Mergers, Acquisitions and Corporate Restructuring exam questions

Multiple-choice questions

Introduction to M&A and IB services

Question

Who within the investment banking organization does generate liquidity to each asset class?

• Investment brokers
• Portfolio managers
• Brokers and traders
• Investors
• Research analysts

Answer

Brokers and traders within an investment banking organization can help generate liquidity for each asset class. Brokers and traders facilitate the buying and selling of securities on behalf of their clients, which can help increase the liquidity of the market for those securities. Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. By facilitating transactions and providing market-making services, brokers and traders can help increase the liquidity of different asset classes.

Question

If you are a research analyst, can you talk to the Chief Financial Officer or the Investor Relations Manager of a listed company?

• No, because it's a publicly traded company
• Sometimes, but only if the company is private (not a traded stock)
• Sometimes, but limiting the conversation to what CFO or IRM allow
• Yes, always

Answer

As a research analyst, you can sometimes talk to the Chief Financial Officer (CFO) or the Investor Relations Manager (IRM) of a listed company, but you must limit the conversation to what the CFO or IRM allow. Publicly traded companies have strict regulations regarding the disclosure of information to the public, so any conversations with the CFO or IRM must be within the bounds of these regulations. The CFO or IRM may provide information that is already publicly available or that is not considered material non-public information.

Question

Are traders or "Sales and trading" part of the Investment Banking division in a typical IB organization?

• True
• False

Answer

False. Sales and trading are part of the Equity or Fixed Income divisions of an IB organization.

Question

In an information flow diagram within a typical investment bank organization, does a "Chinese wall" exist between the Investment Banking divison and the Research Sales division?

• True
• False

Answer

True. Within a typical IB organization, a "Chinese wall" exists between the investment banking division and the research sales division. This is an information barrier designed to prevent the flow of confidential information between the two divisions and to prevent conflicts of interest. The investment banking division may have access to sensitive information about a client's upcoming transactions or financial performance, while the research sales division provides analysis and recommendations to investors. The Chinese wall helps to ensure that this information is not shared inappropriately and that the research sales division's recommendations are not influenced by the investment banking division's activities.

Question

Arbitrageurs buy the stock and make a profit on the difference between the bid price and the target's current stock price, if the deal is consummated.

• True
• False

Answer

True. Arbitrageurs, also known as risk arbitrageurs or merger arbitrageurs, seek to profit from the price difference between the bid price and the target's current stock price in an M&A transaction. If the deal is consummated, the target's stock price will typically rise to the bid price, allowing the arbitrageur to sell their shares at a profit. However, if the deal falls through, the target's stock price may decline, resulting in a loss for the arbitrageur. This strategy is known as merger arbitrage or risk arbitrage and involves taking on a certain level of risk in order to potentially generate a profit.

Types of acquisitions/takeovers and motivation for M&A

Question

Rising stock market and the type of transaction (horizontal, vertical, conglomerate, strategic, financial) are similar among merger waves?

• True
• False

Answer

False. Merger waves are periods of increased merger and acquisition activity. While a rising stock market can provide companies with the financial resources to engage in mergers and acquisitions, the type of transaction (horizontal, vertical, conglomerate, strategic, financial) can vary among merger waves. Each wave may have its own unique characteristics and drivers.

Question

The overvaluation of the target share price relative to acquirer share price does not contribute to the formation of merger waves.

• True
• False

Answer

True. Valuation does affect mergers only if the one that acquirer has its shares overvalued.

Question

Often the attempt to control supply or distribution channels can be considered a distinctive element or motivation of horizontal M&A deals.

• True
• False

Answer

False. The attempt to control supply or distribution channels can be a motivation for vertical mergers and acquisitions. By acquiring a supplier or distributor instead of a competitor (horizontal merger), a company may be able to gain greater control over its supply or distribution channels, which can provide strategic advantages.

