This file contains questions only, and is provided for those who prefer to self-test without immediate

access to the answers. The answers can be found in the file “Questions and Answers.”

Chapter 1 Questions

1. “Best practice in M&A requires that we augment the deterministic focus on

structure with a probabilistic focus on conduct.” What does this mean?
2. The chapter described six elements of structure that influence M&A transactions.

What are these and how do they influence success or failure in M&A? 3. Why is conduct important in due diligence? 4. How might conduct play a role in the search for partners?
5.

In what other areas of M&A might conduct have an influence?

6. Why is process so important in deal development?

7. What are some benchmarks against which a deal’s outcomes might be measured?
8. Why is a deal a system? It being a system, what are the implications in terms of

unanticipated side effects? Explain.
9. Should one use the same blueprint for all M&A deals? Explain. 10. An enhanced brand in M&A should be one of the goals that deal makers aspire to.

Why is this important?

Chapter 2 Questions

True or False

1. The field of business ethics is important because it provides detailed solutions to the ethical dilemmas one encounters in M&A.

2. Ethical business practices build trust, but they do not yield economic gains.

3. Following and paying attention to the law are necessary but not sufficient requisites for acting ethically.

4. The U.S. legal framework generally requires directors and managers to operate a company in the best interests of its shareholders.

5. Edward Freeman argues that a firm’s activities should be primarily focused on maximizing value for shareholders.

6. Utilitarianism is an ethical theory stating that actions should provide the greatest good for a few people deemed to be the most important.

8. 9. Incorporating business ethics in the workplace builds stronger teams and leaders. A focus on duties defines right versus wrong based on virtues. which defines right and wrong by virtues. primarily focuses on personal pride and character—not duty. The tradition of ancient Greek philosophy. .7. A person who follows this ethical theory would consider what a virtuous person would do in a given situation. 10. A company’s only defense against unethical business behavior is to institute a code of ethics in the workplace.

Does Milton Friedman’s stockholder school of thought promote or not promote ethical decision making in business? Explain why. 2. What is greenmail and why might it be considered unethical? . Describe and explain the role of ethics in mergers and acquisitions by providing some key reasons for its importance in this field. James. 4. If ethics is so important in M&A. What would you recommend that he do? 5. has just been charged with the task of implementing a structured program to promote ethical behavior at his company. the chief learning officer of Best Investments.Short Answer 1. why hasn’t it been given more attention? 3.

cheap to execute. Clinical studies can be characterized as inductive research. because researchers often induce unanticipated insights by focusing on one transaction (or a small number of transactions) in great depth. Despite the unique characteristics of M&A deals and their respective targets and buyers. 3. Statistical significance is essentially the same thing as economic materiality. and each can independently shed light on whether M&A transactions create or destroy value. . 4. event studies have dominated the field of M&A research. 2.Chapter 3 Questions True or False 1. and able to evade the problem of holding constant other factors that plague ex post studies of mergers’ effects. theoretically well-grounded. benchmarking against value creation permits generalizations to be drawn about factors correlated with successful and failed deals. This technique was considered a genuine innovation. Since the 1970s.

which experienced a 75 percent annualized gain in the last year? What assumption underlies this comparison 4. Short Answer 1. Why shouldn’t the gains from M&A activity be evaluated using benchmarks other than the economic one? Shouldn’t strategic benefits such as human capital. The returns resulting from the event are 1. economies of scale. another stock in your portfolio. and improved operations be considered? 3. Average returns to target and buyer company shareholders are stable over time. which has just completed an acquisition.2 percent in the first week. What does it mean to conserve value? 2. What are some negative drivers of M&A profitability? .5. Theoretically. Suppose you are an investor in Company A. how does this compare to those of Company B. What are some positive drivers of M&A profitability? 5.

How have research studies addressed this issue? 8. A popular notion is that the acquisition premiums that buyers pay represent expected future value. receive zero to slightly negative returns? . How would you explain why buyers. Suppose two business school students are asked to look at and evaluate the same statistical study of M&A deals. One student says that 60 percent of the M&A transactions failed. while the other says that 60 percent of the M&A deals succeeded. on average. the data results are clear. The main challenge of evaluating the profitability of M&A to combined entities (the buyer and target firms combined) stems from the size differential between the buyer and target. The sample size is large and random. Could they both be right? How might you explain the difference in their responses? 9.6. Why are hostile takeovers more profitable to buyers than friendly offers? 7.

5.S. they occur in line with increases in stock prices. 3. Despite the correlation between certain economic conditions and M&A activity. M& A waves are procyclical to the stock market. Schumpeter stresses the importance of paying particular attention to entrepreneurs —not only because of their important function in creative destruction but also . Possible explanations for waves of M&A activity include bargaining power effects in segments of supply chains. Eastman Kodak and U. Steel. scholars have cited the occurrences of M&A waves as one of the ten most important unresolved questions in financial economics. as well as managerial psychology. 4. 2.Chapter 4 Questions True or False 1. The second wave of M&A activity (1925–1929) was characterized by horizontal mergers and produced the following firms: General Electric.

1. Wave 1. Multiple Choice: Please pick the best answer. was characterized by the following: I. 6. II. from 1895 to 1904.because their independence and tendency to appear singly makes them easy to miss in the crowd. I. & III 2. II. I only b. II & III only d. Holding the view that market manias always drive M&A activity is consistent with the assumption that managers and markets are rational. III. I & II only c. Economic and capital market buoyancy Technological innovation Vertical mergers a. In which of the following periods did M&A activity involve more hostile takeovers and more going-private transactions? .

I. None of the above 3. .a. 1965–1970 b. II & III only d. Bond prices rise. II. In the most recent merger wave. I only b. II & III 4. M&A activity increased briskly in all segments of the economy. III. I. 1981–1987 d. II. 1992–2000 c. Bond yields rise. M&A activity was high in the banking and high technology sectors. a. Defense spending increased and led to high M&A activity in the defense sector. from 1992 to 2000. I & II only c. Merger activity appears to slow when I.

III only b. I & II only c.III. I. a. At the level of firms. II & III only d. II & III Short Answer . II. At the level of the economy. I & III only d. At the level of markets. The cost of capital increases. to understand M&A activity we should listen to turbulence I. According to Schumpeter. II & III only c. I & II only b. III. a. I & III only 5.

What are some common characteristics among the different merger waves between 1895 and 2000? 2. Western firms were able to make toehold acquisitions in Central and Eastern Europe. Provide examples of industry-specific drivers that spur M&A activity. 3.1. . After 1989. What was the turbulence that created this opportunity? How does Schumpeter’s theory creative destruction apply here? 5. Describe an inside-out approach and an outside-in approach for identifying turbulence and monitoring M&A activity. Why does Schumpeter identify turbulence as the driver of M&A activity? 4.

What motivations might drive companies to look for acquisition targets overseas? 4. must an analyst consider when evaluating a country’s competitive advantage? . in your view. In what ways do cross-border transactions usually differ from domestic acquisitions? What might explain these differences? 3. What factors must one look at to assess a country’s investment climate? 7. The volume of cross-border M&A transactions has risen to record levels in recent years. What. are some of the factors that have contributed to this trend? 2.Chapter 5 Questions 1. How does free trade encourage cross-border merger activity? 6. What factors. does it make more sense to invest in a globally integrated market or one that isn’t? Explain. 5. according to Porter’s diamond model. For purposes of reducing risk through diversification.

8. What do researchers suggest is the reason behind cross-border acquisition targets being mostly manufacturing companies? .

and cite its advantages and disadvantages. What is its chief drawback? 6. Briefly describe the BCG growth-share matrix. 2. what are the five factors that drive economic attractiveness of an industry? Please identify and briefly describe these factors.Chapter 6 Questions 1. 4. What are some reasons why firms pursue inorganic growth? 9. 8. What are the three classic successful strategies? Describe each. 3. Why is business definition so important? 7. According to Porter. Describe the role of strategy in M&A. Briefly describe the attractiveness-strength matrix and its use. How might diversification actually create value? . What are the strategic map and the strategic canvas? What are they used for? 5.

What does a business manager need to consider when choosing a path for inorganic growth? 14. redeploy. What are some of the benefits that joint ventures and strategic alliances might bring? 12. What are some transactions to restructure. What are some common motives for business managers to consider restructuring or exiting a business? 15. What is financial recapitalization? What is a leveraged restructuring? An ESOP restructuring? . What is a carve-out? A spin-off? A split-off? What is tracking stock? 17. or sell? 16. What is Tobin’s Q? 13. What are the alternatives to M&A for achieving inorganic growth? How do these avenues differ from each other? 11.10.

What characteristics increase the value of a network? 7. Why are networks important in the acquisition search process? How can one be a member of and enhance one’s position in a network? 6. Where can one find the “sweet spot” of acquisition searches? 4. 2.Chapter 7 Questions 1. What is the efficient markets hypothesis and what are its implications for the acquisition search process? 5. What is the role of navigators in the acquisition search field? Who are these navigators? What were the two categories of navigators discussed in the chapter. Is there a role for opportunism in acquisition searches? Why or why not? . In the acquisition search phase. and what functions do they serve? 8. what might be some screening criteria used to evaluate potential targets? 3. List some characteristics of a good acquisition search process.

What does Metcalfe’s Law say and what implications does it have in the acquisition search process? . Please explain. However. How can a searcher increase the probability of a positive payoff from the acquisition search process? 10. What lessons about the acquisition search process did the example of Kestrel Ventures illustrate? 11. 12. A traditional view is that quality matters more than quantity.9. it may be quite the opposite: Weaker ties may matter more than strong ties. with social networks. and the breadth (quantity) of contacts may be more meaningful than the quality.

How is investing in due diligence like buying an option? For each of the following issues. 5. 4. 1. it is advisable to focus on specific issues. 6. write out some due diligence questions you would want to ask: . A compliance mentality will prepare for M&A success better than an investor mentality. or market compatibilities between buyer and target. 3. 2. product. Obtaining facts is the main objective of due diligence. particularly accounting and legal issues. Cultural compatibility is no less important than financial. Due diligence should begin when the buyer approaches the target. Short Answer 1. Professionals can be held liable for the failure to know of potential risks. In acquiring a target. When conducting due diligence. In what situations might a narrower scope of due diligence be justified? 2. rather than to try to cover many areas.Chapter 8 Questions True or False: If false. when should the process of due diligence be begun? 3. please explain why.

