CFM Mergers, Acquisitions & Corporate Restructuring 1 — Questions and Answers
Question 1: What is the primary purpose of due diligence in a merger or acquisition?
- To negotiate the final purchase price with the seller
- To assess risks and verify the target's financial, legal, and operational information (Correct answer)
- To file the required regulatory paperwork with the SEC
- To begin integrating the two companies' IT systems
Correct answer: To assess risks and verify the target's financial, legal, and operational information
Due diligence involves thoroughly investigating the target company to identify risks, liabilities, and verify all disclosed information before completing the transaction.
Question 2: When an acquirer pays more than the fair market value of a target's identifiable net assets, the excess amount is recorded on the consolidated balance sheet as:
- Retained earnings adjustment
- Intangible asset premium
- Goodwill (Correct answer)
- Acquisition reserve
Correct answer: Goodwill
Goodwill represents the excess of the purchase price over the fair value of all identifiable net assets acquired, reflecting intangibles such as brand reputation, customer relationships, and expected synergies.
Question 3: Which M&A valuation approach determines a target's value by benchmarking its financial multiples against those of similar publicly traded firms?
- Discounted Cash Flow (DCF) analysis
- Comparable Company Analysis (CCA) (Correct answer)
- Leveraged Buyout (LBO) analysis
- Sum-of-the-parts analysis
Correct answer: Comparable Company Analysis (CCA)
Comparable Company Analysis uses market-derived multiples such as EV/EBITDA or P/E from peer companies in the same industry to estimate the target's fair value.
Question 4: A leveraged buyout (LBO) is primarily financed by:
- Equity from the acquirer's retained earnings
- Government grants and tax incentives
- Borrowed funds secured by the target's assets and cash flows (Correct answer)
- New stock issuance to the target's existing shareholders
Correct answer: Borrowed funds secured by the target's assets and cash flows
In an LBO, the acquirer uses a high proportion of debt—typically secured by the target's own assets and future cash flows—to fund the purchase, minimizing the equity contribution required.
Question 5: Operational synergies in an M&A transaction most commonly refer to:
- Reduced tax obligations arising from combining the two entities' tax attributes
- Cost savings and revenue enhancements generated by combining operations (Correct answer)
- Increased borrowing capacity created by merging two balance sheets
- Regulatory advantages gained through greater market concentration
Correct answer: Cost savings and revenue enhancements generated by combining operations
Operational synergies arise when the combined entity achieves greater efficiency or revenue than the two standalone firms through economies of scale, eliminated redundancies, or cross-selling opportunities.
Question 6: A 'poison pill' shareholder rights plan is primarily designed to:
- Increase regular dividend payouts to reward long-term shareholders
- Make a hostile takeover prohibitively expensive by allowing existing shareholders to buy new shares at a steep discount (Correct answer)
- Attract competing friendly bidders to maximize the acquisition price
- Accelerate debt repayment obligations upon a change of control
Correct answer: Make a hostile takeover prohibitively expensive by allowing existing shareholders to buy new shares at a steep discount
A poison pill triggers when a single investor acquires a threshold stake, allowing other shareholders to buy additional shares at a discount and thereby massively diluting the hostile acquirer's position.
Question 7: The 'acquisition premium' paid in an M&A transaction is best defined as:
- The target company's share price immediately before the deal announcement
- The percentage by which the offer price exceeds the target's pre-announcement market price (Correct answer)
- The total advisory and legal fees paid to investment banks and attorneys
- The market capitalization of the combined entity on the closing date
Correct answer: The percentage by which the offer price exceeds the target's pre-announcement market price
The acquisition premium is the amount above the target's pre-deal market value that the acquirer pays, typically ranging from 20–40% for public company acquisitions, reflecting expected synergies and control value.
CFM Mergers, Acquisitions & Corporate Restructuring 1
What is the primary purpose of due diligence in a merger or acquisition?