CFM Mergers, Acquisitions & Corporate Restructuring 2 — Questions and Answers
Question 1: Which statement most accurately distinguishes a merger from an acquisition?
- In a merger, one company purchases only the assets of another; in an acquisition, both companies combine as equals
- In a merger, two companies combine to form a new or surviving entity; in an acquisition, one company purchases and absorbs another (Correct answer)
- Mergers are always friendly transactions, while acquisitions are always hostile
- Mergers require antitrust approval; acquisitions of any size do not
Correct answer: In a merger, two companies combine to form a new or surviving entity; in an acquisition, one company purchases and absorbs another
A merger combines two companies into a single surviving or newly formed entity, while an acquisition involves one company purchasing another and maintaining its own corporate identity.
Question 2: In a stock-for-stock acquisition, what do the target company's shareholders receive as consideration?
- Cash at the negotiated offer price per share
- A mix of cash and newly issued debt instruments
- Shares of the acquiring company based on a predetermined exchange ratio (Correct answer)
- Warrants to purchase shares of the combined entity at a future date
Correct answer: Shares of the acquiring company based on a predetermined exchange ratio
In a stock-for-stock deal, target shareholders exchange their shares for acquirer shares at an agreed-upon ratio, making them equity holders in the combined company.
Question 3: A 'crown jewel' takeover defense strategy involves the target company:
- Repurchasing its own shares at a premium to reduce the hostile bidder's potential return
- Divesting or spinning off its most valuable assets to make the company less attractive to the acquirer (Correct answer)
- Seeking a friendly competing bidder to outbid the hostile party
- Issuing new shares to dilute the hostile acquirer's ownership percentage
Correct answer: Divesting or spinning off its most valuable assets to make the company less attractive to the acquirer
The crown jewel defense removes the primary asset the hostile bidder is pursuing, reducing the strategic rationale for the acquisition and making the target less valuable.
Question 4: A key advantage of using EV/EBITDA over a P/E multiple in M&A valuation is that EV/EBITDA:
- Is simpler to calculate using only income statement line items
- Is capital-structure neutral, enabling fair comparison across companies with different levels of debt (Correct answer)
- Incorporates the time value of money and long-term growth expectations
- Reflects only the equity value attributable to common shareholders
Correct answer: Is capital-structure neutral, enabling fair comparison across companies with different levels of debt
Because EV/EBITDA uses enterprise value (which includes debt) divided by pre-interest, pre-tax earnings, the multiple is unaffected by how a company is financed, enabling apples-to-apples industry comparisons.
Question 5: In a hostile takeover scenario, a 'white knight' is best described as:
- A regulatory authority that intervenes to block the hostile bidder's attempt
- A friendly alternative acquirer invited by the target's board to submit a competing bid (Correct answer)
- An investment bank retained by the target to build takeover defenses
- A shareholder activist who publicly supports the target's incumbent management
Correct answer: A friendly alternative acquirer invited by the target's board to submit a competing bid
A white knight is a preferred buyer that the target's board actively solicits to make a competing offer, providing shareholders with an alternative to the hostile bid on more favorable or culturally compatible terms.
Question 6: A corporate spin-off is best described as a transaction in which:
- A business unit is sold to a private equity firm for cash consideration
- Shares of a subsidiary are distributed pro rata to the parent company's existing shareholders, creating an independent public company (Correct answer)
- Two subsidiaries of the same parent are merged into a single consolidated operating unit
- New equity is issued by a subsidiary to fund a large internal capital project
Correct answer: Shares of a subsidiary are distributed pro rata to the parent company's existing shareholders, creating an independent public company
In a spin-off, the parent distributes subsidiary shares to its existing shareholders, resulting in the subsidiary becoming a separately traded public company while the parent retains its own listing.
Question 7: A fairness opinion in an M&A transaction is typically issued by:
- The target company's internal audit committee after reviewing management projections
- The SEC as part of its mandatory transaction review and approval process
- An independent investment bank, confirming the deal price is fair to shareholders from a financial point of view (Correct answer)
- The acquiring company's board of directors as part of its fiduciary declaration
Correct answer: An independent investment bank, confirming the deal price is fair to shareholders from a financial point of view
A fairness opinion is an independent financial analysis provided by an investment bank that confirms the transaction consideration is fair to the target's shareholders, helping the board fulfill its fiduciary duties.
CFM Mergers, Acquisitions & Corporate Restructuring 2
Which statement most accurately distinguishes a merger from an acquisition?