Legal issues Accounting issues Tax issues Information technology Risk and insurance issues Environmental issues Market presence and sales issues Operations Real and personal property issues Intellectual and intangible assets Finance Cross-border issues .

Human resources Cultural issues Ethics .

List an advantage and disadvantage for each and explain why it is an advantage/disadvantage. Describe and define the nine estimators of value discussed in this chapter. What is the theory of value additivity? How does knowing this theory enable one to create value? 4. Think through each of the eight big-picture rules on valuation discussed in this chapter. What does it mean to “think like an investor”? 2. 5. What might happen if these rules are violated? . Is intrinsic value something that can be measured precisely? Why or why not? How does one arrive at intrinsic value through valuation? 3.Chapter 9 Questions 1. Describe situations in which certain valuation approaches are more useful than others.

. Economists project both the real rate of growth and inflation to be 3 percent. List and define the two approaches discussed in this chapter for estimating terminal value growth rates. 7. When is it necessary to unlever and relever betas? 10. the company’s return on equity has averaged 10 percent. Discuss the differences between the enterprise value and equity value approaches of DCF. In recent years.6. 8. What factors might bound low-side and high-side bids of buyers? 9. Which approach is better? 11. and it has paid out roughly 10 percent of its annual profit in dividends. a. Calculate the terminal value growth rate using the sustainable growth model and the Fisher equation. What are the different ways of estimating the cost of equity? Describe the methods and explain the rationale behind each of them. Suppose you are establishing the terminal value growth rate for a large industrial goods manufacturer.

Which of your two results do you think is more appropriate to use? Why? 12. often account for a majority of the value of a firm? Why is the terminal value growth rate the tail that wags the dog? . Why does the terminal value.b. rather than near-term forecasts of cash flows.

An American option may be exercised at any moment before expiration. Options are very risky instruments. Therefore. d. b. $65. and $70 at expiration. b. $45. Critique the following arguments: a. An option is the right but not the obligation to do something. $55. the addition of an option to your portfolio will increase the risk of your holdings. Therefore. it is worthless. . and $60. a. $60. $50. For this reason. it is always less risky to invest in options than in stocks. Suppose that a stock trades at $50 today. Calculate your potential payoff one month later for these three options by assuming the stock will trade at $30. $35. c. and that you can buy call options that expire in one month at exercise prices $40.Chapter 10 Questions 1. $40. 2. When an option is out-of-the-money. $50. it has a higher value than a European option with exactly the same terms. Draw the payoffs on one graph and intuitively decide which option is more valuable.

Draw the payoff diagram for a portfolio that includes a. 2003.3. All the options expire at the same time and the stock trades at $20 today. volatility increases.58.85. conversely. two long calls at exercise price $20. Briefly explain why it is never optimal for an investor to exercise an American call option for a stock that does not pay dividends. 5. the S&P 100 (OEX) closed at 463. one can implement different trading strategies. 6.91. The following option prices were quoted from the Wall Street Journal: . one short call at exercise price $25. and the NASDAQ 100 (NDX) at 1112. and. exercise price decreases. Briefly explain why a call option price rises as stock price increases. the Dow Jones Industrials (DJX) at 84. time to maturity increases. and c. one short call at exercise price $15 b. 4. and risk-free rate increases. On May 21. what someone who is selling this portfolio might be thinking. Explain what someone who holds this portfolio might be thinking about this stock. By using various combinations of simple call and put options.

40 $3.50 $20.55 $2. Compare the time values among the options on that index that expire at different dates.00% 1.04% 1. What do you observe? 8. Briefly explain the underlying assumptions of put-call parity and why put-call parity might not always hold in the real world.90 $25.50 $14. 7.10 DJX 84 Put ($) $1.45 $3.50 Interest rate* 1.02% * Rates are of Treasury bill rates maturing on the given dates.10 $4. . Briefly explain how the option analogy can be used to value loan guarantees and debts.00 NDX 1125 Put ($) $39.00 OEX 465 Put ($) $9.00 $47.00 $59. Refer to problem 6.50 $14. Select three sets of data from the table and verify that put-call parity holds.50 DJX 84 Call ($) $2.00 $82.70 NDX 1125 Call ($) $31. Why can the equity of a firm be viewed as an option on its assets? How would you calculate the value of this option? 9.Expiration June 20 July 18 September 12 OEX 465 Call ($) $13. Select any index and calculate the intrinsic value and time value for the options on that index.

chemical. and there is an equal chance of it going up to $60 or down to $20 next year. Mr. The one-year risk-free rate is 10 percent. For $20. The annualized six-month risk-free rate is 8 percent. Suppose stock ABC trades at $40 today. Does put-call parity hold in this case? (Please use the binomial tree approach. the Black-Scholes option pricing model. Due to current market turbulence. and computer services—and assigned his associate to come up with some choices. 12. Stock XYZ trades at $100 today. you can buy a six-month call option on stock XYZ at exercise price $90. a.xls. . he wanted to diversify the risk in his portfolio by adding three stocks. What probability of ABC going up to $60 next year will make the put-call parity hold? 11. He picked three industries—financial.) b. Calculate the value of at-the-money call and put options. It has a 30 percent annual volatility. Thompson was a portfolio manager at a mid-sized asset management firm. Is the option overvalued or undervalued? How might you take advantage of this opportunity? Please use Option Valuation.10. to answer these questions.

85 $ 40.20 1.04% Wednesday.00 June 20 $ 0. Mr. May 21.04% 1.40 $ - 3.67 $ 12.xls and make a judgment about which firm is which.00 June 20 $ 2.04% 1.47 $ 125. 2003 .85 0. Could you use these data to help Mr.50 June 20 $ $ 1.70 1. Thompson identify which stock is in which industry from the implied volatilities in these options? Please compute these implied volatilities using Option Valuation.65 $ C $ 13. Stock Stock price Exercise price Expiration date Dividend payout Call option value Put option value Risk free rate Date: A $ 123.80 $ 0.25 $ B $ 38.64 $ 2.After the associate handed him the folder with the information about three stocks she had picked. Thompson misplaced the folder and only recovered three pages containing today’s stock option quotes.

or remain the same in connection with an acquisition announcement? 4. Why must one “think like an investor” when evaluating synergies? What could go wrong when one does not think like an investor? 3. fall. state whether there is an option embedded and if so.Chapter 11 Questions 1. In each of the following cases. In what instances will a buyer’s share price rise. what type of option it is. What is the defining feature of a synergistic transaction? 2. and provide definitions and examples of in-place synergies and real option synergies: In Place Re al Option VSynergies = VSynergies + VSynergies In Place Re al Option VSynergies = VSynergies + VSynergies 5. Case 1 . Explain in your own words the following equation.

a company in the business of electricity generation. recently acquired a 40 percent interest in a Southeast Asian bottler. Their operations intersect nowhere. Kinetic’s generation plants are all gas-fired. But the CEO believes that the debt capacity of Newco will be larger than the sum of the debt capacity of the two firms standing alone. has agreed to acquire Alpine Utility. They serve the same market. Part of the rationale for acquiring Alpine was to achieve cost savings through greater flexibility in responding to changes in the relative prices of the two fuels. an international soft drink manufacturing company of Latin American origin. SuperSodas’ stake was limited because laws in the Southeast Asian country prohibited companies that were more than 40 percent foreign-owned from acquiring real estate. Among the synergies projected by SuperSodas was $87 million in revenue enhancements if the Southeast Asian bottler were to build another plant in the country’s southern region. while Alpine’s plants are all oil-fired. Purchasing land and building a new plant would require an initial investment of $2. Case 2 A large oil company has agreed to merge with a steel company. . The CEO has no plans to actually use this new debt capacity in the near term.8 million. Case 3 Kinetic Utility.SuperSodas. which was currently underserved.

.1 c.” Wall Street Journal. Explain the reasoning behind your decision. a. or less than WACC. “Hewlett-Packard Tries to Gain Votes for Compaq Deal. Most of the cost synergies would come from layoffs and organizational restructurings. For valuing each of the synergies described below. the CFO of HP announced that $2. The French government wants to promote the merger of two companies and guarantees a yearly annuity if the two agree to merge. 2 Pui-Wing Tam.6.” Morgan Stanley Dean Witter. explain whether you would use a discount rate equal to WACC.2 1 Andrew Conway and Christopher O’ Donnell. December 5.5 billion in cost synergies were expected from the Compaq acquisition. On what conditions are these truly synergies? 7. PepsiCo management believed that by acquiring Quaker Oats. they would be able to improve operating income growth from 8 percent to 10 percent through revenue enhancements and cost savings. greater than WACC. 2002. In the proposed merger between Hewlett-Packard and Compaq in 2002. b. “PepsiCo Acquires Quaker: Strengthening the Core. February 28. What are the two forms of WACC synergies described in the chapter? Define each form and explain how each might create economic value. 2000.

5 percent of revenues per year. Brown expects that with greater market power. Increased revenues will require an increase in working capital equivalent to 2 percent of the first year’s sales. Cost savings of $25 million are expected in the first year. Among the main arguments for the AOL Time Warner merger was the potential revenue enhancement to be gained from merging broadband delivery (AOL) with content (Time Warner). revenues will increase in nominal terms by $50 million in the first year. additional working capital needs will increase at the rate of 0. An initial investment of $90 million is required to realize the cost savings. and $40 million thereafter. it was expected that both companies could achieve far greater market penetration. By combining these offerings. by 5 percent in year 4. $30 million in the second year. Michael Brown is trying to determine an offer price and has asked you to estimate the value of synergies. Thereafter. The cost savings after year 3 will have to be adjusted to reflect inflation.d. Brown Paper Mills is planning to acquire Woodland Pulp and Paper. Expected inflation is 2 percent. by another 8 percent in years 2 and 3. and zero in year 5. 8. .

