TEST QUESTIONS FOR CHAPTER 6:

M&A SALE PROCESS

1. Provide two pros and two cons of running a broad auction.
Explanation:
Pros:
–Maximizes potential competitive dynamics and probability of
achieving maximum sale price
–Helps to ensure that all likely bidders are approached
Cons:
–Difficult to preserve confidentiality
–Unsuccessful outcome can create perception of an undesirable asset
(“taint”)
2. Under what circumstances might a targeted auction be more appropriate
than a broad auction?
Explanation: A targeted auction is more appropriate if there is a
select group of clearly defined buyers; also may be preferable
if the seller wants to preserve confidentiality both externally
and internally.
3. Why would a company hire an advisor?
Explanation: Given the high stakes involved in an M&A transaction,
companies need the specialized skills of investment bankers.
For example, sell-side advisors have buyer relationships,
sector knowledge, modeling and valuation expertise,
execution experience, and dedicated resources.
4. What are the four primary methodologies for valuing a target company?
How are they used by the sell-side advisor during the sale process?
Explanation: The four primary methodologies are comparable
companies, precedent transactions, DCF analysis, and LBO
analysis. The sell-side advisor does upfront work to frame
valuation expectations. Through the first and second rounds,
the advisor needs to refresh the valuation range to negotiate
with prospective buyers and interpret bids.

Chapter 6_M&A Sale Process_Q&A

 5. Under what circumstances might the sell-side advisor recommend a
negotiated sale?
Explanation: When there is a clear, natural buyer with synergies,
who is prepared to launch a preemptive bid.
6. How many parties are typically contacted in a targeted auction? Broad
auction?
Explanation: Targeted auction = 5 to 15. Broad auction = 10 – 100+.
7. How long does a typical auction take?
a) 4–6 months
b) 4–6 weeks
c) 24 months
d) 20 days
Answer: A
8. What are the key stages of an auction process?
Explanation:
–Organization and preparation
–First round
–Second round
–Negotiations
–Closing
9. What do the first round and second round refer to?
Explanation: First round refers to the time from the initial contacting
of buyers to receipt of initial bids. Second round refers to the
time from the management presentation to receipt of final
bids.
10. What is sell-side advisor due diligence? Why is it important?
Explanation: The sell-side advisor performs in-depth due diligence
on the target in order to:
–Fully understand the company
–Enable the positioning of the company, which is key for marketing
to buyers
–Help craft the financial projections
–Establish valuation parameters

Chapter 6_M&A Sale Process_Q&A

 11. Who generally crafts the target’s financial projections?
Explanation: Target management crafts the financial projections
with help from the sell-side advisor.
12. Why are financial projections in an M&A sale process so important?
Explanation: Financial projections provide the foundation for the
buy-side valuation work. They need to be realistic and
defensible.
13. What criteria are used to select the prospective buyers’ universe?
Strategics vs. Financial Buyers?
Explanation: When evaluating strategic buyers, the banker looks first
and foremost at strategic fit, including potential synergies.
Financial capacity or ability to pay, which is typically
dependent on size, balance sheet strength, access to financing,
and risk appetite, is also closely scrutinized. Other factors
play a role in assessing potential strategic bidders, such as
cultural fit, M&A track record, existing management’s role
going forward, relative and pro forma market position (anti-
trust concerns), and effects on existing supplier and customer
relationships.
When evaluating potential financial sponsor buyers, key
criteria include investment strategy/focus, fund size, track
record, fit within existing portfolio, sector expertise, fund
cycle , as well as ability to obtain financing. The deal team
also looks for sponsors with existing portfolio companies that
may serve as attractive combination candidates for the target.
14. Traditionally, which type of buyer has been able to pay a higher price?
Why?
Explanation: Strategic buyers have been able to pay a higher price
due to the ability to realize synergies, lower cost of capital,
and lower return thresholds.
15. What are the key marketing materials in an M&A sale process?
Explanation: Marketing materials include the teaser and CIM in the
first round and management presentation in second round.

