Corporate Finance【 Reading 32】Sample following, 2012

hariRaj

Which of the following is NOT a commonly used merger classification describing forms of integration?

A) Regulatory merger.

B) Consolidation.

C) Subsidiary merger.

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Regulatory merger is not a commonly used merger classification. Both remaining answers are commonly used to describe the form of integration following a merger.

anshultongia

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.

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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.

anshultongia

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.

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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.

anshultongia

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.

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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.

anshultongia

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.

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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

HuskyGrad2010

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.

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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.

HuskyGrad2010

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.

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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.

HuskyGrad2010

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.

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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

HuskyGrad2010

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.

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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.

HuskyGrad2010

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.

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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.