.and expected operating margins are 10 percent. The tax rate is 35 percent. Brown wants you to discount the synergies at 10 percent.

You feel that the valuation is too optimistic given the high political risks of operating in the country. 2. dollar and the Chilean peso stood at US$ 1: CLP 473. How does a worldwide tax credit system differ from a territorial tax system? Which tax system does your country use? 3.71 percent.Chapter 12 Questions 1.S.84 percent. the exchange rate between the U. Based on these numbers. while the yield on the one-year US Treasury was 4. The one-year Treasury rate in Chile stood at 15. Cite some country factors that analysts must consider when evaluating crossborder acquisitions. In what ways might you adjust the DCF valuation? . what would be the peso-dollar exchange rate one year hence? 4. You are reviewing a DCF valuation for an overseas acquisition target.5. At the end of August 1998.

817 33. This time.00 percent. what is the present value of depreciation tax shields from year 1 to year 5? c. and the tax rate is 40 percent.5.942 30. Go back to (a). and that it has a useful life of 10 years.942 2007 44. Values are given in Taiwan dollars (NT$).264.567 2005 15.419 Assume the following: . b.719 2004 9. the real discount rate is 4. use the real discount rate to calculate the present value of the tax shields. Using the same discount rate. Now assume that you can inflate depreciation expense at a rate of 2. in millions) Free cash flows Terminal value Cash flows including terminal value Present value in Taiwan dollars Present value in US dollars 2003 231 231 1. What do you observe? How would you interpret the results? 6. What would be the present value of the depreciation tax shields from year 1 to year 5? Use the nominal discount rate to calculate present value. Inflation is 2.567 9.875 1.210 2008 59. Assume you have acquired manufacturing equipment for $800 million.5 percent. Below is a free cash flow estimate and valuation for a Taiwanese company.96 (NT$. and the NPV is translated into US dollars at the current exchange rate of US$ 1 : NT$ 34.830 15.335 1.219.830 2006 30. a.178.5 percent annually.

4% -0.50% 7. Did you come up with the same present value? What rate did you use to discount the U.Inflation rate.00% 8. foreign country 5. US Market risk premium. Translate the cash flows into US dollars.0% a. Estimate the discounted cash flow value of the investment under the two forecasts (U.96 5. dollars and Taiwan dollars). You have the following data: 10-year Treasury bond rate.S.96 1. b.00% . What factors might contribute to the segmentation of an economy? Would identical assets in separate segmented markets command identical prices? 8. Taiwan Exchange rate at time 0 (Taiwan dollars per US dollar) Real discount rate 2. US dollar denominated sovereign bonds Beta of target versus foreign country stock index Beta of foreign country stock index versus US index Market risk premium. You are trying to determine the cost of equity for a foreign target whose cash flows you have projected in dollars. US Inflation rate.2% 34. US 10-year rate.S. dollar flows? What assumptions are necessary to obtain equivalency between approaches A (converting local flows into dollars and discounting at a dollar rate) and B (forecasting in local currency and discounting at a local rate)? 7.30 6.75% 0.

and 1. is a holding company that operates in areas such as ports and related operations. market. and also a beta of 1. China Mobile (Hong Kong) Ltd.S.0. You estimate. Country B has a local market volatility of 20 percent. Their betas relative to the global equity portfolio over the past 12 months were 1. and a country beta relative to the United States of 1. retail and manufacturing.S. market has a volatility of 18 percent. Country A has a local market volatility of 36 percent.What would your estimate of this firm’s cost of equity be? 9. Hutchison Whampoa Ltd. . List the different ways of calculating Ke discussed in the chapter and provide a brief explanation for each. provides cellular phone services in China.31. property and hotels. based on the last 10 years of data. The U. Of the two countries. 0. 11.21 respectively. Assume you are CEO of a U. company evaluating three companies listed on the Hong Kong Stock Exchange. telecommunications. Hang Seng Bank Ltd. Currently. infrastructure. which is more segmented? Explain.S. provides banking and other financial services.S. that the equity market risk premium on the global portfolio is approximately 6 percent.0 versus the U. the long-term U. finance and investments. and so on. Treasury bond yields 1.4 percent.74. What is your estimate of each company’s cost of equity based on the above data? 10.

With the bank’s lending and investment criteria in mind. to be used toward the $3. CASE: GURU TECHNOLOGIES* In 1984. Allegro Electronics Inc. Forte was seeking to borrow $2. Brown worked in the corporate finance division of Kuchler & Bevill (K&B. a deal maker well known for managing successful company turnarounds.Chapter 13 Questions Review the following case and then answer the questions that follow.5 million from K&B.5 million cash purchase of GTC. Jay Forte. Brown needed to consider making both a bridge loan and an equity investment. Brown created a financial structure that she anticipated would follow the buyout. approached Debra Brown for advice on a proposed management buyout of an electronics manufacturer. from its parent company. or “the ank”). She developed the forecast of residual cash and the structure of the transaction flow based on specific assumptions (found in Exhibits 1 and 2 below). She assumed that the credit . Guru Technologies Company (GTC). at which Forte was a well-known customer. He proposed that he and the bank would make an equity investment of $1 million.

Therefore. practically speaking. a new incentive system for managers to meet their budget. The management group originating the buyout would benefit from including K&B as an equity investor since the debt provided by the bank would be priced approximately 250 basis points less than had the deal been financed strictly with debt from another lender.0 million.5 million in fiscal year 1985. company sales would rise to $5. Brown also made the assumption that the equity would begin at a value of $1 million (the total equity investment value for Forte and K&B). To successfully turn the company around. Forte proposed a business plan for a sharp reduction in overhead. His financial analysis projected that in a worst-case scenario. so new equity invested by Forte and the bank would still total $1. Please refer to the following exhibits and notes before answering the questions that follow: . the only cash flow to be received by common stockholders would come from the terminal value. _______________________________________________________________________ * This is a disguised case of an actual leveraged buyout. Forte indicated that any equity investment negotiated with the bank would reduce the original investors’ contribution by a similar amount. She would repay the debt as fast as the required cash balance (2 percent of sales) would allow. and a restructured marketing effort.agreement as finally negotiated would prohibit the payment of dividends to common stockholders until the debt was substantially reduced.

0% 750 500 $ $ $ 1988 13.50% $7.000 19.5%) Market risk premium Beta-unlevered 12. Dollar Figures in thousands ($000) Pro Forma Assumptions Tax rate Shares outstanding Other net working capital/sales Cash/sales 48% 100.Exhibit 1 GURU TECHNOLOGIES INC.0% Bank requirment 1985 13.42% 17.0% 550 550 $ $ $ 1987 13.800 19.500 16.50% $10.50% $5.0% 750 500 - Base rate Sales (000) Operating margin Capital expenditures Depreciation Organizational expenses Cost of capital assumptions (as of April.50% $11.0% 750 500 $ $ $ 1989 13. 1984) Risk free rate Internal rate (base + 3.000 23% 2.45 .00% 6.3% $ $ $ 260 600 200 $ $ $ 1986 13.500 19.200 19.50% $8.00% 1.

0 1.990 3. 1 Exh.0 24.139 $ 1.1 580 550.0 260.2 852 500.958 1.000 3.807 $ 1.500 1.0 176 176.990 3.656.0 141.0 262.207.00 2.920.656.540 Notes Note 5 $ $ $ $ $ 2.0 320.170 2.200 2.330 $ 3.0 299.0 79.432 2. 1 Note 2 Note 3 0.0 Note 4 $ $ $ $ $ Debra Brown's Forecast of Economic Balance Sheet and Capital Accounts Dollar Figures in thousands ($000) Cash Other Net Working Cap.2 0.490 4. Residual Cash Flow Cash (Beginning) Changes Cash (Ending) Cash (Required) $ $ 1985 5.740.185.0 207.7 4.8 1.000.099. 1 Exh.5 339.425. 1 $ 600.0 24.100 $ 2.0 1989 $ 11.7 176.208 1.990 1.8 $ 0.440 1.5 3.2 1.900.8 535.334 3.481.0 750.365 2.3 171.0 0.0 224 224.1 2.865 $ $ 1987 176 2.3 $ 5.0 301. 1 Exh.482 1.3 (302) (449) 1.5 186 $ $ 1986 7.800 1.0 $ 5.185.5 150.114.000 1.Exhibit 2 Debra Brown's Forecast of Cash Flows and Economic Balance Sheets Dollar Figures in thousands ($000) Sales EBIT Interest Org'l Expenses Pre-Tax Profit Taxes @ 48% Net Profit Depreciation Capital Expenditures Additions to WC Additions to Cash Debt Amort.0 448.0 357.377.8 3.500 $ $ 1.0 185.333.0 40.5 716.0 1.8 661.638.0 110.481.240 4.5 1.0 1.7 110.765.672.7 3.500 2.0 110.0 $ $ 1987 8.865 2.0 1.656 $ 1.179.0 276.0 24.6 200.265 1.4 921.0 750.0 2.7 1.0 $ $ $ Exh.179 (80) 2.8 579.4 716 500.0 460.990 1989 $ 224.0 750.7 998.6 0.333.2 0.0 26.100 (141) 1.958 $ 2.2 200.0 310.332 Note 2 $ $ $ NOTES: .024 2.9 4.0 24.300 2.186 2.0 $ $ 1988 10.128.0 95.0 110 110.765 2.0 550.8 $ 999 500.765.7 4.029 $ 1. Net Fixed Assets Total Assets Debt Equity Debt & Equity Memo: Debt Balances Debt (Beginning) Changes Debt (Ending) Debt (Average) Memo: Equity Balances Equity (Beginning) Changes Ending @ Closing $ $ 1.365 $ $ 1986 150 1.500. 1 Note 1 Exh.3 3.0 150 150.500 896.500 1.0 Notes Exh. 1 Exh.5 2.958. 1 Exh.0 40.440 $ $ 1988 200 2.0 (321) 2.9 851.332.0 276.0 26.6 $ 4.000 $ 1985 110 1.0 200 200.576.500 $ 2.0 786.340 $ 1.540 1.0 294.179 $ 2.725 1.

