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标题: Corporate Finance【 Reading 32】Sample [打印本页]
作者: hariRaj    时间: 2012-3-30 13:49     标题: [2012 L2] Corporate Finance【Session 9- Reading 32】Sample

Which of the following is NOT a commonly used merger classification describing forms of integration?
A)
Regulatory merger.
B)
Consolidation.
C)
Subsidiary merger.


Regulatory merger is not a commonly used merger classification. Both remaining answers are commonly used to describe the form of integration following a merger.
作者: hariRaj    时间: 2012-3-30 13:49

Suppose that a manufacturer of steel bridge beams (BridgeCo) acquires its main supplier of the steel (SteelCo) used to make the beams. After the merger is completed, the only surviving entity is BridgeCo. This is best described as a:
A)
subsidiary merger.
B)
horizontal merger.
C)
vertical merger.


This is best described as a vertical merger, since BridgeCo is purchasing a company from which it gets production inputs. It could also be described as a statutory merger, since only the acquiring firm is in existence following the combination.
作者: hariRaj    时间: 2012-3-30 13:50

A combination of two firms in entirely different industries is called a:
A)
vertical merger.
B)
horizontal merger.
C)
conglomerate merger.


When two firms in entirely different industries merge, it is called a conglomerate merger.
作者: hariRaj    时间: 2012-3-30 13:50

Burger World is interested in obtaining a controlling interest in Snappy Auto Repair. This potential merger is best described as a:
A)
conglomerate.
B)
horizontal merger.
C)
vertical merger.


Combining firms in separate industries represents a conglomerate merger.
作者: hariRaj    时间: 2012-3-30 13:51

Which type of merger is most likely when the motivation for merging is to bootstrap earnings per share (EPS), and what does this imply about the lifecycle stage of the acquirer and the target?
A)
Conglomerate and same stage.
B)
Conglomerate and different stages.
C)
Horizontal and different stages.


In order for EPS bootstrapping to occur, the target must have a lower price-to-earnings (P/E) ratio than the acquirer. Since firms in the same industry are more likely to have similar P/Es, this makes a horizontal merger less likely. The differential in P/Es implies a differing level of expected growth. All else being equal, this suggests that the firms will be in different lifecycle stages
作者: hariRaj    时间: 2012-3-30 13:51

Grogan Medical Devices (GMD) is a leading manufacturer of cardiac treatment devices including defibrillators and pacemakers. Over the last three months, problems have been discovered with a GMD defibrillator model, resulting in a massive product recall. As a result of the recall, and the potential impact on future sales, the price of GMD’s stock dropped to its current level of $18 per share.

As a result of the drop in the price of the stock, two firms have expressed interest in acquiring GMD. Paulsgrove Corporation (Paulsgrove) is a large health care conglomerate with businesses in consumer products, pharmaceuticals, and cardiac treatment devices. The management team at Paulsgrove sees a merger with GMD as a means to combine its current defibrillator and pacemaker operations with those of GMD, creating the worldwide leader in those two product lines.

Bailey Scientific (Bailey) is a specialty manufacturer of stents used to open clogged arteries during heart surgery. Bailey sees a merger with GMD as a natural extension of its existing heart treatment product line, and believes using its existing stent product specialists to also market defibrillators and pacemakers could result in significant cost savings. They also believe that there would be benefits from expanding the size of Bailey’s operations. What would be the best description of the type of merger if GMD were to merge Paulsgrove or if GMD were to merge with Bailey respectively?
Merger with PaulsgroveMerger with Bailey
A)
Horizontal mergerHorizontal merger
B)
Conglomerate mergerHorizontal merger
C)
Horizontal mergerVertical merger


Either a merger with Paulsgrove or a merger with Bailey would be described as a horizontal merger. In a horizontal merger, the two businesses operate in the same or similar industries. Even though Paulsgrove is already a conglomerate firm, the purpose of the merger would be to combine Paulsgrove’s existing defibrillator and pacemaker business with that of GMD. A merger with Bailey would also be considered a horizontal merger as the two firms operate in similar industries. Note that the primary benefit for either Paulsgrove or Bailey is economies of scale, which is typically the strategy behind a pure horizontal merger. With a vertical merger, a firm moves up or down the supply chain (i.e., acquiring a firm that makes the equipment to make pacemakers, or buying a hospital to distribute the products). With a conglomerate merger, the businesses operate in separate industries.
作者: hariRaj    时间: 2012-3-30 13:52

World Beaters, a maker of electric mixers and other kitchen appliances, is considering a hostile takeover of Gadgets ’N More, a catalog retailer specializing in products for the kitchen.Lars Clausen, deputy chief financial officer for World Beaters, is preparing a report on the merger for senior management. After a review of financial literature on mergers and extensive interviews with managers for both World Beaters and Gadgets ’N More, Clausen submits a report recommending against the merger. The reasons for his disapproval are listed below:
Gadgets ’N More has a higher growth rate than World Beaters, and a purchase will lower per-share profits. Shareholders will not benefit from World Beaters’ new lower financing rates. Because the merger must be an acquisition of assets, World Beaters will need shareholder approval from Gadgets ’N More.
Which of Clausen’s arguments against the merger is least valid?
A)
Gadgets ’N More has a higher growth rate than World Beaters, and a purchase will lower per-share profits.
B)
Shareholders will not benefit from World Beaters’ new lower financing rates.
C)
Because the merger must be an acquisition of assets, we will need approval from Gadgets ’N More shareholders.


In an acquisition of assets, the acquirer buys assets directly from the company, skirting shareholders. As such, the claim that World Beaters will need shareholder approval is false, and the argument is invalid. When a high-growth firm purchases a low-growth firm, per-share profits are temporarily boosted, thus lowering future growth prospects on a per-share basis. Since Gadgets ’N More has a higher growth rate than World Beaters, the effect will be just the opposite, depressing EPS in the near term. While the acquisition could boost the growth rate going forward because of the depression of current earnings and the integration of a faster-growth business, this could indeed be used as an argument against a merger, as in some cases, any one-time decline in EPS is unacceptable. As such, this argument is somewhat valid. Lower financing rates benefit the company, but usually not shareholders, because the company’s price likely reflects the fact that shareholders of both companies end up guaranteeing each other’s debt.
World Beater’s proposed purchase of Gadgets ’N More is a:
A)
vertical merger.
B)
horizontal merger.
C)
conglomerate merger.


In a vertical merger, the acquiring company moves up or down the supply chain. In this case, World Beaters wants to buy a retailer that sells its products, moving up the supply chain toward consumers.
作者: hariRaj    时间: 2012-3-30 13:55

Which of the following represents a vertical merger?
A)
A hamburger chain purchasing a pizza chain.
B)
An automobile manufacturer purchasing a tire manufacturer.
C)
An automobile manufacturer divesting its tire manufacturing division.

In a vertical merger, the acquiring company seeks to move up or down the product supply chain. In purchasing a tire manufacturer, the automobile manufacturer is acquiring one of its inputs to production.
作者: hariRaj    时间: 2012-3-30 13:59

A conglomerate is most likely to participate in which type of merger?
A)
Vertical merger.
B)
Diversifying merger.
C)
Horizontal merger.


Conglomerates by definition invest in unrelated business lines.
作者: hariRaj    时间: 2012-3-30 13:59

If a firm combines with one of its suppliers or customers, it is called a:
A)
horizontal merger.
B)
conglomerate merger.
C)
vertical merger.


When a firm merges with a supplier or customer, it is a vertical merger.
作者: hariRaj    时间: 2012-3-30 13:59

A combination of two firms in the same line of business is called a:
A)
horizontal merger.
B)
congeneric merger.
C)
vertical merger.


A combination of two firms in the same line of business is a horizontal merger.
作者: soverby    时间: 2012-3-30 14:01

Which of the following is least likely a commonly used merger classification describing the type of merger?
A)
Diagonal merger.
B)
Conglomerate merger.
C)
Vertical merger.


Diagonal merger is not a commonly used merger classification. Both remaining answers are commonly used to describe the type of merger that has occurred.
作者: soverby    时间: 2012-3-30 14:01

Which of the following is least likely a criticism of merging purely for diversification purposes?
A)
Diversification does not increase the overall value of the company.
B)
Empirical evidence finds a diversification discount to conglomerates.
C)
Increasing the size of the firm helps provide job security for management.