Question

A conglomerate is often:

• A merger trying to achieve economies of scale or scope
• A merger trying to control supply or distribution channels
• A merger trying to diversify the company by combining unrelated assets and income stream
• None of the above

Answer

A merger trying to diversify the company by combining unrelated assets and income stream. A conglomerate is a type of merger where two or more companies that operate in unrelated business areas combine their assets and income streams in order to diversify their operations and reduce risk. This type of merger is not focused on achieving economies of scale or scope or controlling supply or distribution channels, but rather on diversifying the company's operations.

Question

Which of the following common managers' needs represent motivations to pursue M&As which are not always in the best interest of the firm or shareholders?

• Increasing operational efficiency and profitability
• Decreasing leverage ratio
• Reducing firm risk through diversification
• All of the above

Answer

Reducing firm risk through diversification can represent a motivation for managers to pursue mergers and acquisitions (M&As) that is not always in the best interest of the firm or its shareholders. While diversification can help to reduce a firm's overall risk by spreading its investments across multiple industries or markets, it can also dilute the firm's focus and expertise. In some cases, managers may pursue M&As for the purpose of diversification without fully considering the potential impact on the firm's core business or its shareholders. Increasing operational efficiency and profitability and decreasing leverage ratio, on the other hand, are generally considered to be in the best interest of the firm and its shareholders.

Additionally, shareholders can reduice their risk by themselves by diversifying their capital investments.

Question

Which of the following is not a value creation motivation for M&A?

• Reducing average issuing costs
• Using tax deduction in a higher tax bracket to obtain a large tax shield
• Making use of unused production, sales or marketing capacity
• Increasing production capacity to consolidate the number of firms in the industry

Answer

Increasing production capacity to consolidate the number of firms in the industry. A M&A can generate economies of scale by reducing capacity through consolidation in the number of firms in the industry, reducing average issuing costs, make better use of tax deductions and credits and make use of unused production, sales and marketing channel capacity.

Question

Which of the following is not true about friendly takeovers?

• They are often less expensive than hostile takeovers
• They generally do not require target shareholder approval
• They promote ease of post-acquisition integration
• Bidder and target management often reach agreement on key issues early in the negotiation process

Answer

Takeovers involve the shift of control from the majority of shareholders. Therefore, a friendly takeover requires target shareholder approval.

Question

All of the following represent common international market entry strategy except for:

• Spin-offs
• M&A
• Solo ventures or startups
• JV

Answer

All of the following represent common international market entry strategies except for spin-offs. Some common international market entry strategies include exporting, licensing, joint ventures, company ownership, franchising, outsourcing.

Strategic approach to M&A and key competitive analysis frameworks

Question

If the product of two companies are easily substitutable for each other, do the two companies always have high "customer sharing"?

• True
• False

Answer

False. If the products of two companies are easily substitutable for each other, it does not necessarily mean that the two companies have high "customer sharing." Customer sharing refers to the degree to which customers purchase products from multiple companies within the same market. While product substitutability can be a factor in customer sharing, other factors such as brand loyalty, marketing, and customer service can also play a role. It is possible for two companies to have easily substitutable products but still have low customer sharing if customers have a strong preference for one brand over the other.

Question

Which of the following are commonly used screening criteria?

• Profitability
• Market share
• Degree of leverage
• All of the above

Answer

All of the above. Profitability, market share, and degree of leverage are all commonly used screening criteria. Screening criteria are used to evaluate potential investment opportunities and identify those that meet certain predefined standards. Profitability measures a company's ability to generate profits and can be an indicator of its financial health. Market share measures a company's share of the market in which it operates and can be an indicator of its competitive position. Degree of leverage measures a company's use of debt relative to its equity and can be an indicator of its financial risk.

Question

If a company focuses on a price-premium strategy, and another on cost leadership, both of them are concerned on how to make their current products cost structure sustainable.

• True
• False

Answer

False. The key concern for cost leadership firms is to ensure sustainability, while key concerns for price premium companies are monitoring their performance versus perception investments, pursuing a branding and marketing strategy, and paying attention to customer segmentation.

Question

The degree of overlapping in cost structure and customer base refers to what framework?