. (Requirement equals 2 percent of sales. Note 5: Other net working capital is computed by multiplying the ratio of other net working capital/sales) times sales. where the base rate is as given in Exhibit 1) times the average debt balance for the year. What do you estimate to be the equity value of Guru Technologies (GTC)? Refer to Exhibit 13. Use a perpetual growth rate of 7 percent.Note 1: Interest expense is computed as the interest rate (base rate plus 1 percent. it is specifically the residual cash flow to Jay Forte and K&B.4 as a guide for your calculation of the terminal value and the appropriate annual discount rates. Note 4: The sum of residual cash flow plus additions to cash.’s shares. Note 2: Assumes debt is repaid as fast as required cash balance will allow.) Note 3: Because this residual cash flow nets out the repurchase of Global Electronics Inc. Questions: 1.

what is the net present value of the $2. analyze this deal structure from the point of view of Debra Brown and K&B. Perform sensitivity analysis on the terminal growth rate. .) What percentage of the equity should the bank request as part of its commitment to lend in order to break even on its required return? 3. How sensitive is your valuation to the growth rate? With this information.2. From the bank’s point of view.5 million loan? (Hint: Lay out the amortization and payment structure to calculate the NPV.

Training a work force to do multiple tasks e. which one seems like an option to you? Why? 4. They are metallic painting. Real options are pervasive everywhere. the salesperson recommends four alternatives to you. even in daily life. Automobile insurance b. After you pick the right model.000 more than a normal gasoline-powered car. adjustable passenger side seat. Automakers are beginning to develop a hybrid car that can use gasoline or electricity as power sources. Suppose you go to an automobile dealer to buy a car. and adjustable steering wheel. a normal gas-powered . Identify which of the following alternatives are real options. automatic transmission. Assume one such car sells for $2. How do options differ from opportunities? 3. Among these four.Chapter 14 Questions 1. Taking swimming lessons 2. a. Based on your estimation. Defined benefit retirement plan c. Cash or credit cards in your wallet d.

car will consume present value of $10. If you find natural gas. After consulting with a geologist. considers investing in a software development project. you estimate that there is roughly a 70 percent chance of finding gas. the present value of future payoffs is zero. is the investment . What kind of option is the test? 6. the cost of electricity for the lifetime of the car may drop to $10. But if a new source of energy is developed soon. You can purchase the right to drill in a natural gas field for $6 million. the PV of future payoffs will be $10 million. R&D will cost $5 million right now. Forecasted profit from the sales of software follows a lognormal distribution with a mean of $10 million and a standard deviation of 50 percent.000 now. Marketing and advertising expenses for the sales are estimated at $5 million. The one-year risk-free rate is 7 percent. In your opinion. Does the hybrid car represent an option to you? How much of its premium is accounted for by the option value? 5.000 over its lifetime if gas prices stay at the current level. The probability of status quo is predicted at 60 percent. He also told you that you can spend a certain amount of money to drill a test well in the field so that you can be sure whether you will find gas or not. it will cost you $15. Draw a decision tree that determines the value of the test. If you only use electricity for the hybrid car. If you have a dry well. The software development can be finished in one year.000 in present value term and gas price may double in the future. The CEO of MegaSoftware Inc.

The three-year government bond yield is 6 percent.) 7. Company ABC has a promising drug candidate in the pipeline which just passed the Phase II clinical trials. (Assume no time value of money in this problem). The annual historical volatility of this company’s equity is 25 percent. estimate the value of this option using the binomial method: (a) draw the lattice. There is an 80 percent chance for this drug to pass the Phase III clinical trial and get FDA approval. If FDA approves its use. Suppose you are negotiating an agreement with a start-up company that allows you to buy 50 percent of its equity three years from now at $10 million. A big pharmaceutical company XYZ is considering a joint venture deal with biotech company ABC. a.in R&D an option? If so. Therefore. 8. the forecasted sales will most likely be $200 million with a . (b) fold it back to determine the present value. The market value of the equity today is $8 million. and what is its value? (Calculate the option value using OptionValuation. Assuming risk neutrality. what kind. ABC needs cash to push the clinical trials forward and apply for FDA approval.xls. Company ABC asks for a $5 million cash payment now in exchange for fifty percent of the future profits from the drugs. it approaches company XYZ to offer XYZ the right to share the future profits from this drug in exchange for a cash payment now.

To obtain 50 percent of the profit. After reexamining the possibility of passing FDA approval.minimum of $100 million and a maximum of $300 million. Should company XYZ take this offer? b. Company XYZ proposes to ABC that it can pay $2 million if the drug passes the Phase III test and pay a certain amount now. Company XYZ also needs to share 50 percent of the marketing expense of $20 million. How much should company ABC ask for the initial payment? 9. profit margin. and other terms stay the same. company XYZ found that there is a 90 percent chance for this drug to have a positive result from the Phase III clinical trial and there is a 90 percent chance for it to obtain FDA approval. Why it is hard to value real options? . Suppose the sales forecast. The profit margin on the sales is estimated at 20 percent.

Chapter 15 Questions 1. What is liquidity? Why is it valuable? 2. the discount for liquidity for public companies similar to ABC is around 45 percent. . Briefly explain why it is important to consider them in the analysis of M&A transactions. Give some examples of some illiquid securities in financial markets. is estimated to be $4 million. The total synergy. Estimate the maximum payment for this company. You are considering an acquisition of a private company. Based on a standalone valuation. Suppose that in this case. 3. ABC. if the merger is completed. ABC is worth $10 million.

Other owners of the firm are oceanic voters. You think the company is mismanaged and you would like to expand its product lines and to sell them abroad. If power determines the value of votes. and the other 50 percent of votes are held by oceanic voters. Suppose you are the principal at a private equity firm and are considering an opportunity to purchase the majority of shares in a publicly traded machinery tool company.4. Emily. whose votes will be worth the most in each situation? Scenario 1: Jones has 30 percent of votes. The base value for this company is estimated at $100 million. Scenario 3: Jones has 40 percent of votes. Assuming the following three scenarios. Emily has 20 percent of votes. Emily has 20 percent of votes. Scenario 2: Jones has 40 percent of votes. Emily is the second major shareholder. How does one value control? 5. Jones is the first major shareholder and Mrs. The purchase of 60 percent of shares will give you control over implementing your expansion project.xls to calculate the Shapley Value for all the parties. please use the Excel model Power. and the other 40 percent of votes are held by oceanic voters. Emily has 10 percent of votes. Mr. and the other 50 percent of votes are held by oceanic voters. Briefly explain why control is valuable to business managers. Mr. Suppose a retail company has two major shareholders. Jones and Mrs. The expansion project will cost about . 6.

One of your clients is preparing to purchase an oil refining company. The other 40 percent are oceanic voters. the present value will be zero. facing an interesting deal. The deal proposed by both parties is structured so that the buyer will purchase 60 percent of the seller’s shares today and is restricted from selling its holdings in the next five years. If the project succeeds. you believe it will generate . The base value for your firm—the DCF value excluding any value for illiquidity or control—is $100 million. and a public company wants to purchase your company. Assume that the public company is willing to pay a 30 percent premium for control. which does not have any longterm debt on its balance sheet. After your client gains majority control. Suppose you are the CEO of a firm. How much will the individual share price be for bloc shareholders and for oceanic shareholders? 8. are you willing to pay in this case? 7. Can control in this case be seen as an option? If so.$10 million and has an 80 percent chance of succeeding. If it fails. The company is worth $100 million today on a stand-alone basis. If the program succeeds. You are an M&A adviser. he plans to hire outside consultants to initiate a cost-cutting program to make the company more profitable. Assume your opponent uses the base price as his bid price and that there are a total of one hundred shares. you believe it will generate a business worth $20 million in present value terms. There are several major shareholders that cumulatively hold 60 percent of your firm’s share. what kind of option is it and what is the value of this option? How much of a premium. in percentage terms.

how much are the options worth in value? What is your recommended purchase price for this deal? . If it fails.total savings of $20 million in one year. the PV will be zero. The historical volatility for the assets of this firm is about 20 percent. What kinds of options are embedded in this deal? Assuming the risk-free rate is at 8 percent annually. The cost of the program is around $5 million and the chance of success is estimated at 70 percent.

Chapter 16 Questions 1. and why? How are balance sheet and income statement items of the target reflected? How are balance sheet and income statement items for minority investors reflected? 6. rather than as part of goodwill? Explain each. For what percentage of share ownership acquired is this method suggested. What is purchase accounting? 2. 4. Can goodwill be amortized? How does FAS 142 require that goodwill be treated? 3. Describe the consolidation method of accounting for acquisitions. Define goodwill in the context of purchase accounting. How is a receipt of dividends from the target recorded under the equity method? . What criteria determine whether an asset should be classified as intangible. Describe the equity method of accounting for acquisitions. Should acquired intangible assets be amortized? 5. When is this method used? How are the target’s balance sheet and income statement items reflected? 7.

provide the correct answer. 3. the buyer’s past financial results can be retroactively restated. How do the consolidation method and the equity method of accounting differ in their treatment of cash flows of the target? True or False: If false. 2. . In purchase accounting. In purchase accounting. 1. Describe the cost method of accounting for acquisitions. Purchase accounting requires that the purchase price be allocated among the various asset accounts to the FMV of each. When is this method used? What are the three methods of recording acquisitions that fall under the cost method? Explain each. the buyer records assets acquired at their historical cost rather than at their acquisition price. 4.8. liabilities are not recorded at fair market value. 9. The consolidation method is used when material voting power but not majority control is acquired. 5. In purchase accounting.

” 9. 7. Under the consolidation method. “Investment in Target Company. The cost method is typically used when the buyer acquires less than a 20 percent share in the target. The equity method recognizes dividends received from the target as an addition to the “Investment in Target Company” account. balance sheet items attributable to minority investors are carried at fair market value.6. balance sheet items attributable to minority investors are carried on the acquirer’s books. 10. . 8. Under the consolidation method. 11. Under the equity method. Under the equity method. the target’s profits and losses are not reflected on the buyer’s income statement. the buyer recognizes its investment in a target through a balance sheet account.