Increasing the size of the firm does not necessarily benefit shareholders, but it would not be considered a valid criticism. Increasing the size of the firm is a potential benefit for managers because diversification reduces the threat of a takeover, and helps management further secure their employment. Both remaining reasons stated are each valid criticisms of a diversification merger.
作者: soverby    时间: 2012-3-30 14:03

Achieving international business objectives is sometimes used as the rationale for a merger. Which of the following are least likely to be valid objectives that can be realized from a cross-border merger? The merger:
A)
provides the ability to work around trade barriers.
B)
gives the acquiring firm the ability to use technology in new markets.
C)
achieves a reduction in exchange rate exposure.


In general, a cross-border merger is likely to increase the acquiring firm’s exchange rate exposure. Both remaining statements are valid arguments in support of a cross-border merger.
作者: soverby    时间: 2012-3-30 14:03

Merger synergies are usually realized from:
A)
increasing market share.
B)
merger tax benefits.
C)
decreasing costs and/or increasing revenues.


The existence of synergies typically result in decreases in costs for the combined firm (e.g., the same distribution network can support both firms’ retail networks) and/or an increase in revenues (e.g., by cross-selling product lines). Both remaining responses are motivations for M&A activities, but do not result from the realization of synergies.
作者: soverby    时间: 2012-3-30 14:04

Which of the following statements concerning M&A activity is most accurate? Mergers based upon a desire to diversify usually do:
A)
make sense from the shareholders’ standpoint, and also usually make sense from the management’s standpoint.
B)
not make sense from the shareholders’ standpoint, and do not make sense from the management’s standpoint.
C)
not make sense from the shareholders’ standpoint, but may make sense from the management’s standpoint.


Mergers predicated upon the need to diversify are usually not sensible from the shareholders’ perspective, because they can easily diversify their investments by holding shares in multiple firms. Such mergers may make sense for management, because compensation is often positively correlated with firm size.
作者: soverby    时间: 2012-3-30 14:04

Which of the following motives for mergers least likely makes economic sense?
A)
Surplus funds and vertical integration.
B)
Diversification and reduced borrowing costs.
C)
Complementary resources and eliminating inefficiencies.




Diversification does not make economic sense for company shareholders. It is much easier and cheaper for the shareholders to diversify simply by investing in the shares of unrelated companies themselves rather than expend the time and resources necessary to go through a merger. Similarly, merging to simply reduce financing costs is a misplaced argument since the lower cost of debt financing arises because of the greater security afforded bondholders.
作者: soverby    时间: 2012-3-30 14:04

Use the following data to calculate the EPS of the combined firm following the merger. Topeka Industries has EPS of $4.00, a market price of $90 per share, and 500,000 shares outstanding. Omaha Company has EPS of $2.00, a market price of $25, and 500,000 shares outstanding. If Topeka acquires Omaha in an all-stock transaction, what is the EPS of the combined company?

A) $4.70.

B) $3.00.

C) $3.57.





--------------------------------------------------------------------------------
The total value of Omaha is $25 × 500,000 = $12,500,000. Topeka will need to issue 12,500,000 / 90 = 138,889 new shares to acquire Omaha. The combined firm will have total earnings of ($4 × 500,000) + ($2 × 500,000) = $3,000,000. The combined firm will have EPS = $3,000,000 / (138,889 + 500,000) = $4.70. Note that the pre-merger P/E ratio for Topeka was 90 / 4 = 22.5, vs. 25 / 2 = 12.5 for Omaha.
作者: soverby    时间: 2012-3-30 14:05

When Firm A acquires Firm B, and, even though there are no real economic gains resulting from the merger, Firm A’s earnings per share increase, this is called:
A)
synergies.
B)
bootstrapping.
C)
compression.


When a firm acquires another firm and its earnings per share increase, even though there are no economic gains from the merger, this is called earnings per share bootstrapping.
作者: soverby    时间: 2012-3-30 14:06

When bootstrapping, the acquiring firm:
A)
decreases current earnings per share (EPS) because of the increases in the total number of shares outstanding.
B)
increases current and historical earnings per share (EPS) by the amount of the synergy created between the companies.
C)
increases current earnings per share (EPS) without creating any economic gains.


The technique of bootstrapping increases EPS for the acquiring firm without creating any economic gains. Any synergy between the companies will only increase future earnings and is not relevant to bootstrapping.
作者: soverby    时间: 2012-3-30 14:07

When bootstrapping, the acquiring firm purchases:
A)
slow growth firms with low price-to-earnings (P/E) ratios.
B)
high growth firms with high price-to-earnings (P/E) ratios.
C)
high growth firms with low price-to-earnings (P/E) ratios.


Bootstrapping involves a high growth, high P/E ratio firm purchasing slow growth firms with low P/E ratios. The low P/E implies that the acquiring firm can purchase the firm “cheap” since its stock exhibits a higher price for a given level of earnings. The end result is that the earnings of the two firms are added together, while the exchange of high P/E company’s shares are made at a less than 1 to 1 ratio for the low P/E company shares. Thus, earnings per share will increase due to the lower total number of shares outstanding.
作者: soverby    时间: 2012-3-30 14:08

Riley Industries is a manufacturer of after-market automobile parts that are distributed and sold throughout the United States. The company possesses significant market share, with last year's sales exceeding $450 million. Gross sales of Riley Industries, plus two other comparable-sized competitors, represent roughly 60% of parts sold to the major auto parts retailers in the U.S. last year. Of the remaining 40% of sales, market share is highly fragmented, with no single supplier exceeding 5% of the market's overall market sales. Riley Industries' management has proposed a merger with Durable Parts, a small manufacturer with sales of $50 million per year. The merger with Durable Parts would give Riley Industries an additional manufacturing facility in a central region of the country where Riley Industries does not currently have production operations. Previously, Riley Industries' management had considered the possibility of constructing a new facility in that area, and Durable Part's relatively new facility can provide the additional capacity that Riley Industries is seeking in order to meet increasing demand.
The proposed merger is structured as a stock purchase, in which the shareholders of Durable Parts receive shares of Riley Industries' common stock. The proposed exchange ratio is 1:5, meaning that for every 5 Durable Parts shares owned, shareholders will receive one share of Riley Industries.
<P > [td=1,1,111]Riley IndustriesDurable PartsRiley — Post Merger
Stock Price$50.00$10.00$50.00
EPS$3.50$2.25<P > [/td]
P/E Ratio14.294.44<P > [/td]
Total shares o/s9,000,0003,000,000<P >

Neither the management nor the shareholders of Durable Parts had anticipated being the target of a merger transaction. Several members of the board have expressed their desire to remain an independent entity, and have proposed seeking a friendly third party that would be willing to purchase a minority stake in the company without buying controlling interest. This would block Riley Industries from gaining enough shareholder approval to purchase the entire operation. The board acknowledges that there is some additional risk involved in the pursuit of this strategy, but is not aware of any other viable options that would allow Durable Parts to remain an independent company.
Additionally, the same members of Durable Part's board of directors have instructed the company's accountants to estimate the Herfindahl-Hirschman Index (HHI) for the industry, both pre- and post-merger. They estimate the pre-merger HHI is 975, while the post-merger HHI is 990. They believe that the increase in post-merger HHI indicates that Riley Industries should not continue to pursue the merger because of a likely antitrust challenge.The impetus behind the merger of Riley Industries with a Durable Parts, a smaller competitor, is to provide Riley with the means to increase its own production capacity. This type of merger is commonly called a:
A)
horizontal merger.
B)
consolidation.
C)
synergistic merger.


In a horizontal merger, both entities operate in the same or similar industries, and the operations of the combined company would be similar to the two, pre-merger companies. (Study Session 9, LOS 32.a)
Companies can utilize a strategy whereby a high P/E firm acquires a low P/E firm in exchange for stock is commonly called:
A)
vertical merger.
B)
horizontal merger.
C)
bootstrapping.


Bootstrapping combines the earnings from two companies after a merger so that the result of the merger is an increase in earnings per share of the acquirer, even though no real economic gains have been achieved. (Study Session 9, LOS 32.c)
Given the above information, the post-merger EPS of Riley Industries is closest to:
A)
$3.04.
B)
$3.98.
C)
$3.19.