• Adjacencies matrix
• Business definition matrix
• Cost leadership vs. Differenciation matrix
• New products vs. New markets matrix

Answer

The degree of overlapping in cost structure and customer base refers to the business definition matrix. The adjacencies matrix instead answer the questions "what are we selling? to who? through what channel? at what cost?" to identify new products, new customer segments, new businesses, new value chain steps, new geographies and new channels starting from the core business.

Question

Profit pools are total profits earned by all companies in a specific point of the value chain.

• True
• False

Answer

False. Industry profit pools refer to the total profits earned by all companies along all the value chain.

Question

Low switching costs (in supplier substitution) are a source of bargaining power for suppliers in Porter's Five forces.

• True
• False

Answer

False. Low switching costs reduce the bargaining power for suppliers.

M&A Process: sell-side and buy-side activities

Question

Which one of the following is generally not considered a phase of the acquisition process?

• Searching for the potential target
• Post-closing integration
• Developing a business plan
• Setting up a virtual dataroom

Answer

Setting up a virtual dataroom.

Question

A transaction with proper preparation generally leads to a lower number of submitted initial offers, but to a higher final transaction value.

• True
• False

Answer

False. If you have a good amount of information and a good preparation of the data room (room where the company prepares all the documents for the due diligence activity), this allows to receive the highest number of initial offers and to select the best potential buyer.

Question

The objective of the data room is to ensure that final offers are made on the basis of full disclosure of all relevant infomation.

• True
• False

Answer

True. The objective of a data room is to provide all relevant information to potential investors or buyers so that they can make informed decisions and final offers based on full disclosure. This helps to ensure transparency and fairness in the process.

Question

As sell-side financial advisor, following the data room due diligence you will require the potential investors to provide their non-binding indicative offers.

• True
• False

Answer

False. Non-binding indicative offers have already been submitted before being allowed to perform the due diligence.

Question

There is no legal obligation of the seller to disclose possible liabilities regarding the target, it is up to the purchaser to try to find possible issues.

• True
• False

Answer

True. In common law system caveat emptor is the traditional principle, which states how there is no obligation for the seller to disclose possible liabilities that may occur after the sale, so it is up to the purchaser to find possible issues.

However, vendor due diligence is convenient for the seller, because if you are aware of your issues you can try to disclose them and to negotiate on them, while if instead you are not aware of them, during the shareholder purchase agreement some "penalties" for the seller could arise, because the idea is the one that the buyer has more knowledge than you. From the seller’s point of view it is also important to have knowledge of possible liabilities and try to agree with the purchaser on disclosed liabilities that are not covered by the indemnification obligations of the Seller. Such disclosures are often referred to as Disclosure Schedule or Disclosure Letter.

Question

In order to know what to look for, the professionals involved in the due diligence must have full knowledge of the deal structure and the business of the target.

• True
• False

Answer

True. In order to conduct a thorough and effective due diligence process, the professionals involved must have full knowledge of the deal structure and the business of the target company. This knowledge allows them to identify the key areas of risk and opportunity and to focus their due diligence efforts on those areas. Without this knowledge, the due diligence process may be less effective and may not uncover all of the relevant information needed to make an informed decision about the proposed transaction.

Question

As buy-side financial advisor you should always have the seller signing the NDA before you provide the Information Memorandum.

• True
• False

Answer

False. The seller provides the NDA for the buy-side signature before the seller provides the Information Memorandum.

Question

There is no real difference between the content of a LOI and that of a term-sheet.

• True
• False

Answer

True. A Letter of Intent and a term sheet are similar in that they both outline the key terms of a proposed M&A between two parties and they are usually non-binding. Usually Term Sheets are more informal than LOI as they are structured as bullet points and sometimes they are not even signed, and the parties agree on their contents and without signing it they just go to the next step.

Question

In which of the following activities of the due diligence process from the purchaser point of view should be taken into account?

