regulated industries less competitive - -Set profit margins, lack of consumer care
-M/A Motives - -Synergies, Diversification, strategic, hubris, buy undervalued/sell over
valued, mismanagement, managerialism, market power
-Operational Synergies - -Cost savings, revenue enhancements, process involvements
-Financial Synergies - -Financial engineering, tax benefits
-How do synergies come about - -Shared know-how, shared tangible resources, pooled
negotiating power, coordinated strategies, vertical integration, combined business creation
-What kind of synergies are more reliable - -Cost synergies
-Why can diversification destroy value - -(1) Inefficient internal capital markets (lower
cost of capital to failing divisions)
(2) reduced managerial accountability / greater entrenchment
(3) loss of focus
(4) incentive problems
-What drives horizontal integration - -economies of scale and scope
-what drives vertical integration - -greater control over production and distribution, can
be forward or backward integration
-LBO - -Acquisition of a target using debt to finance a large portion of the purchase price
-What are the historical weights debt to equity for lbo? - -60-70% debt and 30-40% equity
-How does leverage play a role in an lbo? - -(1) Enables sponsor to achieve desired returns
(2) tax savings due to tax deductibility of interest payments
(3) some say it also improves firm governance
-Types of M/A financing - -Cash on hand
Debt financing
- revolving credit facility
- term loan
- bond / note
, - commercial paper
Equity financing
Contingent consideration (earnout)
-What is a contingent consideration / earnout - -Extra money is dished out to management
depending on how the target performs
-Accretive - -If earnings go up as a result of the transaction
-Dillutive - -If earnings go down as a result of the transaction
-Main players in an acquisition - -Acquirers, targets, investment banks, lawyers,
accountants, proxy solicitors, institutional investors, hedge and PE funds, M/A arbitrageurs
-What is a proxy solicitor - -Someone who tries to get shareholders to vote a certain way.
-What is a strategic acquirer - -An operating company
-What is a financial sponsor - -A financial firm like a PE firm
-What is a strategics strategy - -typically hold for a long term and have strategic motives
-What is a financial sponsors strategy - -Purchase companies short term for roughly 5
years and then sell
-What happens to targets returns when transaction is announced - -around transaction
date, abnormal returns of about 20% for target shareholders in a friendly deal, 30-35% in a
hostile deal
-Why does the stock price increase at announcement date - -usually a premium is paid
-How do M/A arbitrageurs make their money? - -They purchase stock of companies that
are part of deals they guess that will be allowed to commence
-What happens to the returns of the acquirer around announcement date? - -Around
announcement date, average bidder shareholders abnormal returns close to zero or
slightly negative, but is not indicative of the whole story
-In what situations do acquiring bidders receive positive returns? - -The target is mature
(I think), the target is small compared to the acquirer, and it is a cash transaction rather
than stock.
-When is it best to acquire? - -Early in an M/A wave because the best assets will be
available