Momentum advocates believe that firms with momentum enjoy higher earnings (or revenue) multiples than firms without. Scott Sterling Johnson. acceleration. EPS momentum and revenue momentum are the most common approaches. . Among different momentum strategies. dramatically accelerating earnings . . . There are six things I specifically look for . strong relative price strength . said.’ which is the point of maximum rate-of-change. a momentum investor. In the chapter. . dynamic trends . “I want to be in the sweet spot of the ‘S curve.Chapter 17 Questions 1. . In the chapter. . Please critique this belief. What are the common features of this strategy? 2. 3. . . ” What is the key bet of an investing strategy such as this? 4. . . . 5. momentum . . . four cases are discussed to illustrate the concept of momentum acquisition strategies. industries that are doing well . . . strong balance sheet . . . low institutional ownership . . Why is momentum acquiring unsustainable indefinitely? How might analysts incorporate this unsustainability in their valuations? . Briefly describe both strategies.

The target has 1 million shares outstanding and $500. Company A is more technologically advanced.000. You estimate your own . 8. Both companies have 2 million shares outstanding. The target’s current P/E ratio is 16.000 is expected. 7. 30 and 40 percent. and $1. 10. The buyer has 2 million shares outstanding and $2 million in earnings. which implies a high growth potential. Assume you as the CEO of a publicly listed company are considering a purchase in a related industry.000.000. $750.000.000. After a careful study of their businesses. $1. 20. Explain the results. and projected earnings for this year for both companies are the same at $2 million. There are two opportunities available. the buyer can avoid dilution. $500.000 in earnings. Company A’s stock trades at $20 and company B’s stock trades at $15. But it also demands a higher premium than company B. you estimate that earnings of company A will grow at a rate of 12 percent and those of company B will grow at 3 percent. which has lower growth opportunities. assuming the target still has same P/E ratio.000. Calculate the earnings per share for Newco after the merger and the percentage change in the buyer’s EPS.250. Suppose the buyer is willing to offer a 20 percent premium for the target and a purchase-related transaction charge of $50.6. Assume that buyer and target agree to a stock-for-stock acquisition. and for target earnings of $250. Its current P/E ratio is 20. Refer to problem 6. Calculate the percentage dilution or accretion for purchase premiums of 0. By changing the bid price for the target.

projected earnings for this year are $3 million. 9. what are the implications of each approach for you? .firm’s earnings will grow at 8 percent. If company A asks for a 60 percent premium over its market price and company B only asks for a 20 percent premium. There are 3 million shares outstanding for your firm. Why is value creation a superior approach compared to momentum acquisition strategies? As a manager. Your firm’s stock trades at $25. which company would you acquire? Use quantitative evidence to back up your decision. Assume that the earnings of Newco after the merger will be just the simple arithmetic addition of the forecasted earnings of your firm and the target.

Why might fixed payments have an adverse signaling effect? 6. How might deal terms be designed to deter either party from backing out of an M&A deal? . What are some of the terms that are usually negotiated in an M&A deal? 4. What are some issues to be considered when deciding on a form of payment? What are the general forms of payment? And what are some circumstances under which each might be used? 5.Chapter 18 Questions 1. Why is a deal a system? 2. What are some of the classic objectives of deal design in M&A? 3.

7. How can a deal be tailored to hedge against security price risk in a share-for-share exchange? 10. What is an earnout? In what deal situations might it especially be useful? 8. 9. What impact might the form of payment have on the timing of a deal? 11. Is there a single best feasible deal? Explain. . Describe how price might be influenced by the form of payment.

In a purchase of assets for cash. What is a forward triangular cash merger? How does the IRS view this transaction? . What three possible kinds of tax benefits are M&A transactions usually associated with? 2. 5. Explain how a buyer might realize a tax benefit from purchasing an asset for cash. which alternative is more desirable to the seller. From a tax standpoint. 4.Chapter 19 Questions 1. What is a reverse triangular cash merger? How does the IRS view this transaction? 8. the sale of a company’s assets or the sale of its stock? Explain. Which main issues must a deal designer consider when deciding on the form of acquisitive reorganization? Explain. What happens in a triangular cash merger? 7. 3. how might a conflict of interest due to tax consequences arise between buyer and seller? 6.

What condition does the IRS require in order for statutory mergers and consolidations to be tax-free? 12. In addition. What happens in a voting stock-for-assets acquisition (type C reorganization)? How can this transaction qualify as tax-free? 16. Describe what happens in a statutory merger and in a statutory consolidation. What happens in a forward triangular merger under a type A reorganization? What is needed in order for this kind of transaction to qualify as tax-free? 13.9. Which among the reorganization structures saves the CEO from a confrontation with dissidents? . A CEO wants to acquire a target but faces dissident shareholders in his own company. he must seek shareholder authorization if he pays for the target with stock. What happens in a reverse triangular merger under a type A reorganization? What requirements must be met for this kind of transaction to qualify as tax-free? 14. What happens in a voting stock-for-stock acquisition (type B reorganization)? How can this transaction qualify as tax-free? 15. What advantage does a cash merger have over a cash purchase of stock? 10. 11.

payment in cash is associated with close to zero returns. Research indicates that for buyer shareholders. agency costs. Hostile takeover. Jumbo deal. while cash deals yielded +90. while payment in stock is associated with significantly negative returns. Buoyant period in the stock market cycle.1 percent. b. share-for-share transactions yielded average excess returns of +14. and information asymmetry? 4.Chapter 20 Questions 1. What might explain this? 3. Why do the following seem to affect the choice of form of payment: minimization of costs. 2. What might explain this phenomenon? 5. a. What are the tax implications of a cash deal for the target? What about a stock deal? . For each of the following. d.5 percent. A study on shareholder returns found that over the five years following the deal. Ownership is concentrated. Explain why. c. identify whether stock or cash tends to be the prevalent form of payment.

What is a risk-neutral maturity structure? Reinvestment risk? Refinancing risk? . and distribution. How is it that some forms of payment might consume financial slack. control features. Are there any signaling implications when the target insists on a cash payment? 9. and others might create it? 8. Do stock prices of bidders react positively or negatively upon the announcement of a cash deal? What about a stock deal? Explain. 13. Explain the difference in price. form of payment. How does the choice of strategy affect the form of payment and financing chosen? 12. 11. and financing between a preemptive and a contingent strategy. Do abnormal returns to target shareholders tend to be larger in stock or in cash deals? Why? 7. currency. The chapter discussed seven dimensions of M&A transaction financing: mix. Explain how issuing equity to fund an acquisition might send negative signals to the markets. Explain how each plays into a decision maker’s choice of financing. maturity.6. yield basis. exotic terms. 10.

What are the “Six C’s of Credit”? 15.14. What is the FRICTO framework? .

Explain.xls in answering the questions below. The buyer’s and target’s share prices are currently trading at $35 and $20. What three factors tend to determine how the middle ground is carved up in cases where there is a large zone of potential agreement between buyer and seller? Explain. respectively. and the target. Which party does not want to go above a certain maximum exchange ratio? Which party does not want to go below a certain minimum exchange ratio? 3. The buyer is projected to earn $200 million.Chapter 21 Questions 1. Why does the value of Newco matter in exchange ratio determination? Put another way. it is possible to arrive at a sweet spot. True or false: In every deal. An electric utility company is in a stock-for-stock negotiation with an acquirer. why does the exchange ratio not depend only on the current ratio of the buyer’s value to the target’s value? 4. $150 . 5. Use the spreadsheet file Deal Boundaries. 6. What is the exchange ratio? 2.

How high must Newco’s price/earnings ratio be for a deal to be possible? What does your answer tell you in general about price/earnings expectations of parties that enter into M&A transactions? 8. Refer to the problem above. What would be the range of feasible exchange ratios for the deal? 9. suppose that buyer and target both estimate Newco’s DCF value to be $5 billion. Synergies of $10 million are expected from the deal. What are the resulting maximum and minimum exchange ratios? Graph your solution and interpret the results. Assuming again that the expected P/E ratio for Newco is 11 times. Referring to the same problem. Each party has 80 million shares outstanding.million. Both buyer and target expect Newco to trade at a price/earnings ratio of 11 times. Now suppose the parties agree to a cash-for-stock transaction instead. 10. Now run a sensitivity analysis using projected DCF values from $3 billion to $7 billion. What is the range of feasible exchange ratios for this deal? 7. is there a feasible deal? Why or why not? .

What should the expected minimum P/E ratio be in order for a deal to be feasible? Graph your solution and interpret the results. What would be the range of feasible cash payments? 13. Assume again that the expected DCF value for Newco is $5 billion. 12. . Now run a sensitivity analysis using projected DCF values from $3 billion to $7 billion.11. Graph your solution and interpret the results. Run a sensitivity analysis using a range of P/E ratios from 11 to 17 times.

You expect $180 million in revenues this year. If earnouts are useful. the management team will be awarded a 10 percent bonus on any extra revenues exceeding $200 million. you estimate that its revenues have a volatility of 18 percent.Chapter 22 Questions 1. The deal is structured as follows: The acquirer will pay $20 million in cash now. You are the CEO of a local beverage firm that is negotiating a deal with a large national food company. the acquirer will pay another $20 million. However. why are they not pervasive in big public deals? 2. Describe the differences and explain their implications for value of earnouts. 3. Checking your firm’s financial statement over the past several years. if the revenues of your firm reach $200 million after three years. Assuming a risk-free rate of 6 percent. but there are also some differences between earnouts and options. In addition. . what is the probability that your firm’s shareholders will get a $20 million payment three years later? How much is the bonus plan to the management team worth? Try using the binomial option-pricing model to value this bonus plan. Earnouts are options.