• Interview the seller or its management going through the due diligence request list to understand what request is applicable and what are the most sensitive areas where the purchaser should focus its activity
• Keeping track of all the Q&A and coordinating with the other advisors in order to properly tailor the SPA
• Send a due diligence request list to the seller or its advisors
• All of the above

Answer

All of the above. From the purchaser's point of view, the due diligence process should take into account all of the following: interviewing the seller or its management going through the due diligence request list to understand what request is applicable and what are the most sensitive areas where the purchaser should focus its activity, keeping track of all the Q&A and coordinating with the other advisors in order to properly tailor the SPA, and sending a due diligence request list to the seller or its advisors.

Question

In an M&A process a potential purchaser will make a final decision on the basis of the Information Memorandum.

• True
• False

Answer

False. While the Information Memorandum is an important document that provides detailed information about the target company to potential buyers, it is unlikely that a potential purchaser will make a final decision solely on the basis of the Information Memorandum. The final decision to proceed with an acquisition typically involves a thorough due diligence process, where the potential buyer conducts a detailed analysis of the target company's financials, operations, and legal and regulatory compliance. The Information Memorandum is just one source of information that the potential buyer will consider during this process.

Question

The signing of a SPA always follows the Closing of the transaction.

• True
• False

Answer

False. The Stock Purchase Agreement and the Closing Date are not the same thing. The Stock Purchase Agreement is a legal document that outlines the terms and conditions of the purchase of a security. The Closing Date is the date on which the stock purchase is finalized and the legal transfer of shares is executed between the buyer and the seller. The Closing Date usually occurs within a few days of signing the Stock Purchase Agreement.

Question

Whenever there is a gap between the Signing and the Closing, it is important to provide rules on how to manage the company during this period.

• True
• False

Answer

When there is a gap between the Signing and the Closing of a transaction, it is important to provide rules on how to manage the company during this period. This is known as the interim period. During the interim period, the seller typically retains control of the company and is responsible for its management. However, the buyer may have certain rights and obligations with respect to the management of the company during this period. It is important to clearly define these rights and obligations in the transaction documents in order to avoid any misunderstandings or disputes.

Strategic alliances as an alternative to M&A

Question

Selecting the right approach for strategic alliance depends on a thorough analysis that includes:

• Consideration of speed and risks involved by the transaction
• Definition of benefits and costs
• Management commitment to doing what is necessary for success
• All of the above

Answer

All of the above. Selecting the right approach for a strategic alliance depends on a thorough analysis that includes consideration of the speed and risks involved in the transaction, definition of the benefits and costs, and management commitment to doing what is necessary for success. A strategic alliance is a cooperative arrangement between two or more companies to achieve a common goal. To determine the best approach for a strategic alliance, companies need to carefully evaluate the potential risks and rewards of the alliance and ensure that they have the necessary resources and commitment to make it successful.

Question

When relative strategic importance with regard to a possible alliance is low for a partner, and high for another, the latter should aim at limiting its partnership with the former only to specific opportunities.

• True
• False

Answer

True. When the relative strategic importance of a possible alliance is low for one partner and high for another, the partner for whom the alliance is more important may aim to limit its partnership with the other partner to specific opportunities. This can help ensure that the partnership is focused on areas where both partners see value and can help prevent the less interested partner from losing interest in the alliance. By focusing on specific opportunities, the partners can work together to achieve their common goals while minimizing the risks associated with a broader partnership.

Question

Which of the following characterizes a Transactional Alliance?

• Generally it lasts more than 5 years
• Partners are willing to share and leverage core capabilitis
• Relationship usually is contract driven and does not involve control
• All of the above

Answer

The third statement characterizes a Transactional Alliance. A Transactional Alliance is a type of strategic alliance in which the relationship between the partners is contract-driven and does not involve control. These alliances are typically focused on specific projects or transactions and are governed by contractual agreements that define the rights and obligations of each partner.

The first and second statements do not necessarily characterize a Transactional Alliance. The duration of a Transactional Alliance can vary and may be shorter or longer than 5 years. Additionally, while partners in a Transactional Alliance may share some capabilities and resources, they may not necessarily be willing to share and leverage their core capabilities.