Using the 1:5 exchange ratio, Riley will issue 600,000 shares (3,000,000 / 5). The 1:5 conversion ratio is intuitive if you note that Riley’s pre-merger stock price is $50 per share and Durable’s market cap is $30,000,000 (3,000,000 x $10). Riley issues 600,000 new shares to generate the funds to purchase Durable ($30,000,000 market cap / $50 = 600,000 shares). Thus, the total number of shares outstanding after the merger would be 9,600,000 shares. The total post-merger income ([$3.50 / share × 9,000,000] + [$2.25 / share × 3,000,000]) = $38,250,000. Therefore the post-merger EPS is $38,250,000 / 9,600,000 shares = $3.98.
The result of bootstrapping is the creation of the appearance of growth in earnings. The acquiring firm is essentially exchanging high P/E shares for low P/E shares. The combined entity has fewer total shares outstanding than the two separate entities, but the same earnings, resulting in a higher EPS. (Study Session 9, LOS 32.c)

Riley Industries will give the owners of Durable Parts shares of Riley stock in exchange for the outstanding shares of Durable. Which of the following statements regarding a stock purchase is most accurate?
A)
With a stock purchase, it is the shareholders of the target company that directly receive compensation, not the company itself.
B)
The shareholders of the target company will not bear any tax consequences associated with the stock purchase; any taxes due are the financial obligation of the acquirer.
C)
Most stock purchases do not involve purchasing the entire company, but rather a portion of the firm or a specific operating division.


Since the shareholders are the owners of the target company, they receive the compensation from any acquisition, whether by cash or securities. Typically, a majority of the shareholders must approve the transaction, and sometimes even more than a majority is required. (Study Session 9, LOS 32.e)
The strategy proposed by Durable’s management of seeking a friendly third party to purchase a minority stake in its firm in order to block Riley’s proposed merger with Durable is most commonly referred to as a:
A)
white squire defense.
B)
white knight defense.
C)
crown jewel defense.




A white squire defense is similar in nature to a white knight defense. A white knight is a friendly third party that will acquire all of the assets of a target company, while a white squire will only buy a minority stake in the target. The white squire will buy enough to thwart a hostile takeover, but not enough to gain control of the target. (Study Session 9, LOS 32.f)
The estimated pre- and post-merger HHI for the industry are 975 and 990 respectively. Which of the following statements regarding these HHI calculations is most accurate?
A)
Regulators consider a post-merger HHI value greater than 1,800 to be indicative of a “moderately concentrated” industry.
B)
Any merger that results in a change in HHI between pre- and post-merger HHI that is greater than 100 is likely to be challenged.
C)
A post-merger HHI of less than 1,000 is indicative of a competitive industry and an antitrust challenge is unlikely.


The HHI is calculated as the sum of the squared market shares for all firms in an industry. A post-merger HHI that is less than 1,000 indicates an industry that is not concentrated, and an antitrust challenge is unlikely. (Study Session 9, LOS 32.g)
作者: soverby    时间: 2012-3-30 14:08

In general, in order for earnings per share bootstrapping to occur, which of the following is most accurate?
A)
The P/E ratio of the target must be greater than that for the acquirer.
B)
The net income of the target must be greater than that for the acquirer.
C)
The price-to-earnings (P/E) ratio of the acquirer must be greater than that for the target.


In order for earnings per share bootstrapping to occur, the P/E ratio of the acquirer must be greater than that for the target.
作者: soverby    时间: 2012-3-30 14:10

Which of the following statements regarding bootstrapping and its effect on earnings per share (EPS) is CORRECT? Bootstrapping:
A)
increases current EPS and decreases future EPS.
B)
increases current EPS and increases future EPS.
C)
decreases current EPS and increases future EPS.


Bootstrapping increases current EPS at the expense of lower growth prospects and lower future EPS.
作者: soverby    时间: 2012-3-30 14:10

The Larson Trust holds a broad portfolio of firms. One of the Trust’s holdings, Music World, is growing at roughly the same, or slightly slower rate as the overall economy. The Trust is considering selling the firm. What stage of the industry lifecycle is Music World most likely in, and which method of selling the firm is most probable?
A)
Stabilization phase, divestiture.
B)
Decline phase, divestiture.
C)
Stabilization phase, equity carve-out.


Music World appears to be in the stabilization phase, as it is growing at approximately the same rate as the overall economy. If it were in the decline phase, growth would be negative. Divestiture, most likely to a firm in a similar line of business, is more likely than an equity carve-out. A divestiture would allow the buyer to consolidate market share. An equity carve-out would involve a public offering of shares with only marginal attractiveness as a stand-alone enterprise
作者: soverby    时间: 2012-3-30 14:10

Conglomerate mergers are least likely for companies in which stages of the industry lifecycle?
A)
Mature Growth, Stabilization.
B)
Stabilization, Decline.
C)
Pioneer/Development, Rapid Growth.


Conglomerate mergers are least likely for firms in the mature growth and stabilization stages of the industry lifecycle. In these stages, industry growth is slowing, and they are more likely to be seeking horizontal mergers to enhance economies of scale.
作者: soverby    时间: 2012-3-30 14:11

When an industry has reached the stabilization stage, the most common type of merger is:
A)
vertical.
B)
conglomerate.
C)
horizontal.


In the stabilization stage, companies typically seek mergers to improve economies of scale. Horizontal mergers are the most common as stronger companies acquire weaker companies to expand market share and reduce costs.
作者: soverby    时间: 2012-3-30 14:12

Firms are most likely to seek mergers in order to gain access to capital during which industry lifecycle stages?
A)
Pioneer/Development and Rapid Growth.
B)
Pioneer/Development and Decline.
C)
Rapid Growth and Mature Growth.

The industry lifestyle stages during which firms often merge to gain access to additional capital are the pioneer/development and rapid growth stages.
作者: soverby    时间: 2012-3-30 14:12

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)
Asset purchase and greenmail.
C)
Stock purchase and greenmail.


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.
作者: soverby    时间: 2012-3-30 14:13

When a merger occurs, the two main forms for the acquisition are:
A)
asset purchase or liability assumption.
B)
asset purchase or subsidiary carve-out.
C)
stock purchase or asset purchase.


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.
作者: soverby    时间: 2012-3-30 14:13

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 tax-effect on the acquiring firm’s shareholders.
B)
The relative valuations of the firms involved.
C)
The distribution of the risk and reward from the transaction.


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.
作者: soverby    时间: 2012-3-30 14:14

The difference between a white knight defense and a white squire defense is that the white knight:
A)
is a post-offer defense, whereas the white squire is pre-offer.
B)
takes a minority interest, whereas a white squire takes over the entire firm.
C)
takes over the entire firm, whereas a white squire only takes a minority interest.


When a firm subject to an unwanted takeover attempt seeks out a friendly third party to purchase the entire firm, this is known as a white knight defense. If the firm seeks out a friendly third party to take a minority interest, this is a white squire defense. Both are post-offer defenses.
作者: soverby    时间: 2012-3-30 14:15

Toulouse Tempered Steel Industries (TTS) is weighing its strategic options following a wave of mergers in the industry across Europe and worldwide. Pascal LaPage, managing director of TTS is wondering whether it makes sense for the firm to position itself as a standalone entity, or if the firm should be pursuing a merger/acquisition of another firm that would provide a good strategic fit. Lyon Bank has been the firm’s primary lender for many years, and Alaine Clamon, CFA, from Lyon’s corporate finance department is due to meet with LaPage and other members of the firm’s finance group to discuss some strategic options.
Clamon begins his presentation with the underlying rationale for even considering a merger or acquisition as a strategic alternative. Some reasons cited by Clamon that can be used to justify a merger are the pursuit of economies of scale, the elimination of operating inefficiencies, and diversification of the firm’s assets. In general, the underlying rationale helps to determine what type of merger the firm will be undertaking. LaPage asks his staff to keep these in mind as they seek suitable candidates for evaluation.
A member of the staff asks Clamon about types of takeover defenses that might by employed by either Aragon or Brittany. Clamon replies that these fall broadly into two categories, pre-offer and post-offer defenses. As examples of pre-offer defenses he describes staggered boards and supermajority voting provisions. As an example of post-offer defenses he describes the crown jewel defense. He notes that, obviously, TTS must take care to account for the ramifications of the presence of any takeover defenses.Which of the following is not a traditional type of merger between two firms?
A)
Conglomerate.
B)
Syndicate.
C)
Horizontal.


The traditional types of mergers are horizontal, vertical, and conglomerate. Syndicate is not a term that is traditionally used to describe mergers.
With regard to the list of sensible motives for undertaking a merger cited by Clamon, he is:
A)
correct with regard to operating inefficiencies, but incorrect with regard to diversification.
B)
correct with regard to operating inefficiencies, and correct with regard to diversification.
C)
incorrect with regard to operating inefficiencies, but correct with regard to diversification.