After careful consideration. changing the agreement from three years to two years. a. The management team will still get 10 percent of any revenues exceeding $200 million. Then. . Keeping other parameters the same. the buyer changes the bonus plan.4. 18. Plot the values and time periods in one table and explain the results. After consulting with an outside marketing firm. b. if the three-year time period is reduced to two years. Using volatilities of 12. 15. recalculate the value of the bonus plan for the above range of volatilities. Moreover. Refer to problem 3 again. how much is the bonus plan worth now? 6. recalculate the value of the bonus plan. 24. a. How much is the bonus plan to the management team worth now? b. 21. This means that the management team will only get $5 million even if the revenues exceed $250 million. but there will be a $5 million cap on the amount of the bonus. Refer to problem 3. are you better off in terms of the chances of getting the bonus as well as the value of the bonus plan? 5. Refer to problem 5. your estimation of the volatility of revenues for the next three years increases from 18 percent to 30 percent. and 27 percent for the revenues.

Your best guess for the EBITDA to sales ratio is 10 percent with a minimum of 5 percent and a maximum of 15 percent. which is based on the EBITDA of your firm. JumpOnline. The three-year risk-free rate is at 6 percent. The buyer estimates that sales growth will follow a normal distribution with a mean of 10 percent and a standard deviation of 5 percent. He expects the EBITDA to sales ratio to likewise follow a normal distribution with a mean of 8 percent and a standard deviation of 3 percent. FreeSpeech is considering an expansion into an online media niche. sales growth is most likely to be 12 percent with a minimum at 6 percent and a maximum at 15 percent. is this deal economically attractive to you? 8. As a prominent media company. A buyer approached you and expressed his interest to buy your firm for $10 million. Based on your knowledge. Your estimation of the value of your firm is $12 million. Currently. An earnout trigger will start at $2 million and increase by that amount each year. Given the above information.7. both of you agree on an earnout plan with the following terms: You will get $5 million now. From his perspective. Refer to problem 7. will last for three years. the sales of your firm are $55 million. the two sides had a heated debate on the assumptions about future revenue growth and profit margins. is this deal attractive? 9. To bridge the gap between you and the buyer. the earnout. During negotiations with a start-up Internet service company. which led to different valuation of the firm .

but FreeSpeech’s estimation of profit margin of the next five years follows a normal distribution with means of 12. c.based on the DCF model. In addition. the sales of JumpOnline are $10 million. FreeSpeech thinks the start-up company is worth $30 million. minus a deductible amount of $1 million now but which would increase at a compound rate of 50 percent annually for the next five years. Sales growth is most likely to be at 40 percent with a minimum of 30 percent and a maximum of 55 percent. Currently the profit margin is 10 percent. what is the value of . and 30 percent respectively and with standard deviations of 20 percent of these numbers respectively. To resolve the disagreement. After the acquisition. 20. The profit margin will improve gradually over the next five years. Currently. FreeSpeech will pay $15 million in cash to acquire JumpOnline now. minus a deductible amount which is $10 million now but will increase at a compound annual rate of 50 percent for the next five years. 15. 25. b. FreeSpeech will pay JumpOnline’s shareholders cash equal to 50 percent of JumpOnline’s gross profits. while the investment banker for JumpOnline thinks that it is worth at least $50 million based on the rapid growth of Internet-related businesses over the past several years. FreeSpeech will pay JumpOnline’s shareholders cash equal to 20 percent of JumpOnline’s gross annual revenues. Assuming a risk-free rate of 8 percent. the two sides agree to a payment schedule as follows: a.

sales growth is most likely to be 60 percent with the minimum at 45 percent and the maximum at 70 percent. and 35 percent respectively and with standard deviations of 15 percent of means. Suppose you are the financial adviser for JumpOnline. Please use the Excel sheet on the CDROM and run the Crystal Ball model. Based on your knowledge. Your estimations for profit margins during the next five years follow normal distributions with means of 15.JumpOnline from FreeSpeech’s perspective? Please use the Excel sheet on the CD-ROM and run the Crystal Ball model. 25. Refer to problem 9. Compare the result with problem 9 and explain. 20. 10. 30. . The profit margin will improve gradually in the next five years. Currently the profit margin is 10 percent.

01. $5. M&A is a risky activity. $20. Also calculate and graph the value of the bid with the collar at these prices.Chapter 23 Questions 1. in which case the exchange ratio will be equal to $18 divided by the buyer’s share price. the exchange ratio is 1. $40. What costs are associated with deal failure? What value is at risk when a deal fails? 4. $30.2 to 1. or (2) the buyer’s share price is greater than $35. the buyer’s share price is $25.2:1. which has a low trigger of $15 and a high trigger of $35. What is the true value of a bid? 3. in which case the exchange ratio will equal $42 divided by the buyer’s share price. How can one price risk management features in M&A? 2. $10. Calculate and graph the number of shares issued for one share of the seller’s stock. unless (1) the buyer’s stock price falls below $15. Thus. (Please use the spreadsheet model Collars Analysis. $45. and $50. Suppose the fixed exchange ratio in a deal is 1. assuming the following share prices for the buyer: $0.xls. $15. What are the four classic profiles of payments in M&A? What are the differences between a floating collar and fixed collar? 5. The buyer and seller agree to a floating collar.) . and that at the time of agreement. $35. $25.

unless the buyer’s stock price falls below $15. The collar would give the target’s shareholders cash equal to the difference between $22 and your firm’s share price one year later. you agree to a collar. with a maximum cash payment of $5 for each share of buyer’s stock. Assume you are the CEO of a publicly listed company and have just agreed to acquire a target. Suppose a seller agrees to receive a payment in a buyer’s stock worth $30 per target share. based on today’s market prices of both companies: $25 for your firm and $40 for the target.6. assuming the following share prices for the buyer: $0.xls.) 7.01. To reduce the risk for the target arising from possible fluctuations in your stock price. in which case the exchange ratio will equal 0. $50. $5. the cash payment will be $30 for each share of the seller’s stock. Calculate and graph the number of shares issued for each share of the seller’s stock. You agree on an exchange ratio of two shares of your firm’s stock for one share of the target’s stock. $40. The annualized volatility for the risk-free rate is 15 percent. a process that will take one year. $15. or unless the buyer’s share price is greater than $40. $10. (Please use the spreadsheet program Collars Analysis.75 shares of stock. and $60. in which case the exchange ratio would be equal to 2 shares of stock. The deal needs to be approved by a government regulatory agency. Thus. which has a low trigger of $15 and a high trigger of $40. $30. Given a risk-free rate of 5 percent . Buyer and seller agree to a collar. Also calculate and graph the value of the bid with the collar at these prices.

) 8. The annualized volatility for the riskfree rate is 20 percent. The contingent value right will permit a holder of Newco to receive a cash payment equal to the difference between $50 and the stock price of Newco after three years. Assume one share of Newco is worth $40 today. To resolve the difference. Suppose the approval period is not certain. Refer to question 7. if Newco’s stock trades below $50. there will be a contingent value right that will give ABC’s shareholders the right to some cash payment at the end of three years if Newco’s stocks do not perform well during this period.xls. Your best guess is that the approval process will take one year. how much is this offer truly worth to the target’s shareholders in terms of share price? (For simplicity. Use the Monte Carlo simulation method to calculate the probability of a cash payment and the expected value of one share of the target’s stock in the deal. The annualized volatility for the risk-free rate is 15 percent. with a minimum time of half a year and a maximum time of two years. start by using the Black-Scholes option pricing model found in Option Valuation. The cash payment will be capped at $15. Assume you are negotiating a deal with company ABC. 9. Given a risk-free rate of 6 percent and estimated volatility .and 22 percent volatility for your stock. then see what the simulation analysis reports in Collars Analysis. Your current bid price is $56 per share but ABC asks for $60 per share.xls to get an approximate figure. company ABC proposes that besides the $56 cash payment.

xls.) 10.of 18 percent for Newco’s stock. The volatility of interest rates is 20 percent. what does the deal cost the buyer in terms of each share of ABC’s stock? (Again as an experiment. use the Black-Scholes option pricing model to estimate the value of the collar.5 years with a minimum of 2 years and maximum of 3 years. Your best guess is that the final agreement will be 2. Assume you would like to renegotiate with ABC the time period for this contingent value right. Use the Monte Carlo simulation method to calculate the expected value of this right and the probability that you will have to make another cash payment in the future. Refer to question 9. Then estimate the answer using the simulation model in Collars Analysis. .

5. the actual economic costs are negligible. Industry specialists. boards of directors. 2. While important. 3. Social issues usually relate only to a narrow group of people. such as division heads and managers. Highly visible executives. Research studies reveal that there is no significant difference in top management turnover between friendly and unfriendly deals. The merger of equals (MOE) structure is designed to combine partners of roughly equal influence. . luckily. Corporate name changes often involve serious consideration and debate because the management team of the new company will want to create a strong brand identity. 4. however.Chapter 24 Questions True or False 1. often claim that the structure of MOEs yields a clear dominance of the buyer over the target firm. which includes senior management. and thus decreases the probability of successfully consummating a deal. such as CEOs. 6. 7. turn over more quickly than less visible ones. The MOE structure is believed to increase the resistance of target managers to a merger. and influential middle managers. social issues do not directly affect the probability of successfully reaching agreement on an M&A transaction.

Social issues do not surface in early discussions of M&A. 9. What are retention payments? In what form are they paid? What determines the size and period of time in which they are paid? 2. how can one calculate an approximation of this cost? 4. What is the benefit of determining CEO leadership succession early in the merger agreement? Are there any drawbacks? . the greater the executive compensation. What are golden parachute payments and when are they paid? Who determines and pays for them? What key function do they hold? 3. If target shareholders bear the cost of the MOE structure. executives wait until after they have discussed the economics of a deal to see if it is even worth considering. 10. rather. There is a strong positive correlation between the size of firms and the compensation they pay to senior executives (such as CEOs): the larger the firm. Short Answer 1. Social issues often stimulate deal-related transactions such as side payments and complex trade-offs.8.

the buyer or target’s corporate name can be retained or a blended name can be created. Regarding the 1998 Fleet Bank and BankBoston merger: . In a merger transaction. provided in the chapter.7 billion. who stays and who leaves)? 6. What message does each option convey about the ongoing firm? 7. In the Hewlett-Packard (HP) and Compaq merger contest.e. Why did the WachoviaSunTrust negotiations not succeed? 10.5. how did Walter Hewlett use information about the prospective compensation of Fiorina and Capellas? 9. Explain why Daimler and Chrysler decided that a new public parent company should be organized under the laws of the Federal Republic of Germany. Wachovia agreed to a merger of equals with First Union Corporation for $12. 8. Consider the vignette of Wachovia Bank’s acquisition plans in 2001. what are three key considerations for determining the new company’s workforce (i..5 billion. In a merger transaction. but then SunTrust Bank appealed directly to Wachovia’s shareholders with an unsolicited offer of $13.

