LOS e: Contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management.

Q1. During negotiations over the method of payment to be made by the acquirer, which of the following issues would least likely be considered?

A)   The relative valuations of the firms involved.

B)   The distribution of the risk and reward from the transaction.

C)   The relative tax-effect on the acquiring firm’s shareholders.

Q2. When the attitude of the target firm’s management is unfriendly with regard to the proposed merger, which of the following statements is most accurate? The offer is said to be:

A)   hostile, and the acquirer can resort to a tender offer to the target firm’s shareholders, or a proxy battle to replace members of the target’s board of directors.

B)   antagonistic, and the acquirer can resort to a proxy battle to persuade the target firm’s shareholders, or a tender offer to replace members of the target’s board of directors.

C)   hostile, and the acquirer can resort to a proxy battle to persuade the target firm’s shareholders, or a tender offer to replace members of the target’s board of directors.

Q3. When a merger occurs, the two main forms for the acquisition are:

A)   asset purchase or liability assumption.

B)   stock purchase or asset purchase.

C)   asset purchase or subsidiary carve-out.

Q4. What form of acquisition is most likely to be associated with a hostile takeover, and which defense is most likely to be employed by the target’s management to fend off the unwanted offer?

A)   Stock purchase and poison pill.

B)   Stock purchase and greenmail.

C)   Asset purchase and greenmail.

LOS e: Contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management. fficeffice" />

Q1. During negotiations over the method of payment to be made by the acquirer, which of the following issues would least likely be considered?

A)   The relative valuations of the firms involved.

B)   The distribution of the risk and reward from the transaction.

C)   The relative tax-effect on the acquiring firm’s shareholders.

Correct answer is C)         

The method of payment is not likely to have any direct tax-effect on the acquiring firm’s shareholders, but may on the target’s shareholders. Both remaining answers are issues that should be considered during the determination of payment method.

Q2. When the attitude of the target firm’s management is unfriendly with regard to the proposed merger, which of the following statements is most accurate? The offer is said to be:

A)   hostile, and the acquirer can resort to a tender offer to the target firm’s shareholders, or a proxy battle to replace members of the target’s board of directors.

B)   antagonistic, and the acquirer can resort to a proxy battle to persuade the target firm’s shareholders, or a tender offer to replace members of the target’s board of directors.

C)   hostile, and the acquirer can resort to a proxy battle to persuade the target firm’s shareholders, or a tender offer to replace members of the target’s board of directors.

Correct answer is A)

If the acquirer persists in pursuing a merger when the target’s management is unfriendly to the concept, the offer is said to be hostile. In such a case, the acquirer generally attempts to go around management and negotiate with the shareholders of the target directly. This usually takes the form of a tender offer to purchase the target’s stock from existing shareholders, or a proxy contest in which the acquirer seeks to convince the target’s shareholders to replace the board of directors with a slate more friendly to the concept of merging with the acquirer.

Q3. When a merger occurs, the two main forms for the acquisition are:

A)   asset purchase or liability assumption.

B)   stock purchase or asset purchase.

C)   asset purchase or subsidiary carve-out.

Correct answer is B)

The two main forms of acquisition are stock purchase—the acquirer purchases all of the target’s stock—or asset purchase—the acquirer agrees to purchase all of the target’s assets.

Q4. What form of acquisition is most likely to be associated with a hostile takeover, and which defense is most likely to be employed by the target’s management to fend off the unwanted offer?

A)   Stock purchase and poison pill.

B)   Stock purchase and greenmail.

C)   Asset purchase and greenmail.

Correct answer is B)

A stock purchase is more likely when the target is hostile to the proposed merger because an asset purchase would ordinarily involve negotiations between two mutually agreeable parties. A poison pill is a pre-offer defense. If one were in place, it would be employed, but if it existed it is far less likely that a hostile merger would ever be proposed. Hence, greenmail is a more likely defense mechanism because it is a post-offer takeover defense.

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