Pursuing a merger where the underlying rationale is to eliminate operating inefficiencies is generally considered sensible. A merger in pursuit of diversification is generally not seen as sensible, since it is ordinarily much more cost-effective for shareholders to diversify on their own.
With respect to the takeover defenses described by Clamon, he is:
A)
correct with regard to the pre-offer defenses listed, and correct with regard to the post-offer defense listed.
B)
correct with regard to the pre-offer defenses listed, but incorrect with regard to the post-offer defense listed.
C)
incorrect with regard to the pre-offer defenses listed, but correct with regard to the post-offer defense listed.


In both cases, Clamon has correctly provided examples of pre-offer and post-offer takeover defenses.
作者: soverby    时间: 2012-3-30 14:15

Which of the following takeover defenses are considered pre-offer defenses?
A)
Fair price amendments, poison puts and staggered boards.
B)
Liability restructuring, poison pills and supermajority voting provisions.
C)
Poison pills, staggered boards and litigation.


Pre-offer defense mechanisms to avoid a hostile takeover include poison pills, poison puts, reincorporating in a state with restrictive takeover laws, staggered board elections, restricted voting rights, supermajority voting, fair price amendments, and golden parachutes
作者: soverby    时间: 2012-3-30 14:16

When the target of an unwanted takeover turns the table and attempts to take over the firm attempting to acquire it, this is a:
A)
post-offer defense and is called greenmail.
B)
post-offer defense and is called the pac-man defense.
C)
post-offer defense and is called the white squire defense.


When the target of a takeover turns the table and attempts to take over the firm making the offer, this is called a pac-man defense. This is a post-offer defense.
作者: soverby    时间: 2012-3-30 14:16

A takeover defense that allows the firm’s existing shareholders to purchase additional shares of the company’s stock at attractive prices is a:
A)
post-offer defense and is called greenmail.
B)
pre-offer defense and is called a poison put.
C)
pre-offer defense and is called a poison pill.


When the firm’s existing shareholders are allowed to purchase additional shares of stock at a significant discount to the current market price in an attempt to thwart a takeover, this is called a poison pill defense. This is a pre-offer defense.
作者: soverby    时间: 2012-3-30 14:16

Froogal Inc. operates in an industry where the current Herfindahl-Hirschman Index (HHI) is at 1,500. The company is considering merging with a competitor that would increase the HHI by 75. Is the merger likely to attract anti-trust action?
A)
Not enough information about the number of competitors.
B)
Yes, because the industry pre-merger is considered highly concentrated and the change in HHI is greater than 50.
C)
No, because the industry pre-merger is considered moderately concentrated and the change in the HHI is less than 100.


If the post-merger HHI is less than 1,000, the industry is considered competitive and an antitrust challenge is unlikely. A post-merger HHI value between 1,000 and 1,800 will place the industry in the moderately concentrated category. In this case, regulators will compare the pre-merger and post-merger HHI. If the change is greater than 100 points, the merger is likely to be challenged on antitrust grounds. A post-merger HHI calculation greater than 1,800 implies a highly concentrated industry. Regulators will again compare the pre-merger and post-merger HHI calculations, but in this case, if the change is greater than 50, the merger is likely to be challenged.
作者: soverby    时间: 2012-3-30 14:17

In the advanced widget industry, there are 10 firms, each with the same market share. Two of the firms are contemplating a merger. What is the likely antitrust action, and which U.S. federal regulatory agency is responsible for taking any action deemed necessary?
A)
Possible challenge; Federal Trade Commission.
B)
Certain challenge; Federal Trade Commission.
C)
Possible challenge; Commerce Department.


Before the merger, the HHI is 1000. After the proposed merger, the HHI would be 1200. The value and the magnitude of the change indicate that a challenge is possible, but not certain. The Federal Trade Commission, along with the Department of Justice, is responsible for reviewing and approving/challenging proposed mergers.
作者: soverby    时间: 2012-3-30 14:17

There are 12 firms in an industry, 10 of them have a market share of 7% each, and 2 of them have a market share of 15% each. If 2 of the 7% market share firms agree to merge, calculate the pre- and post-merger Herfindahl-Hirschman Index, and evaluate the likelihood that the merger will be challenged on antitrust grounds.
A)
Pre-merger HHI = 940; Post-merger HHI = 1038; Unlikely.
B)
Pre-merger HHI = 940; Post-merger HHI = 1038; Possible.
C)
Pre-merger HHI = 833; Post-merger HHI = 972; Unlikely.


The pre-merger HHI = 940 = ((7 × 7 × 10) + (15 × 15 × 2)), the post-merger HHI = 1038 = ((7 × 7 × 8) + (14 × 14 × 1) + (15 × 15 × 2)). Since the change is less than 100, a challenge is unlikely.
作者: soverby    时间: 2012-3-30 14:17

The three broad index value categories for the post-merger competitiveness of an industry, based upon the Herfindahl-Hirschman Index, are:
A)
Less than 1000, between 1000 and 1800, and greater than 1800.
B)
Less than 1000, between 1000 and 2000, and greater than 2000.
C)
Less than 900, between 900 and 1800, and greater than 1800.


The three broad value categories for the post-merger competitiveness of an industry, based upon the HHI index are less than 1000 (competitive), between 1000 and 1800 (moderately concentrated), and greater than 1800 (highly concentrated).
作者: soverby    时间: 2012-3-30 14:18

There are 6 firms in a given industry, each with an equal market share. Suppose that 2 of the firms decide to merge. Calculate the pre- and post-merger Herfindahl-Hirschman Index, and evaluate the likelihood that the merger will be challenged on antitrust grounds.

A) Pre-merger HHI = 1673; Post-merger HHI = 2224; Possible.

B) Pre-merger HHI = 1673; Post-merger HHI = 2503; Virtually certain.

C) Pre-merger HHI = 1673; Post-merger HHI = 2224; Virtually certain.





--------------------------------------------------------------------------------

The pre-merger HHI = 1673 = ((16.7 × 16.7 × 6)), the post-merger HHI = 2224 = ((16.7 × 16.7 × 4) + (33.3 × 33.3 × 1)). Given the 551 point change in the index, an antitrust challenge is virtually certain.
作者: HuskyGrad2010    时间: 2012-3-30 14:22

Gazelle Bancorp was formed 11 years ago to address what its founders deemed unmet consumer needs. Apparently, they were correct in their assessment, and Gazelle has grown rapidly as a niche player. This has attracted the attention of the other banks in its market, and rumors are swirling that two of its competitors are contemplating takeover bids for Gazelle. The firm’s management has approached Omega Financial for advice on strategies it can employ should the firm become a takeover target.Ionnias Padras, CFA, has been assigned as the lead advisor to Gazelle’s management. In advance of their initial meeting, he has prepared a list of questions and discussion points. With this information he hopes to built a coherent strategy either to fend off the potential suitors or to realize maximum value for Gazelle’s shareholders, should a takeover be consummated.
During the course of his meeting with management, Padras asks the bank managers a series of questions, and the answers he received are provided below each question.

Q1: What is your growth rate, and how does it compare to your potential acquirers?
A1: Our profits have been growing at a rate of approximately 10% per year, while our potential acquirers’ profits have been growing in line with the overall economy, which is about 3 to 4% per year.

Q2: Do you have any takeover defenses in place, and, if so, what are they?
A2: We have established a set of compensation arrangements to enhance management’s security. If a merger were to occur, our top 7 management personnel would each be paid 4 years salary. This is contingent upon the managers agreeing to remain in their jobs until the merger is completed.

Q3: How many banks are operating in the market, and what are their market shares?
A3: There are 11 other comparable financial institutions in our market. 8 of these institutions have a market share of 6% each, 3 of them have a market share of 15% each, and we have a share of 7%. Potential acquirer 1 has a share of 15%, while potential acquirer 2 has a share of 6%.

Q4: Do you consider any of your current competitors similar to Gazelle? Were there other banks previously present in the market that have been taken over recently?
A4: None of the current competitors have business models or growth rates that are comparable to Gazelle. There are three previously independent institutions that have business models and growth rates similar to ours, and are our direct competitors. These banks were taken over by other banks within the past 3 years.