Chapter 6_M&A Sale Process_Q&A

 16. What are the key content items in a teaser?
Explanation: The teaser is generally a brief one- or two-page
synopsis of the target, including a company overview,
investment highlights, and summary financial information. It
also contains contact information for the bankers running the
sell-side process so that interested parties may respond.
17. Why is it important for legal counsel to review and approve external
marketing materials in an M&A sale process?
Explanation: Marketing materials should be reviewed because of
legal issues, most notably disclosure requirements for public
companies and potential anti-trust issues for all companies.
18. When is the teaser distributed to prospective buyers?
Explanation: The teaser is distributed at the start of the first round
after the initial contact is made.
19. At what stage is the CIM distributed? What is the key gating item for
the seller prior to distribution?
Explanation: The CIM is distributed in the first round. The key
gating item is the execution of the confidentiality agreement.
20. Select ALL that apply. Which of the following marketing documents
contain detailed financial projections?
a) Final Bid Procedures Letter
b) CIM
c) Management Presentation
d) Teaser
Answer: B and C

Chapter 6_M&A Sale Process_Q&A

 21. Provide an illustrative outline for a CIM.
Explanation:
Table of Contents
1. Executive Summary
2. Investment Considerations
3. Industry Overview
– Segment Overview
– Competition
4. Company Overview
– History
– Strategy
– Products and Services
– Customers and Suppliers
– Management and Employees
5. Operations Overview
– Manufacturing
– Distribution
– Sales and Marketing
– Information Systems
– Legal and Environmental
6. Financial Information
– Historical Financial Results and MD&A
– Projected Financial Results and MD&A
Appendix
– Audited Financial Statements
– Recent Press Releases
– Product Brochures
22. Select ALL that apply. Which of the following are key provisions of a
confidentiality agreement?
a) Use of information
b) Term
c) Permitted disclosures
d) Non-solicitation/no hire
Answer: All of the above

Chapter 6_M&A Sale Process_Q&A

 23. Why is a confidentiality agreement critical in an M&A sale process?
Explanation: The confidentiality agreement prohibits the
dissemination of non-public information by prospective
buyers. Without it, the seller would be less willing or
unwilling to share critical information. It also prohibits the
solicitation to hire employees and, potentially, the unsolicited
purchase of the target’s equity and debt (standstill
agreement).
24. When are buyers contacted? Who generally makes the call?
Explanation: The buyers are contacted at the start of the first round,
marking the formal “launch.” Typically, a senior member of
the sell-side advisory team makes the call, potentially with a
sector coverage officer.
25. What document outlines the details and process for submitting a 1st
round bid?
a) Final bid procedures letter
b) Teaser
c) Initial bid procedures letter
d) Confidentiality agreement
Answer: C
26. What is the purpose of the management presentation?
Explanation: The management presentation is a critical component
of second round buyer due diligence. It provides a detailed
overview of the target and interactive session with the
management team.
27. Who gives the management presentation?
Explanation: The core team presenting typically consists of the
target’s CEO, CFO, and key division heads or other
operational executives, as appropriate.
28. What is the core content of a management presentation?
Explanation: Generally, the content maps to that of the CIM, but is
more crisp and concise. It also tends to contain an additional
level of detail, analysis, and insight, which is more conducive
to an interactive session with management and later-stage due
diligence. The outline typically includes an executive
summary and overviews of the industry, company,
operations, and financials.

Chapter 6_M&A Sale Process_Q&A

 29. What is the primary function of the data room?
Explanation: The data room generally contains a broad base of
essential company information, documentation, and analyses.
In essence, the data room is designed to provide a
comprehensive set of information relevant for buyers to make
an informed investment decision, such as detailed financial
reports, industry reports, and consulting studies.
30. Where is the data room housed?
Explanation: Typically online, although pre-internet (and still in
select cases) it was a physical location with paper files
(typically at the sellers’ legal counsel offices).
31. What type of information may be intentionally excluded from the data
room? Why?
Explanation: Sensitive information critical to the target’s business
plan may be excluded from the data room, especially if
competitors are involved in the process.
32. What is a stapled financing?
Explanation: Pre-packaged debt financing offered in support of the
target being sold. The staple is targeted toward financial
sponsors was and common during the LBO boom.
33. Who runs the staple process?
Explanation: A separate financing deal team that operates separately
from the M&A deal team is set up to run the staple process.
34. What role does the staple play in framing valuation?
Explanation: It establishes a theoretical valuation floor due to the
implied equity contribution percentage on top of the debt
package.
35. How are the staple terms determined?
Explanation: The staple terms are determined through an objective
assessment of the target’s leverage capacity based on LBO
analysis among other analyses, which examine cash flows,
credit statistics, debt repayment, asset coverage, and equity
cushion. The financing team must also assess the
marketability of the structure given prevailing capital markets
conditions.