Question

Your company wants to create a joint venture with another company, both companies are generating operating losses. You and the potential partner believe that significant operating synergies could be created by combining the two businesses. The ownership distribution of the JV should be determined based on:

• Future cash relative contribution
• EBITDA relative contribution
• Strategic/operating asset relative contribution
• None of the above

Answer

In this case it is measured by asset relative contribution, because the EBITDA are negative. If they happened to be positive, the answer would be EBITDA relative contribution.

Strategic vs. financial investors

Question

Strategic buyers and financial investors always look for synergies with the target to maximize their shareholder's transaction value.

• True
• False

Answer

False. While strategic buyers often look for synergies with the target company to maximize their shareholder's transaction value, financial investors may have different motivations for acquiring a company. Financial investors typically view the acquisition as an investment and aim to grow the company and resell it at a higher value. They may focus more on the financial returns of the investment rather than on achieving synergies with the target company.

Question

Are financial buyers typically more prone to spend time building a comprehensive macro view of the industry compared to strategic buyers?

• True
• False

Answer

True. Strategic buyers typically operate in the same industry as the target, so they already know the industry well. On the other hand, financial buyers may need to learn and gein information about this industry from scratch.

Question

Financial buyers are less sensitive to business cycle risk than strategic buyers because of the shorter investment horizon.

• True
• False

Answer

False. Financial buyers and strategic buyers may have different levels of sensitivity to business cycle risk, but it is not necessarily true that financial buyers are less sensitive to business cycle risk than strategic buyers because of their shorter investment horizon. Financial buyers, such as private equity firms, typically have a shorter investment horizon than strategic buyers and may focus on generating returns through financial engineering and operational improvements. However, they may still be sensitive to business cycle risk if their investment strategy relies on favorable market conditions. Strategic buyers, on the other hand, may be more focused on the long-term strategic fit of the target company with their existing business and may be willing to weather short-term business cycle fluctuations.

Question

Is synergy value created from integration economies between the target and a financial buyer?

• True
• False

Answer

False. Synergy value is typically created from integration economies between the target and a strategic buyer, not a financial buyer. Integration economies refer to the cost savings and revenue enhancements that can be achieved by combining the operations of two companies. Strategic buyers may be able to realize these synergies by integrating the target company with their existing business. Financial buyers, on the other hand, typically do not have an existing business with which to integrate the target company and may focus on generating returns through financial engineering and operational improvements rather than integration economies.

Question

Which of the following is false with refer to the typical private equity fund structure?

• The GPs of the partnership are responsible for the day to day management of the partnership investment
• The GPs of the partnership are not allowed to invest capital in the fund
• The LPs of the partnership are only providers of capital

Answer

The second statement is false. GPs of a private equity fund are typically required to invest some of their own capital in the fund alongside the LPs. This is known as having "skin in the game" and helps to align the interests of the GPs with those of the LPs by ensuring that the GPs have a financial stake in the success of the fund.

The GPs of the partnership are responsible for the day to day management of the partnership investment The first and third statements are true with respect to the typical private equity fund structure. In a private equity fund, the general partners (GPs) are responsible for the day-to-day management of the partnership's investments. They make investment decisions, monitor the performance of the portfolio companies, and work to generate returns for the fund's investors. The limited partners (LPs) of the partnership are typically passive investors who provide capital to the fund but do not participate in its management.

Target valuation and LBOs

Question

Which of the following may be used to value small privately owned firms?

• DCF method
• Comparables companies method
• Liquidation method
• All of the above

Answer

All of the above methods may be used to value small privately owned firms:

• The Discounted Cash Flow (DCF) method values a company based on its future cash flows, discounted to their present value.
• The Comparables Companies method values a company by comparing it to similar companies that have recently been sold or valued.
• The Liquidation method values a company based on the net realizable value of its assets if it were to be liquidated.