Q5: What is Gazelle’s current market price and how many shares are outstanding? If your firm were to merge with either of its potential suitors, what is your estimate of the synergies available? Is there any chance that your board would agree to a takeover if the price were right?
A5: Our current share price is $43, and there are 50 million shares outstanding. We estimate that the present value of potential cost reductions and revenue enhancements for an acquirer would be approximately $500m. The board can probably be convinced to accept an offer it believes to be adequate.

Q6: Describe the structure of your banking operations. Is there any other course of action that you would consider that might make the bank less attractive as a takeover target?
A6: Gazelle is a combination of a traditional, full service bank, and a 24/7 provider of personal financial services. For example, we have been able to obtain exclusive agreements with the 2 largest grocery chains in our market to open branch offices in their stores. We have similar agreements with other 24/7 retail establishments, and consumers have found the ability to bank at any time of the day extremely attractive. We believe that this is the part of Gazelle that our prospective suitors are seeking.

Based upon the information provided to Padras, does it appear that the potential suitors are seeking to bootstrap their earnings? What stage of the industry lifecycle is Gazelle most likely in?
Bootstrap EarningsIndustry Life Cycle
A)
NoMature growth
B)
YesRapid growth
C)
NoRapid growth


In order for bootstrapping to occur, a high price-to-earnings (P/E) firm needs to acquire a low P/E firm. In this case, based upon the relative growth rates, the opposite is likely to be true. Gazelle is most likely in the mature growth stage. In this stage, competition is present, but there is still opportunity for above average growth. During the rapid growth stage, competition is more limited than appears to be the case for Gazelle. (Study Session 9, LOS 32.d)
What type of take-over defense does Gazelle have in place, and is this likely to be sufficient to fend off a potential suitor?

Take-Over DefenseDefense Sufficient?
A)
Golden parachuteNo
B)
Golden parachuteYes
C)
GreenmailNo


The company has a golden parachute package in place. If the compensation for the top 7 managers averaged $500,000, the total cost of the golden parachute is $14m. This is probably not sufficient to deter a bidder. Conversely, to the extent that it helps keep management in place during the acquisition, it may make Gazelle more attractive as an acquisition candidate. (Study Session 9, LOS 32.f)
If both of the prospective acquirers were to make bids, what are the probable antitrust ramifications for potential acquirer 1 and potential acquirer 2, respectively?
A)
No chance of antitrust action because change in HHI is less than 100; no chance of antitrust action because change in HHI is less than 50.
B)
Good chance of antitrust action because change in HHI is greater than 100; small chance of antitrust action because change in HHI is less than 100.
C)
Antitrust action virtually certain because change in HHI is greater than 100; small chance of antitrust action because change in HHI is less than 50.


Based upon the market share data provided, the initial HHI value is:

If acquirer 1 were successful, the new HHI = 1222 (an increase of 210). This indicates a good chance of an antitrust challenge.
If acquirer 2 were successful, the new HHI = 1096 (an increase of 84). This indicates a small chance of an antitrust challenge. (Study Session 9, LOS 32.g)
Based upon the information provided, what type of valuation methodology is most likely to be used by the potential acquirers?
A)
Comparable transaction.
B)
Comparable firm.
C)
Discounted cash flow.


Since there are no comparable direct competitors in the market, comparable firm analysis is unlikely. Discounted cash flow analysis is a viable possibility. However, given that there have been 3 comparable transactions over the past 3 years, this argues strongly in favor of a comparable transaction valuation methodology. (Study Session 9, LOS 32.h)
What is the probable price range for an offer for Gazelle? If one of the acquirers makes an offer of $55, should the board accept it?
Price RangeAccept
A)
$43 to $53 No
B)
$43 to $63 Yes
C)
$43 to $53Yes


The probable price range is the current market price to the current price + the value of the synergies. That is, $43 to $43 + 500m / 50m = $53. If they receive an offer greater than $53, the board should accept. (Study Session 9, LOS 32.k)
If Gazelle were to separate itself into two parts, the traditional bank and the 24/7 bank, and to sell off the 24/7 bank in a public offering, what would the action be called from the standpoint of the sale and from the standpoint of a takeover defense?
SaleTakeover Defense
A)
Equity carve-out Crown jewel defense
B)
Equity carve-out Leveraged recapitalization defense
C)
Split-offCrown jewel defense


A public offering of a subsidiary as a stand-alone enterprise is called an equity carve-out. Using this technique to fend off a merger is known as a crown jewel defense. (Study Session 9, LOS 32.n)
作者: HuskyGrad2010    时间: 2012-3-30 14:23

Which of the following statements concerning valuation using comparable transaction analysis of takeover candidates is least accurate?
A)
A disadvantage is that since the approach uses data from actual transactions, it can be difficult to estimate the takeover premium.
B)
An advantage is that estimates of value are derived directly from actual transactions, rather than from assumptions and estimates about the future.
C)
An advantage is that by using real transactions data as the basis of evaluation, the risk of future litigation concerning the proposed takeover price is reduced.


The fact that the approach uses data from actual transactions is an advantage, since it is not necessary to estimate the takeover premium. Both remaining statements are correct as presented.
作者: HuskyGrad2010    时间: 2012-3-30 14:23

Which of the following statements concerning valuation using comparable company analysis of takeover candidates is least accurate?
A)
An advantage is that data for comparable companies is usually easy to access.
B)
A disadvantage is that it is difficult to incorporate merger synergies or changing capital structures into the analysis.
C)
An advantage is that the approach implicitly assumes that the market’s valuation of the comparable companies is accurate.


The fact that the approach implicitly assumes that the market’s valuation of the comparable companies is accurate is a disadvantage if the assumption is not correct. Both remaining statements are correct as presented.
作者: HuskyGrad2010    时间: 2012-3-30 14:24

Which of the following statements concerning valuation using discounted cash flow analysis of takeover candidates is least accurate?
A)
A disadvantage is that the model is difficult to apply when free cash flows are negative.
B)
A disadvantage is that the model is difficult to customize.
C)
An advantage is that the estimate is based on forecasts of fundamental conditions in the future rather than on current data.


An advantage of the discounted cash flow valuation approach is that the model is relatively easy to customize. Both remaining statements are correct as presented.
作者: HuskyGrad2010    时间: 2012-3-30 14:26

Gambit Enterprises is being evaluated as an acquisition target. An analyst believes that the firm will have free cash flow (FCF) of $500m during year 5, after which the growth rate in FCF is expected to be 4% indefinitely. The weighted average cost of capital (WACC) for Gambit is 10%. What is the estimated value of the firm at the end of year 5?
A)
$8333m.
B)
$9167m.
C)
$8667m.


Value at end of year 5 = (FCF year 5 × (1 + g)) / (WACC – g)
Value at end of year 5 = (500 × 1.04) / (0.10 – 0.04) = $8667m
作者: HuskyGrad2010    时间: 2012-3-30 14:26

Gambit Enterprises is being evaluated as an acquisition target. For the upcoming year an analyst has estimated the following values: net income = $300m, net interest after tax = $100m, change in deferred taxes = +$25m, depreciation = $200m, change in net working capital = +$30m, CAPEX = $250m. Calculate the firm’s estimated free cash flow.
A)
$295m.
B)
$405m.
C)
$345m.


Net income + net interest after tax = 300m + 100m = $400m = unlevered net income.
Unlevered net income + change in deferred taxes = 400m + 25m = $425m = NOPLAT.
NOPLAT + depreciation – change in net working capital – CAPEX = 425m + 200m – 30m – 250m = $345m = FCF.
作者: HuskyGrad2010    时间: 2012-3-30 14:26

Felix Hernandez is evaluating a prospective merger between two firms of relatively equal size. The acquirer is planning to borrow the entire purchase price and pay for the merger in cash. Which method of estimating the target’s intrinsic value and potential merger synergies is likely to be most useful?
A)
Comparable company analysis because the values are market-based.
B)
Discounted cash flow analysis because it will allow him to incorporate changes in the capital structure and cost of capital that are likely to result from the way the acquirer intends to raise the funds to pay for the target.
C)
Comparable company analyses because the assumption that similar assets should have similar values is fundamentally sound.