Chapter 6_M&A Sale Process_Q&A

 36. How long are buyers generally given to assess the target and submit a
first round bid?
a) 2 weeks
b) 4–6 weeks
c) 4–6 months
d) 12 weeks
Answer: B
37. What does accretion/(dilution) analysis measure?
Explanation: Public strategics use accretion/(dilution) analysis to
measure the pro forma effects of the transaction on earnings,
assuming a given purchase price and financing structure.
38. Why is it only relevant for public strategic buyers?
Explanation: Private companies are not focused on EPS, but may
look at “accretion” to EBITDA or EBIT margins.
39. Under what circumstances might a buyer pursue an acquisition that
wasn’t accretive in Year 1?
Explanation: In the event it is strategically important and holds
promise for future growth opportunities (i.e., will be accretive
in future years).
40. How can the sell-side advisory team use accretion/(dilution) analysis to
guide purchase price negotiations?
Explanation: For a specific strategic buyer and given a set of
assumptions governing financing mix/cost and synergies, the
sell-side advisor can determine its ability to pay and negotiate
accordingly.
41. Why might a higher bid be rejected in favor of a lower one?
Explanation: Concerns over the certainty of closing and ability to
finance, as well as other structural and contract issues may
cause a higher bid to be rejected in favor of a lower one.

Chapter 6_M&A Sale Process_Q&A

 42. Given the assumptions below, calculate the accretive/dilutive effects of
the transaction on both a dollar and percentage basis.
($ and shares in millions)
Assumptions
Acquirer Net Income $100.0
Acquirer Diluted Shares Outstanding 50.0
Target Net Income $25.0
New Shares Issued 10.0
Explanation:
($ in millions, except per share data; shares in millions)
Accretion Dilution Analysis
Acquirer Net Income $100.0
Target Net Income 25.0
Pro Forma Combined Net Income $125.0

Acquirer Diluted Shares Outstanding 50.0

New Shares Issued 10.0
Pro Forma Fully Diluted Shares Outstanding 60.0

Pro Forma Combined Net Income $125.0

/ Pro Forma Fully Diluted Shares Outstanding 60.0
Pro Forma Diluted EPS $2.08

Acquirer Net Income $100.0

/ Acquirer Diluted Shares Outstanding 50.0
Acquirer Diluted EPS $2.00

Accretion/(Dilution) - $ ($2.08 – $2.00) $0.08

Accretion/(Dilution) - % ($2.08/$2.00 – 1) 4.2%
43. What is the key legal document establishing a formal agreement
between a buyer and seller to purchase the target?
a) Confidentiality agreement
b) Final bid procedures letter
c) Definitive purchase/sale agreement
d) Credit agreement
Answer: C

Chapter 6_M&A Sale Process_Q&A

 44. What is buyer due diligence? What forms does it take?
Explanation: Buyer due diligence is comprehensive data gathering,
analysis, and assessment to fully understand the investment
opportunity represented by the target. It consists of
management presentations, site visits, studying the data room,
and follow-up inquiries.
45. What event usually marks the launch of a typical auction process?
a) Receipt of the CIM and management projections
b) Management presentation and access to the data room
c) Buyer contact and distribution of the teaser
d) Receipt of final bids from prospective buyers
Answer: C
46. What event typically marks the launch of the second round?
a) Receipt of final bids from prospective buyers
b) Management presentation and access to the data room
c) Receipt of the CIM and management projections
d) Buyer contact and distribution of the teaser
Answer: B
47. What are site visits? Why are they important?
Explanation: Site visits are an essential component of buyer due
diligence, providing a first-hand view of the target’s
operations. The typical site visit involves a guided tour of a
key facility, such as a manufacturing plant, distribution
center, and/or sales office. The site visits tend to be highly
interactive as key buyer representatives, together with their
advisors and consultants, use this opportunity to ask detailed
questions about the target’s operations.
48. What reservations may the seller have with regard to site visits?
Explanation:
–Internally—maintaining confidentiality so as not to alarm
employees about a potential sale
–Externally—may be sensitive to share this info with strategic
buyers, especially competitors.

Chapter 6_M&A Sale Process_Q&A

 49. How do the final bid letter requirements differ from those of the initial
bid letter?
Explanation: The final bid letter requires a mark-up of the definitive
agreement, evidence of committed financing or ability to pay,
and timeline for regulatory, shareholder, and board approvals
(if necessary).
50. What is the definitive agreement?
Explanation: A legally binding contract between a buyer and seller
detailing the terms and conditions of the sale transaction.
51. Select ALL that apply. Which of the following are key provisions of a
definitive agreement?
a) Representations and warranties
b) Closing conditions
c) Historical financial overview
d) Summary of operations
Answer: A and B
52. Who prepares the draft definitive agreement and when is it typically
distributed to prospective buyers?
a) Seller’s legal counsel; during the first round
b) Buyer’s legal counsel; during negotiations
c) Buyer’s legal counsel; along with the initial bid procedure letter
d) Seller’s legal counsel; along with the final bid procedures letter
Answer: D
53. Select ALL that apply. What are some of the key representations and
warranties made by a seller?
a) Its financial statements are accurate
b) It has the necessary funds to complete the deal
c) No material adverse change has occurred since signing
d) Its business has not deteriorated, if using its stock as consideration
Answer: A and C