Each method has its own strengths and limitations and the most appropriate method will depend on the specific circumstances of the company being valued.

Question

Looking at the valuation line, from a turnaround/distressed investment perspective, which of the following EV/EBITDA value represents the best multiple as an investment entry point (multiple)?

• 3.5x with the valuation going down
• 2.5x with the valuation going up
• 2.5x with the valuation going down

Answer

From a turnaround/distressed investment perspective, a lower EV/EBITDA multiple may represent a more attractive investment entry point. In this case, a 2.5x EV/EBITDA multiple with the valuation going down could represent the best investment entry point among the options you mentioned. However, it is important to note that the EV/EBITDA multiple is just one factor to consider when evaluating an investment opportunity. Other factors such as the company's financial health, growth prospects, and the potential for operational improvements should also be taken into account.

Question

Enterprise cash flow reflect all of the following except for:

• Cash from financing activities
• Cash from investing activities
• Cash from operating activities
• After-tax operating income

Answer

Enterprise cash flow reflects all of the following except for after-tax operating income. A company's cash flow is typically categorized as cash flows from operations, investing, and financing. Operating cash flow is obtained from EBIT, which is pre-tax operating income.

Question

Focusing on which of the following key areas would improve the valuation of the target in an M&A process?

• Strategic strenght
• Market dynamics
• Relatedness
• All of the above

Answer

All of the above. Focusing on strategic strength, market dynamics, and relatedness can all improve the valuation of a target in an M&A process.

• Strategic strength: A target company with strong strategic capabilities, such as a unique product or service offering, a strong market position, or valuable intellectual property, may be more attractive to potential acquirers and command a higher valuation.
• Market dynamics: A target company operating in a growing or attractive market may be more valuable to potential acquirers than one operating in a stagnant or declining market. Understanding the market dynamics and positioning the target company accordingly can help to improve its valuation.
• Relatedness: A target company that is closely related to the acquirer's existing business may offer greater potential for synergies and value creation. Demonstrating the potential for synergies and relatedness between the target and the acquirer can help to improve the target's valuation.

By focusing on these key areas and highlighting their strengths, a target company can improve its valuation in an M&A process.

Question

With regard to the VC method, the required ownership percentage to meet the target rate of return is the amount to be invested by the venture capitalist divided by the terminal value of the company at the year of exit.

• True
• False

Answer

False The Venture Capital method is a valuation method used by venture capitalists to determine the pre-money valuation of a startup and the required ownership percentage to meet their target rate of return. The required ownership percentage is calculated by dividing the amount to be invested by the venture capitalist by the present value of the terminal value of the company at the year of exit. This calculation takes into account the venture capitalist's target rate of return and the expected growth rate of the company.

Question

Which of the following should be added to the firm equity value in determining the total equity value of the firm?

• Surplus land
• Cash balances in excess of normal operating requirements
• PV of unused patents
• All of the above

Answer

All of the above. In determining the total equity value of a firm, surplus land, cash balances in excess of normal operating requirements, and the present value of unused patents should all be added to the firm's equity value.

Question

Which of the following is generally not considered a factor critical to the success of an LBO?

• Improving operating performance
• Large reinvestment requirements to sustain growth
• Knowing what type of firm you buy
• Not overpaying for the target firm

Answer

Large reinvestment requirements to sustain growth is generally not considered a factor critical to the success of a leveraged buyout (LBO). Factors that are critical to the success of an LBO include improving operating performance, knowing what type of firm you are buying, and not overpaying for the target firm. In an LBO, the acquiring company typically uses a significant amount of debt to finance the purchase of the target company, so it is important to focus on improving cash flow and reducing debt in order to successfully manage the LBO.

Question

Search fund is an innovative asset class with an expected return in the range of:

• 40% - 45%
• 25% - 30%
• 9% - 12%
• 4% - 6%

Answer

Most search fund have an expected return of 25% - 30%

Question

Initiating the search process involves the development of as many selection criteria as possible to identify as many potential targets as possible.