Why was there a retention plan for employees of BankBoston Robertson Stephens? b. What were the terms of the retention plan? c. How and why did they differ from the retention plans created when BankBoston merged with Robertson Stephens in 1996? .a.

What are some of the first-round documents that may be drafted in a merger? In general. Give an example of a material adverse change. Are parties to a deal obligated to issue a letter of intent (LOI) during merger negotiations? Does the letter of intent represent a binding agreement? Why are LOIs used? 3. according to the Supreme Court. What is a standstill agreement and what risks does it manage? 7. What. 2.Chapter 25 Questions 1. How might it derail the deal process? 8. Walk through the usual timeline of a deal. What factors might parties to a deal consider when deciding whether to issue a letter of intent or other first-round documents? 5. are the factors a company must consider in deciding whether and when to disclose a transaction? 6. . How might a sudden change in share prices derail the deal process? Explain. when and why are first-round documents issued? 4.

Chapter 26 Questions

1. What is governance? Through what processes do boards of directors exercise governance?

2. What are agency costs? Why do they arise?

3. What is jawboning? How is it different from exit?

4. How does governance reduce agency costs?

5. Does good governance pay? How?

6. Through what mechanisms can investors influence managers and directors?

7. Describe what happens in a typical dual-class recapitalization.

8. Define the duties of loyalty and care.

9. What is the business judgment rule?

10. What is the enhanced business judgment rule? When does the enhanced business

judgment rule get triggered?

11. What two tests must be met for courts to rule that directors have performed their

duties in accordance with the enhanced business judgment rule?

12. What is the Revlon rule? When does it get triggered?

Chapter 27 Questions

1. What is the aim of securities laws?

2. How does one determine whether a fact is material?

3. What is the significance of the Securities Act of 1933?

4. What is a registration statement? A prospectus? A red herring?

5. When is a registration deemed to be effective?

6. What is the Securities Act of 1934?

7. What is the Williams Amendment to the Securities Exchange Act of 1934? What are the four important “rules of the road” imposed by the Williams Amendment?

8. Do states have jurisdiction over securities registration? What are blue-sky laws?

9.

What are the two theories of insider trading liability? Explain each.

10.

Can one buy or sell securities during the waiting period of filing a registration statement with the SEC?

Chapter 28 Questions 1. Define horizontal. What two conditions are necessary for a merger to have an anticompetitive effect? 4. Which government agencies enforce antitrust laws? What are their respective functions? 8. What is a contestable market? 3. and conglomerate mergers. What is the Hart-Scott-Rodino Act? 7. What is a trust? Why are trusts harmful to consumers? 2. What motivates each type of merger? 9. vertical. What are the two quantitative measures used to determine degree of market concentration in horizontal mergers? Explain conceptually what each aims to measure. What is the Sherman Act? 5. . What is the Clayton Act? 6.

Golden Books Family Ent. Inc. Marvel Enterprises Inc. A review of prices over the last 20 years reveals that the demand for margarine rises 3 percent for every 1 percent increase in the price of butter.027. Descriptions of both companies are given below. John Wiley & Sons Inc. Thomas Nelson Inc.9 73.5 243. a manufacturer of margarine. Suppose Scholastic Corporation wanted to acquire Marvel Enterprises. Hungry Minds Inc. Millbrook Press Inc.6 594. Houghton Mifflin Co. Do you think the FTC would approve this transaction? Scholastic Corporation . Scholastic Corp.402.5 1. Listed below are the top ten book publishers.281.4 McGraw Hill Cos.0 1.8 265. Calculate the cross elasticity of demand and interpret the results. wants to acquire Firm B. Information Holdings Inc. The Federal Trade Commission wants to determine the economic relationship between butter and margarine. a manufacturer of butter. 11. Firm A.3 231. Calculate the HHI indices premerger and postmerger.3 21.10. ranked according to fiscal year 2000 revenue:1 2000 Revenue (in $ MM) 4.7 148.

including the Babysitter’s Club and Clifford the Big Red Dog series. comic book publishing. Its success is based on traditional favorites. What other guidelines do the regulatory agencies use to determine whether to approve or disapprove a horizontal merger? . is one of the world’s most prominent characterbased entertainment companies.”2 Marvel Enterprises. X-Men. .“Selling more than 325 million books annually. .700 characters. and toy businesses in both domestic and international markets. Scholastic also specializes in educational materials. The company operates in the licensing. Fantastic Four and the Incredible Hulk. with a proprietary library of over 4. publishing 35 magazines that are read by more than 20 million elementary and high school students in the United States alone. “Marvel Enterprises. Inc. most notably the wildly popular Harry Potter series. Scholastic Corporation is a leading publisher of children’s books.”3 12. Captain America. . as well as on newcomers. Inc. Marvel’s library of characters includes Spiderman.

What is the importance of the “Parties to the Deal” component of the definitive agreement? 9. What is a letter of intent? Why do some M&A advisers advise against issuing an LOI? 7. What is a definitive agreement? How is it a risk management device? 8. What information does a term sheet contain? What is the purpose of having a term sheet? 6. What is the “Recitals” component? . What is a confidentiality agreement? 3. What does an exclusivity agreement do? 4. What is a standstill agreement? What is its objective? 5.Chapter 29 Questions 1. What is the role of first-round documents in merger negotiations? 2.

What are the three ways in which the seller’s right to register shares might appear? Provide an explanation for each of the ways.10. What purpose does the “Conditions to Closing” section serve? . Sellers are less concerned about the condition of the buyer if the buyer pays in stock rather than in cash. What information is contained in the “Description of the Basic Transaction” section? Why is this section important? 12. b. What purpose does the “Covenants” section serve? 16. a. 15. If a representation or warranty is found to be false after the closing of the deal. Are the following statements true or false? Explain. the injured party can always sue for damages. What is in the “Representations and Warranties” section? What is the difference between a representation and a warranty? Why is this section important? 14. Why is it important to include a provision in the definitive agreement for registering shares? 13. Why is the “Definition of Terms” component important? 11.

17. 24. What is a proxy statement? 21. 2 percent of the company’s total outstanding shares. The ESOP has a clause that would allow shares to vest automatically if Busy Bee were acquired or became party to a merger. The merger proxy statement made no mention of the unexercised options on the shares. 23. Busy Bee has an employee stock ownership plan (ESOP) with options unexercised on 923. Does having a fairness opinion from a financial adviser mean that a deal is good for shareholders? Explain. What is a bring-down? 18. What does the “Termination” section contain? 19. Should this information have been disclosed in the proxy statement? Explain. Why do proxy statements disclose the number of shares held by directors and officers? .000 shares. Infant World and Busy Bee have agreed to a merger of equals. What purpose does the “Indemnifications” section serve? 20. What is a merger proxy statement? What information does a merger proxy statement usually contain? 22.

Companies often have what is called a rights agreement. Why do proxy statements often contain information on financing arrangements for the buyer? Or. What is this and what is its purpose? 28. What is a keepwell covenant? Why is it important? 29.25. Why are the target’s articles of incorporation and bylaws often amended in connection with a merger? 27. What is the purpose of the “Conditions to the Offer” section of a proxy statement? . alternatively. why are commitment letters (for funding) so important? 26.

rather than claim. parallel bargaining rather than single-issue. What is ZOPA? When does it exist? 2. 3. What is the endowment effect? What is status quo bias? What causes both phenomena? What does the occurrence of these two phenomena suggest about behavior in deal making? 5. What does it mean to create. is it a good idea to anchor? 4. What are three ways to address a stalemate during negotiations? . serial bargaining? 8.Chapter 30 Questions 1. Why is it advisable to conduct multi-issue. What steps must one take to prepare for a negotiation? 6. What is BATNA? Why is it important to have one during negotiations? Give an example of a BATNA. value? 9. How might sunk costs negatively affect a party to a negotiation? 7. What is anchoring? In terms of strategy.

Briefly describe each. Auctions can be classified as open versus sealed. common value versus private value.Chapter 31 Questions 1. What is an English auction? A Dutch auction? A first price sealed bid auction? A second price sealed bid auction? What are the advantages and disadvantages of each method? 4. single versus double. What are the main advantages of using auctions for asset sales? What are the main disadvantages? 6. What are the five methods of sale discussed in the chapter? Describe each method and discuss advantages and disadvantages associated with each. What is the “Winner’s curse”? 7. 3. Which auction method would maximize revenues to the seller? 5. 2. Why must the effective M&A practitioner master the art of multi-attribute bidding in auctions? .

If an asset for sale is unique. is it advisable for the seller to use an auction process? Explain.8. .

and profit from the gains in investment. What is a hostile takeover? 2. What is a leveraged recapitalization? Why might a target resort to it? 6. True or false: The investment opportunities hypothesis says that takeovers are motivated by the buyer’s desire to purchase a target at a low valuation. What should a bidder consider in determining its highest or walk-away bid and its lowest bid? . To what factors are an M&A arbitrageur’s returns most sensitive? Explain.Chapter 32 Questions 1. What is an M&A arbitrageur? How might M&A arbitrageurs determine the outcome of a takeover contest? 4. 3. should a bidder make a tender offer with a shorter or longer holding period? Explain. All things equal. improve its operations and gains in efficiency. 5. 7.

an integrated small molecule drug discovery and development company. on June 13. What is EVNT? How is it calculated? 10. The deal was structured as a stock swap in which AXYS shareholders would receive 0. Scott Siegel. Celera Genomics. manager of an M&A hedge fund. When would a low-bid strategy be appropriate? 14. Celera had . 2001. watched the tape go across his Bloomberg screen at 4:00 p.m. What are stub shares? 12. a Rockville company known for mapping the human genome. announced it would acquire AXYS Pharmaceuticals Inc.. What is a bear hug? What is the advantage of using this strategy? 13.1016 Celera share for each AXYS share. what needs to happen for target shareholders to tender their shares? 11. In economic terms.8. What is a minority shareholder freeze-out? 9.