Because the firms are of relatively equal size, and because the acquirer is planning to borrow the entire purchase price, it appears probable that the outcome will be a large change in capital structure. Comparable company analysis assumes that the capital structure remains fairly constant. Discounted cash flow analysis allows the analyst to incorporate changes in cash
作者: HuskyGrad2010    时间: 2012-3-30 14:27

Gambit Enterprises is being evaluated as an acquisition target. An analyst estimates the firm’s free cash flows as $10m, $20m, $30m, $40m, and $50m over the upcoming 5 years. At the end of year 5, you estimate that the firm’s value will be $1000m. If the weighted average cost of capital (WACC) is 8%, what is your estimated value of the firm today?
A)
$794m.
B)
$683m.
C)
$881m.


Value =
作者: HuskyGrad2010    时间: 2012-3-30 14:27

An analyst has identified three companies that they believe are comparable to a firm under evaluation as a takeover candidate. The relative value measures that they have selected are price-to-earnings (P/E) and price-to-sales (P/S), and the average values of these ratios are 13.2 and 1.3. The target firm has earnings per share of $3.75, and sales per share of $36.08. If the estimated takeover premium is 25%, what is the estimated takeover price per share?
A)
$60.25.
B)
$61.88.
C)
$58.63.


The estimated value based upon P/E is $49.50 = (3.75 × 13.2).
The estimated value based upon P/S is $46.90 = (36.08 × 1.3).
The average of these two values is $48.20.
The estimated takeover price is $48.20 × 1.25 = $60.25.
作者: HuskyGrad2010    时间: 2012-3-30 14:28

An analyst has identified three companies that they believe are comparable to a firm under evaluation as a takeover candidate. The relative value measures they have selected are price-to-earnings (P/E) and price-to-cash flow (P/CF). The market price, earnings per share, and cash flow per share, for each company, respectively, are:
Market PriceEPSCF per Share
Company A55  4.80  6.26
Company B12910.4013.75
Company C19  1.80  2.10

What values for these ratios should be applied to the target firm?
A)
P/E = 12.5x, P/CF = 8.9x.
B)
P/E = 11.5x, P/CF = 9.1x.
C)
P/E = 11.9x, P/CF = 9.0x.



作者: HuskyGrad2010    时间: 2012-3-30 14:28

Which of the following orderings is most accurate with regard to the steps involved in valuation using comparable company analysis?
A)
Identify comparable companies, apply value measures to target firm, calculate relative value measures, estimate takeover premium, and calculate the estimated takeover price.
B)
Calculate relative value measures, identify comparable companies, apply value measures to target firm, estimate takeover premium, and calculate the estimated takeover price.
C)
Identify comparable companies, calculate relative value measures, apply value measures to target firm, estimate takeover premium, and calculate the estimated takeover price.


The correct ordering is identify comparable companies, calculate relative value measures, apply value measures to target firm, estimate takeover premium, and calculate the estimated takeover price. Note that the estimation of the takeover premium could be done at any point prior to the final step, but the other four steps are sequential
作者: HuskyGrad2010    时间: 2012-3-30 14:28

Fuel Cell Enterprises is in a new and rapidly-evolving industry, and is being evaluated as an acquisition candidate by Auto Giant, Inc. There are about 10 firms that broadly resemble Fuel Cell, but none of its competitors have been taken over up to this point. Because of the nature of the firm’s technology, the level of risk is difficult to estimate and may change rapidly as the technology matures. Which type of analysis is likely to be most appropriate in the valuation of Fuel Cell?
A)
Comparable company analysis.
B)
Discounted cash flow analysis.
C)
Comparable transaction analysis.


The fact that no mergers of similar companies have occurred effectively rules out comparable transaction analysis. The difficulty in estimating the firm risk suggests that discounted cash flow analysis is fraught—small changes in the discount rate can lead to large changes in estimated firm value. Since there is a sufficiently large sample of firms similar to Fuel Cell, this suggests that comparable company analysis is likely to be most appropriate.
作者: HuskyGrad2010    时间: 2012-3-30 14:29

Clothing Tree is a Milan-based holding company. The holding company comprises individual firms with unique brands that produce and sell products ranging from infant and children’s clothing, to fashion wear, to work uniforms, to undergarments. The firm’s founder and chairman, Romano Nocci, says that “since we assume that people will continue to wear clothes, we continue to believe that this is a good business for the long haul.”
However, in spite of his overall belief in the soundness of the clothing market, he realizes that tastes and fashions change, and believes that the firm should constantly be on the lookout for suitable candidates to add to the Clothing Tree empire. He also believes that it may make sense to restructure the firm by creating a new holding company, Family Tree, to own the Clothing Tree plus two new divisions—Food Tree and Drug Tree.
The Food Tree would be a holding company formed to acquire companies in all phases of the food business. The Drug Tree would be a holding company formed to acquire companies in all phases of the non-prescription pharmaceuticals market. Both of these product lines are necessary goods, so Nocci believes that they would fit well with the firm’s existing clothing businesses.
To help implement this acquisition strategy, Nocci has hired Zurich Investment Advisers. Armando Palocci, CFA has been assigned to be the lead advisor in this effort. When Palocci and his team met with Nocci and other key Tree managers, they discussed a wide-ranging set of subjects relating to the nascent acquisition plans. These discussions are summarized in the paragraphs below.
Palocci asks whether additions to the Tree empire will continue to maintain their identities. For example, if Food Tree were to purchase Parma Foods, would the company be operated as a subsidiary and maintain its identity, or would it be combined with other acquisitions and rebranded as Food Tree? Nocci indicates that this would likely depend upon the value of maintaining the brand versus the efficiencies that could be gained from combining acquisitions.
Does the Tree want to avoid firms that have takeover defenses in place? If so, which types of defenses? Nocci responds that he “would prefer to avoid firms that have pre-offer defenses, such as poison pills and pac-man defenses in place because these make the cost of an acquisition prohibitive. However, if a firm has shown a willingness to pay greenmail in the past, he would not be averse to testing the management again on this count.”Some of the acquisition targets will likely have business interests in the U.S. and Canada, as well as Europe. Palocci describes to Nocci how industry concentration is measured in the U.S., and what might cause an acquisition to be challenged on antitrust grounds. Nocci indicates that whether or not it makes sense to run the risk of an antitrust challenge will depend, in part, on the potential gains from the merger. Thus, they must be evaluated on a case by case basis.

Palocci and Nocci conclude their discussions with a review of acquisition target valuation methods, the evidence concerning the distribution of merger benefits, and strategies that the firm might employ if it were to purchase a firm with several divisions, some of which it does not wish to keep.If Food Tree is successful in purchasing a food company for which it maintains the firm’s existing identity and brands, the first such purchase would be classified as a:
A)
statutory, conglomerate merger.
B)
subsidiary, conglomerate merger.
C)
subsidiary, horizontal merger.


The first food company, being in an entirely different business from clothing, would have to be considered a conglomerate merger. The fact that the firm intends to maintain the target’s identity after it is acquired indicates that it would be considered a subsidiary merger. (Study Session 9, LOS 32.a)
With regard to Nocci’s description of the types of takeover defenses he would prefer to avoid, he is:
A)
incorrect with respect to the poison pill defense, and incorrect with respect to the pac-man defense.
B)
correct with respect to the poison pill defense, and correct with respect to the pac-man defense.
C)
correct with respect to the poison pill defense, but incorrect with respect to the pac-man defense.


Nocci is correct with respect to the poison pill defense. It is a pre-offer defense that can make an acquisition prohibitively expensive. The pac-man defense is a post-offer defense. It involves the acquisition target turning the table and attempting to acquire the firm that is making the offer. (Study Session 9, LOS 32.f)
With respect to antitrust challenges in the United States, Palocci should have told Nocci that the decision to challenge is based upon a:
A)
qualitative measure of industry concentration, but that the issue is not clear-cut.
B)
quantitative measure of industry concentration, and that the issue is clear-cut once the change in the measure is known.
C)
quantitative measure of industry concentration, but that the issue is not clear-cut.


Palocci should have told him that the decision to challenge is based upon a quantitative measure of industry concentration, but that the issue is not necessarily clear-cut. (Study Session 9, LOS 32.g)
Food Tree is likely to have to evaluate potential acquisition targets that are temporarily experiencing financial distress or earnings problems that can be solved with an application of the Tree’s financial strength and management expertise. That said, the food industry, by and large, consists of firms that have relatively predictable revenue and cost patterns, and the level of investment risk is well-understood. All else being equal this set of circumstances would seem to argue for which of the following valuation approaches?
A)
Discounted cash flow.
B)
Comparable company.
C)
Comparable transaction.