Chapter 6_M&A Sale Process_Q&A

 54. Select ALL that apply. What are some of the key representations and
warranties made by a buyer?
a) It has obtained a fairness opinion
b) It has the necessary funds to complete the deal
c) No material adverse change has occurred since signing
d) Its business has not deteriorated, if using its stock as consideration
Answer: B and D
55. What indemnities does the seller typically provide to the buyer?
Explanation: Breaches of representations and warranties, covenants,
and specific liabilities, such as environmental exposures.
56. What is a break-up fee? Who is it designated to protect and why?
Explanation: Break-up fees were historically reserved for payment to
the buyer as a deal protection device to compensate the buyer
in the event the seller pursues a “superior” bid consistent with
the board’s fiduciary duties to seek the highest value (relevant
for public targets). During the mid-2000s, it became
customary for financial sponsors to agree to pay a "reverse
break-up fee," typically if all of the conditions to the
transaction were satisfied, but the buyer did not come up with
the funds to consummate the transaction.
57. How many final bids might the seller expect to receive? Why?
Explanation: The seller may receive two to three; others typically
withdraw at some point during the second round.
58. What is a fairness opinion?
Explanation: A fairness opinion is a letter opining on the “fairness,”
from a financial point of view, of the consideration offered in
an M&A transaction. It is supported by detailed analysis and
documentation providing an overview of the sale process run
(including number of parties contacted and range of bids
received), as well as an objective valuation of the target.

Chapter 6_M&A Sale Process_Q&A

 59. Who prepares the fairness opinion?
Explanation: Historically, the investment bank serving as sell-side
advisor to the target has typically rendered the fairness
opinion. In recent years, however, the ability of the sell-side
advisor to objectively evaluate the target has come under
increased scrutiny. As a result, some sellers hire a separate
investment bank/boutique to render the fairness opinion from
an “independent” perspective that is not contingent on the
closing of the transaction.
60. What regulatory approval is often required to close a given M&A
transaction, especially between two competitors?
a) Sarbanes-Oxley
b) Hart-Scott-Rodino
c) Glass-Steagall
d) Securities Act
Answer: B
61. An M&A transaction involving a public target where its shareholders
vote on whether to approve or reject the proposed transaction at a
formal shareholders’ meeting is commonly referred to as a _______
merger.
a) One-step
b) Two-step
c) 338(h)(10)
d) Asset deal
Answer: A
62. An M&A transaction involving a public target where a tender offer is
made directly to the target's shareholders with the target's approval
pursuant to a definitive agreement, with any untendered shares to be
“squeezed out” if a certain threshold is met, is commonly referred to
as a _______ process.
a) One-step
b) Two-step
c) 338(h)(10)
d) Asset deal
Answer: B

Chapter 6_M&A Sale Process_Q&A

 63. Under the most favorable scenario, approximately how long can a two-
step process take?
a) 2 weeks
b) 2 months
c) 10 days
d) 1 month
Answer: D
64. What are some of the primary reservations in running a negotiated sale
process between two competitors?
Explanation:
–Limits seller negotiating leverage and competitive tension
–Potentially leaves “money on the table” if other buyers would have
been willing to pay more
–May require sharing of sensitive information with competitor
without certainty of transaction close
–Provides less market data on which board can rely to satisfy itself
that value has been maximized
65. Why might a negotiated sale achieve the same result as an auction?
Explanation: If the negotiated sale is with the best buyer, then it
could have the same result as an auction, especially if the
buyer strongly desires the asset.
66. Why do negotiated sales often involve a strategic buyer?
Explanation: A strategic buyer may have the ability to pay a pre-
emptive price due to its ability to realize synergies. Often, the
principal executive officers have an existing relationship and
have had previous conversations about a potential
combination.
67. Why might a negotiated sale with a strategic buyer be completed more
quickly than an auction?
Explanation: It can be completed more quickly because there is less
need for sector due diligence and less upfront marketing if the
buyer is a competitor that is already familiar with the target.

Chapter 6_M&A Sale Process_Q&A

 68. Select ALL that apply. From the seller’s perspective, what are some of
the key advantages of a negotiated sale?
a) Maximizes competitive tension
b) Maintains confidentiality
c) Minimizes potential “taint”
d) Ensures all potential buyers are contacted
Answer: B and C

Chapter 6_M&A Sale Process_Q&A