Assume further that Siegel purchased 300. could raise the value of Spitzer to $42 a share. Assume that the acquisition was completed in 5 months (150 days). and AXYS at $3.50 apiece. Members of the Spitzer family (which owns 40 percent of the company) occupy all board seats and are determined to keep the company within their control. HLI estimates a 50 percent chance that the Spitzer family will win the bid. and a 20 percent chance that neither scenario will materialize.closed the previous day at $41.43. Inc.15. by their estimates. HLI has determined that its purchase price should not exceed $44 per Spitzer share. 16. An aggressive raider named Mathias Martin is reportedly going to join the bidding contest. wants to acquire Spitzer’s Environmental Services (SES). What would Siegel do as an M&A arbitrageur? Explain. .75.00. calculate the return on Siegel’s investment for the holding period and on an annualized basis. Healthy Land. a waste management services company. a 30 percent chance that Martin will win. 15.45.800 shares of Celera.000 shares of AXYS at an average cost of $4. HLI thinks Mathias will place a bid of $35. (HLI). Assuming a borrowing cost of 8 percent. Celera’s share price on the closing date was $27. Should HLI put in a bid? If so. and shorted 29. how much should HLI bid? Draw a decision diagram facing the investor. Siegel funded 70 percent of his purchase with debt. The shares currently trade at $28. Their consultants have drawn up a restructuring plan that.

7. Research evidence shows that targets of hostile bids have higher debt and inside ownership and lower liquidity and debt capacity. Golden parachutes grant target managers generous payments if they decide to stay at the combined firm following an acquisition.Chapter 33 Questions True or False 1. 6. A board of directors has the power to rescind a poison pill. 3. 5. Whether defensive tactics create or destroy value for target shareholders depends on both corporate governance and uncertainty. Defense tactics are particularly discouraging to arbitrageurs. 2. The “Saturday Night special” is a surprising offer to the target board that is left open for only a brief period of time. A godfather offer is a cash offer that is accompanied with an implied threat. . 4. which makes directors feel pressured to accept.

9. The poison pill is a nondetachable shareholder right to obtain shares at nominal cost upon the occurrence of a triggering event. Governments can give external presentation to targets through the implementation of discriminatory laws and regulations.8. .

. Where do deal-embedded defenses appear and what are they intended to do? Do they discriminate among specific bidders? 8. If most public corporations have not been subject to a hostile takeover contest. What is the key difference between a proxy contest and consent solicitation? 6. What is the fair price provision and does it have much of a presence in the U. A target’s litigation can cover a number of possible claims regarding M&A bids and transactions. What is a street sweep? What is a drop and sweep? 3. What is the Williams Act and why is it important? 5. What are four things to consider in choosing a form of takeover attack? 7. What is the difference between a white knight and a white squire? 10. Please give a few examples. What do toehold purchases attempt to do? 4.S.Short Answer 1. why are takeover defenses so prevalent? 2. markets? 9.

A consent solicitation is similar to a proxy fight in that it requires a shareholder meeting. The Revlon standard stems from a 1986 case in which the court ruled that when a company puts itself up for sale.Chapter 34 Questions True or False 1. 4. 2. For a leveraged recapitalization. stakeholder interests can be considered only in light of increasing shareholder value. Leveraged recapitalizations can be structured as a going-private transaction or as a restructuring in which the target will remain a public company. 7. managers are absolved from having to concern themselves with the reactions of public shareholders. the target company needs to be one that is “levered” with a high debt-to-total-capital ratio. With the MBO. in which shareholder approval must be obtained. . 5. The special rights afforded by a poison pill can be amended and rescinded by a board of directors with shareholder approval. A stock undervaluation can make a company susceptible to a hostile takeover attack. 6. 8. 3. A crash in the stock market might serve to temporarily remove a takeover threat for a company.

A leveraged recap can be particularly effective when the initial hostile bid is high. . 10.9. Management must be able to finance the equity portion of a recapitalization.

What does the Delaware Antitakeover Statute stipulate? Why was it designed? 3. wanted to acquire Toy Land Company (TLC) and thus made a tender offer to the shareholders of Toy Land at $45. If there has been no instance in which a company’s golden parachute has defeated a hostile bid.Short Answer Questions 1. How might you explain why so few shares were tendered? 4. Aqua Toys Inc. a price that represented a significant premium to TLC’s current stock price. why do over 350 firms of the Fortune 500 have golden parachutes in place? 5. How can a company employ a “double attack” against a poison pill? . Why can business diversity make a company less attractive for acquisition? 2. The offer was set to expire on January 31. Why might a white knight pay for a hostile bidder’s tender offer expenses? 6. Aqua Toys then decided to raise its bid to $60 and extend the deadline because only a small fraction of shares had been tendered as of January 30. The diverse nature of American Standard was thought to be a deterrent to many potential buyers.

7. What are some key differences between an MBO and a leveraged recapitalization? 10. What is the main drawback of leveraged restructurings? . How can the substantial increase in corporate leverage resulting from a restructuring increase value for the firm? 9. What are some benefits and drawbacks of an MBO? 8.

is it advisable to say as little as possible? Why or why not? 6. Why is it important to prepare carefully for a deal presentation? 2. When first announcing a deal to the public. what should be the deal presenter’s main objective? 5. what steps should the presenter take in advance to meet those challenges? 3.Chapter 35 Questions 1. Reflecting on the classic challenges to preparing an effective presentation. what is the specific objective that the deal presenter hopes to achieve? . What would you say are some characteristics of a good deal presentation? How does good deal presentation facilitate corporate governance? 4. What are the four classic kinds of deal presentations discussed in the chapter? For each type. Explain how an investor estimates the new share prices for target and buyer upon the announcement of a deal. In this context.

Explain the guiding principles by which board directors make their decisions. how must a deal presentation be framed in order to gain CEO approval? 8. what should be the focus of a deal presentation to the board? . What kind of decision is a CEO making when he/she evaluates a deal? In this light.7. In view of these.

In what kinds of situations might each be appropriate? 5. interdependence. and control required by each strategy. What are the four types of integration strategy presented in the chapter? Describe the degree of autonomy. When might none of the four models be advisable but instead might a totally new organizational culture be superior? In what types of deals is it advisable to impose/merge cultures? In what types of deals is it advisable to keep distinct cultures? Explain. . interdependence. and control defined in the chapter. What business areas should integration planning cover? 7. 6. How are autonomy.Chapter 36 Questions 1. in the context of postmerger integration? 4. From where should postmerger integration strategies originate? 3. When should planning for postmerger integration begin? 2. Should postmerger integration be done piecewise or in a systemic fashion? Explain.

Can integration execution begin before a deal is consummated? 9. What are some crucial elements for success in integration execution? 10.8. What are some pitfalls to be avoided in postmerger integration? .

6. . Employing a bottom-up deal pipeline is the best approach for developing M&A business. A strategic capability is difficult to imitate. federal and state governments (and.Chapter 37 Questions True or False 1. 3.S. to foreign governments) upon entering the LOI (letter of intent) stage. 2. as required in certain cases. Lawyers are the only functional experts that become a part of a business development team. The first contact between a potential buyer and target should be a cold call from a sales or marketing professional in the division. A company’s larger business units are always the least acquisitive. 4. 5. the smaller business units are often the most acquisitive because of their need for growth and expansion. 7. Antitrust and other regulatory filings are submitted to the U. Merger integration planning becomes rigorous between the signing of the definitive agreement and closing of the deal.

It is beneficial when integration teams get involved early on in the due diligence because they can access information that will help steer the integration planning process. Why did GEPS develop and organize Centers of Excellence (COE)? . 9.8. Identify the two sources from which GEPS discovers new acquisition opportunities. What are GEPS’ four key criteria for screening acquisition opportunities? 3. What are the three “buckets” of information that GEPS sought from a target firm? 4. The electronic digitization of company information can enhance effective merger process flow. Short Answer 1. 2.

_____GE operating unit leader and business development leader review recent GEPS acquisitions and discuss their success. LOI development stage (LOI). and outside counsel begin drafting a standard contract and tailoring it to the particular needs of the transaction. Why does the business development unit of GEPS perform postacquisition audits on all of their deals? What is the main purpose and focus of the post-audit? For questions 6 to 15. 7. a GE M&A lawyer. definitive agreement phase (DA). _____ GE and the target firm sign a confidentiality agreement. 9. _____GEPS evaluates the target firm to see if it meets certain quantitative criteria. 10. _____GEPS business development leader. identify the corporate development stage in which the stated GEPS activity takes place: initial planning stage (IS). 8.5. _____GEPS appoints leadership of the postmerger integration plan. 6. and postmerger integration (PMI). .

11. _____The comprehensive due diligence report is near completion.

12. _____Integration plans become rigorous at this stage.

13. _____An Integrity Briefing is scheduled.

14. _____GE senior counsel and lawyers become involved.

15. _____The CEO of GEPS gives his internal support for the deal.

Chapter 38 Questions

True or False

1. Given the inherent variability in M&A, it may not be worthwhile to formulate an opinion about the future of M&A activity.

2. The increasing automation of analytical techniques will allow deal designers to focus less on number crunching and more on the creative task of shaping good deals.

3. Any potential advantage gained from real option valuation will likely diminish over time.

4. Learning from current events is passive and easy.

5. Research has answered all the important questions in M&A.

Short Answer

1. Why is it imperative to develop one’s view about the future of M&A?

2. How will continuous technological change and progress affect M&A practitioners and how they conduct business?

3. Why can the application of real option valuation in the field of M&A be both a curse and a blessing? 4. Why is it a good idea for serious M&A professionals to get professional help? 5. How do you define or characterize an M&A deal leader?

87. p. Plunkett’s Entertainment & Media Industry Almanac 2002-2003. Plunkett. p. 411. 3 Ibid.. p. . 326.11 Jack W.. 2 Ibid.

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