If a firm is in financial distress or experiencing earnings problems, this will make it difficult to apply the comparable company or comparable transaction approaches. However, if the firm can be restored to health and future cash flows and risks are fairly predictable, this implies that discounted cash flow valuation may provide the best results. (Study Session 9, LOS 32.i)
Suppose that Drug Tree has identified three comparable companies relative to a target under evaluation. The valuation metric is price to sales (P/S). The three comparable companies have P/S ratios of 2.17, 1.98, and 2.09. The target has sales of €600m. What value of the P/S should be applied to the target, and what is the estimated value?

P/SEstimated Value
A)
2.08€1248m
B)
2.17€1302m
C)
1.98€1188m


The appropriate value to apply to the target is the average, or P/S = 2.08. If sales = €600m then solving for P = 2.08 × €600m yields an estimated target value of €1248m. (Study Session 9, LOS 32.j)
Palocci advises that if the Food Tree purchases a firm that includes a division that does not fit the Tree’s strategic plan, the firm can sell the division via divestiture, equity carve-out, spin-off, or split-off. However, he tells Nocci that only the divestiture will provide Food Tree with cash after completion, because the others all involve the distribution of stock in the division. Palocci’s advice is:
A)
correct with respect to the alternatives, and correct with respect to the provision of cash.
B)
incorrect with respect to the alternatives, and incorrect with respect to the provision of cash.
C)
correct with respect to the alternatives, but incorrect with respect to the provision of cash.


Palocci’s list of methods is correct for a going concern (liquidation is also an option if the firm is in financial distress, which is assumed not to be the case here). However, he is incorrect with respect to the provision of cash. An equity carve-out will also generate cash, via the public offering of shares in the division. A spin-off or split-off will not generate cash for Food Tree. (Study Session 9, LOS 32.n)
作者: HuskyGrad2010    时间: 2012-3-30 14:29

Which of the following orderings is the most accurate with regard to the steps involved in valuation using comparable transaction analysis?
A)
Identify comparable companies, calculate relative value measures, apply relative value measures to target firm, estimate takeover premium, estimate takeover price.
B)
Identify recent takeovers of comparable companies, calculate relative value measures, apply relative value measures to target firm, estimate takeover premium, estimate takeover price.
C)
Identify recent takeovers of comparable companies, calculate relative value measures, apply relative value measures to target firm.


The correct ordering is: identify recent takeovers of comparable companies, calculate relative value measures, apply relative value measures to target firm. Identifying comparable companies is not correct by itself because they need to have been taken over. There is no need to estimate the takeover premium because this will be present in the relative value measures for firms that have been taken over.
作者: HuskyGrad2010    时间: 2012-3-30 14:30

An analyst has identified three companies (AAA, BBB, and CCC) that have recently been taken over and are comparable to a firm under evaluation as a takeover candidate. The relative value measures they have selected are the price-to-earnings (P/E) and price-to-sales (P/S). The takeover price, earnings per share, and sales per share, for each company, respectively, are as follows:
Takeover PriceEPSSales per Share
AAA654.8048.00
BBB14910.40118.75
CCC261.8019.50

What values for these ratios should be applied to the target firm?
A)
P/E = 14.3x, P/S = 1.33x.
B)
P/E = 13.5x, P/S = 1.25x.
C)
P/E = 14.1x, P/S = 1.31x.


Takeover PriceEPSSales per ShareP/EP/S
AAA654.8048.0013.51.35
BBB14910.40118.7514.31.25
CCC261.8019.5014.41.33

作者: HuskyGrad2010    时间: 2012-3-30 14:30

The quick change oil industry has been in a consolidation phase for about a decade, during which time the number of firms has shrunk from more than 50 to 15. An analyst is evaluating one of the remaining 15 firms as an acquisition target, and has come up with the following estimated acquisition prices:

Methods of Analysis

Price per Share


Discounted CF

$50


Comparable Company

$48


Comparable Transaction

$57


Under the circumstances, which of these estimates is most likely to represent the ultimate acquisition cost, and why?
A)
Comparable transaction, because a sufficient number of transactions have occurred for intrinsic value to be relatively well-understood by market participants.
B)
Comparable company, because there is a large enough sample to ensure that valuation is correct, on average.
C)
Discounted cash flow (CF), because this considers expectations for the future as well as current data.


Given the large number of acquisitions that have occurred in the industry, comparable transaction is likely to provide the most reliable estimate of the ultimate acquisition price. Comparable company analysis is certainly a viable method to estimate value, but still requires the analyst to estimate the takeover premium. This step is unnecessary when using the comparable transaction approach. Discounted CF valuation is also a viable method, but, in the presence of numerous comparable firms and transactions, logic suggests that the market-based valuation provided by the comparable transaction approach is more likely to produce superior results.
作者: HuskyGrad2010    时间: 2012-3-30 14:31

An analyst has identified three companies that have recently been taken over which they believe are comparable to a firm under evaluation as a takeover candidate. The relative value measures that they have selected are the price-to-earnings (P/E) and price-to-cash flow (P/CF), and the average values of these ratios are 11.2 and 8.6. The target firm has earnings per share of $2.45, and cash flow per share of $3.05. What is the estimated takeover price per share?
A)
$27.44.
B)
$26.23.
C)
$26.84.


The estimated value based upon P/E is $27.44 = (2.45 × 11.2).
The estimated value based upon P/CF is $26.23 = (3.05 × 8.6).
The estimated takeover price is the average of these two values: $26.84.
作者: HuskyGrad2010    时间: 2012-3-30 14:31

Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:

Big Steel  Small Steel
Pre-merger stock price $75  $100
Number of shares outstanding 500m  40m
Pre-merger market value $37,500m  $4,000m
Estimated synergies  $600m  

If Big Steel buys Small Steel by exchanging 1.45 shares of its stock for each share of Small Steel, what are the gains to Big Steel and Small Steel, respectively?

Big Steel Small Steel


A) $100.8m $491.3m


B) $223.9m $376.1m


C) $246.2m $353.8m






--------------------------------------------------------------------------------


Value after takeover = $37,500 + $4,000 + $600 = $42,100m.
Shares exchanged for Small Steel = 1.45 × 40m = 58m.
Post-takeover share price = value after takeover / shares outstanding = 42,100m / 558m = $75.45.
Takeover price = number of shares to small steel × post-takeover share price = 58m × $75.45 = $4,376.1m.
Gains to Small Steel = takeover premium = $4,376.1 – $4,000 = $376.1m.
Gains to Big Steel = synergies – takeover premium = $600 – $376.1 = $223.9m
作者: HuskyGrad2010    时间: 2012-3-30 14:31

Which of the following statements concerning the gains from a merger are least accurate?
A)
In a stock offer, gains to the target shareholders are dependent upon the post-merger stock price of the acquirer.
B)
In a stock offer, the target shareholder’s gains are less than those from a comparable cash offer.
C)
In a cash offer, the target shareholder’s gains are capped at the amount of the takeover premium.

In a stock offer, the target shareholder’s gains will generally exceed those from a comparable cash offer. This, of course, depends upon the acquirer’s stock price following the merger. But, if the exchange ratio is based upon the acquirer’s pre-merger price, and if the post-merger price exceeds the pre-merger price, the target’s gains from the stock offer should be greater than those from a cash offer.
作者: HuskyGrad2010    时间: 2012-3-30 14:32

Big Steel is considering making a bid for Small Steel. The following data applies to the analysis:
Big SteelSmall Steel
Pre-merger stock price$75$100
Number of shares outstanding500m40m
Pre-merger market value $37,500m $4,000m
Estimated synergies $600m

If Big Steel buys Small Steel for $110 per share in cash, what are the gains to Big Steel and Small Steel, respectively?
Big SteelSmall Steel
A)
$400m$200m
B)
$200m$400m
C)
$500m$100m


Gains to Small Steel = takeover premium = $4,400 – $4,000 = $400m.
Gains to Big Steel = synergies – takeover premium = $600 – $400 = $200.
作者: HuskyGrad2010    时间: 2012-3-30 14:32

Oak Industries is considering making a bid for Tidy Trim Makers. The following data applies to the analysis:

[td=1,1,67]
Oak Ind.
[td=1,1,102]
Tidy Trim

Pre-merger stock price
$55
[td=1,1,102]
$80

Number of shares outstanding
400m
[td=1,1,102]
20m

Pre-merger market value
$22,000m
[td=1,1,102]
$1,600m

Estimated synergies
[td=1,1,94]

$700m



If Oak Industries is confident that the merger synergies will be at least $700m or greater, the merger price should be between:
A)
$1,600m and $2,300m and be paid for with cash.
B)
$1,600m and $2,300m and be paid for with stock.
C)
$700m and $2,300m and be paid for with cash.


The merger price should fall within the range of the pre-merger value of the target ($1,600m) and the pre-merger value plus the estimated synergies ($2,300m). Since the acquirer is confident that the synergies will be $700m or greater, they will most likely seek to pay in cash so that they capture any upside for themselves.
作者: HuskyGrad2010    时间: 2012-3-30 14:33

Which of the following statements regarding merger synergies are least accurate?
A)
The more confident the acquirer is that synergies will be realized, the more likely they will make a cash offer.
B)
In a stock offer, if estimates regarding the value of the synergies are too high, the target shareholders will bear some of the downside.
C)
In a stock offer, all of the risks and potential rewards shift to the target shareholders.


In a stock offer, some of the risks and potential rewards shift to the target shareholders. Both remaining statements are correct as presented.
作者: HuskyGrad2010    时间: 2012-3-30 14:33

Which of the following statements regarding a cash offer are least accurate?

A) If the synergies are less than expected, the acquirer will bear the cost.

B) The target assumes some of the risk regarding the value of the synergies.

C) The target’s payoff is fixed, regardless of the synergies realized.





--------------------------------------------------------------------------------
The target’s payoff is fixed, and the acquirer assumes the risk and the reward regarding the value of the synergies.
作者: HuskyGrad2010    时间: 2012-3-30 14:34

The theoretical price range for a merger transaction is between the pre-merger price of the target (VT), and:
A)
VT + the takeover premium.
B)
VT + synergies resulting from the merger – the takeover premium.
C)
VT + synergies resulting from the merger.


Assuming that the true intrinsic values and synergies from the takeover can be correctly estimated, the theoretical price range for a merger transaction is between a low of the pre-merger price of the target (VT), and a high of VT + synergies resulting from the merger. At the low, all of the gains from the merger accrue to the acquirer. At the high, all of the gains accrue to the target
作者: HuskyGrad2010    时间: 2012-3-30 14:34

Based upon long-term stock performance following a merger, academic studies suggest that acquirers:
A)
moderately outperform their peers, with slightly more than half exceeding their group.
B)
significantly underperform their peers, with more than 60% lagging their group.
C)
moderately underperform their peers, with slightly more than half lagging their group.


Based upon long-term (3-year) performance following a merger, academic studies suggest that acquirers significantly underperform their peers, with more than 60% performing worse than their peer group averages.
作者: HuskyGrad2010    时间: 2012-3-30 14:34

Based upon short-term stock performance around the merger date, academic studies concerning the distribution of the benefits suggest that:
A)
the acquirer usually loses value, but the target usually gains value.
B)
both parties usually gain value.
C)
the target usually loses value, but the acquirer usually gains value.


Studies based upon short-term stock performance around the merger date suggest that the acquirer loses a small amount of value, while the target makes significant gains.
作者: HuskyGrad2010    时间: 2012-3-30 14:35

Empirical evidence suggests that the majority of the benefits from a merger accrue to the target firm’s shareholders. What does this suggest about the outcome of a competitive bidding process, and what does this imply with regard to the payment strategy and bidding strategy for prospective acquirers? It suggests that the:
A)
target’s management is infected with pride, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.
B)
winner’s curse is real, that the preferred payment method in competitive bidding should be stock, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.
C)
winner’s curse is real, that the preferred payment method in competitive bidding should be cash, and that the bidder should be prepared to withdraw if the probable cost exceeds the target’s pre-merger value plus estimated synergies.


If the values of the bids are, on average, correct, then the winner has, by definition, overpaid. This is the winner’s curse. Since the empirical evidence suggests that the process is risky for the bidder, the form of payment should be stock so that the risk is shared with the target’s shareholders. The bidder should be prepared to withdraw if the cost exceeds maximum fair value.
作者: HuskyGrad2010    时间: 2012-3-30 14:35

Which of the following statements regarding the distribution of the benefits from a merger are least accurate?
A)
Short-term performance around the date of a merger suggests that target management suffers from reference dependence in attempting to extract value for shareholders.
B)
Long-term performance following a merger transaction suggests that the acquiring firm is unable to capture the synergies expected prior to the merger.
C)
The winners curse implies that in a contested takeover, on average, the winning bidder overpays for the target.


Short-term performance around the date of a merger suggests that, on average, target shareholders benefit handsomely from the completion of a merger transaction. In fact, they appear to extract all of the benefits of the merger. Reference dependence is a behavioral finance term that does not appear to be applicable to target firm management in the case of mergers
作者: HuskyGrad2010    时间: 2012-3-30 14:36

When a parent company sells a subsidiary or a coherent group of assets with a stated reason to provide a near-term infusion of cash, which method for selling the assets is most likely?
A)
Spin-off.
B)
Equity carve-out.
C)
Divestiture.


Spin-offs involve the issuance of shares in the new firm, and do not generate cash for the parent company. Hence, this can be ruled out if the intent is an infusion of cash. An equity carve-out will generate cash for the parent when the public offering is completed, but this can take time. A divestiture is typically a sale to another firm for cash, and is likely to be completed much more quickly than a carve-out. Therefore, if the intent is to provide a near-term infusion of cash, a divestiture is most likely.
作者: HuskyGrad2010    时间: 2012-3-30 14:36

The difference between a spin-off and a split-off is that in a spin-off:
A)
the parent’s existing shareholders receive shares in the new firm on a pro-rata basis, whereas they must surrender their shares in the parent to obtain shares of the new firm in a split-off.
B)
shares in the new firm are distributed on a pro-rata basis to existing shareholders, but are sold via a public offering in a split-off.
C)
the parent’s existing shareholders must surrender their shares in the parent to obtain shares of the new firm, whereas they receive shares in the new firm on a pro-rata basis in a split-off.


In a spin-off, shares of the new firm are distributed to the parent’s existing shareholders on a pro-rata basis. In a split-off, the parent’s existing shareholders must surrender their shares in the parent to obtain shares in the new firm.
作者: anshultongia    时间: 2012-3-30 14:38

The usual distinction between a divestiture and a spin-off is that a divestiture:
A)
is the sale of a subsidiary for cash, whereas a spin-off involves the distribution of shares in the subsidiary to the parent’s existing shareholders.
B)
is a simple distribution of shares in the subsidiary to the parent’s existing shareholders, whereas a spin-off involves an exchange of the parent’s shares for shares of the subsidiary.
C)
involves the distribution of shares in the subsidiary to the parent’s existing shareholders, whereas a spin-off is the sale of a subsidiary for cash.


Both actions involve the sale of a subsidiary or some coherent subset of the firm’s assets. In the case of a divestiture, the sale is usually for cash. In the case of a spin-off it involves the distribution of the new firm’s shares to the parent’s existing shareholders
作者: anshultongia    时间: 2012-3-30 14:38

Insofar as reasons for divestitures are concerned, when a firm divests of assets because of reverse synergies, this is most consistent with the rationale of:
A)
a lack of profitability.
B)
assets no longer fitting the long-term strategy.
C)
individual parts being worth more than the whole.


Whereas synergies imply that the whole is worth more than the sum of the parts, reverse synergies imply that the whole is worth less than the sum of the parts. Therefore, the firm is better off selling the parts to which this applies because they are worth more separately than they are as a part of the firm.
作者: anshultongia    时间: 2012-3-30 14:39

Insofar as reasons for divestitures are concerned, when a firm divests of assets because of a desire to focus on its core business, this is most consistent with the rationale of:
A)
individual parts being worth more than the whole.
B)
assets no longer fitting the long-term strategy.
C)
a lack of profitability.


A stated desire to focus on the firm’s core business indicates that the assets being sold are not a part of the core business. Thus, the assets no longer fit the long-term strategy.
作者: anshultongia    时间: 2012-3-30 14:39

Insofar as reasons for divestitures are concerned, when a firm divests of assets because of rising costs or a change in consumer tastes, this is most consistent with the rationale of:
A)
assets no longer fitting the long-term strategy.
B)
individual parts are worth more than the whole.
C)
a lack of profitability.


Changes in consumer tastes imply that sales are below expectations, while rising costs are self-explanatory. In either case, this seems to indicate that profitability objectives are not being met.



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