• True
• False

Answer

Initiating the search process for potential targets in a merger or acquisition involves developing specific and well-defined selection criteria to identify the most suitable targets, rather than as many targets as possible. Having too many selection criteria or identifying too many potential targets can make the search process inefficient and unfocused. It is important to have a clear understanding of the strategic objectives of the merger or acquisition and to develop selection criteria that align with those objectives in order to identify the most suitable targets.

Traditional vs. distressed M&A

Question

If you had the opportunity to choose between "asset deal" (purchase of an asset) and "share deal" (share transaction) to acquire the same company, you would prefer the first because:

• Due diligence on assets will be less expensive
• The reference enterprise value will be lower
• The buyer will avoid some contingent liabilities

Answer

The buyer will avoid some contingent liabilities. The choice between an asset deal and a share deal depends on the specific circumstances of the acquisition. However, one reason a buyer might prefer an asset deal is that it can allow the buyer to avoid some contingent liabilities associated with the target company. In an asset deal, the buyer can choose which assets and liabilities to acquire, whereas in a share deal, the buyer acquires all assets and liabilities of the target company.

Question

A tender offer involving cash for total stock is called an exchange offer.

• True
• False

Answer

False. A tender offer involving cash for total stock is not called an exchange offer. An exchange offer is a type of tender offer in which the acquiring company offers to exchange its own securities for the securities of the target company. In contrast, a tender offer involving cash for total stock is a cash tender offer, where the acquiring company offers to purchase the target company's shares for cash.

Question

Representations and Warranties are very important when the Purchaser is "buying a box" because:

• It wants to be sure of the content of the box
• Some essential aspects of the target cannot always be covered by the due diligence
• It does not know the value of the shares

Answer

It wants to be sure of the content of the box. With representations and warranties the seller provides assurances about the condition and accuracy of the undisclosed or undiscovered aspects. The buyer wants to be sure that the content of the box (for which he is paying the purchase price) is warranted. Hence the need of regulating aspects such as purchase price adjustments, interim management, representations and warranties and indemnities.

Question

A company which is not able to meet its obligations and reimbursement schedule does not look attractive for distressed investors.

• True
• False

Answer

False. Distressed investors are investors who specialize in investing in companies that are in financial distress and are unable to meet their obligations and reimbursement schedules. These investors see potential value in these companies and believe that they can turn them around and generate a return on their investment. While a company that is unable to meet its obligations may not be attractive to traditional investors, it may be attractive to distressed investors who have the expertise and resources to help the company recover.

Question

Most SMEs are largely financed through bank debt from several institutions, in many cases such minor exposure drives lack of attention and control by banks, leading to further extension of credit and fresh money to SMEs in distressed situations.

• True
• False

Answer

True. Small and medium-sized enterprises (SMEs) are largely financed through bank debt from several institutions. However, in many cases, such minor exposure can lead to a lack of attention and control by banks. This can result in further extension of credit and fresh money to SMEs in distressed situations.

Question

If a company has both:

• Asset Value < Debt
• Sustainable debt < Actual debt

It often means that:

• Debt coverage > 2
• Interest coverage > 5
• Debt service coverage ratio < 1

Answer

If a company has both Asset Value < Debt and Sustainable debt < Actual debt, it often means that the Debt service coverage ratio < 1. The Debt service coverage ratio (DSCR) is a measure of a company's ability to generate enough cash flow to cover its debt obligations. A DSCR of less than 1 indicates that the company is not generating enough cash flow to cover its debt obligations. In this case, the company's asset value is less than its debt and its sustainable debt is less than its actual debt, indicating that the company may be in financial distress and may not be able to generate enough cash flow to cover its debt obligations.

The investor perspective

Question

What is the expected recovery rate by the subordinated debt holders, given:

• Enterprise Value = 90M€
• Senior Debt = 75M€

• Subordinated Debt = 50M€

• 30%

• 40%
• 55%
• None of the others

Answer

In this scenario, the expected recovery rate for the subordinated debt holders would be 30%. The recovery rate is the percentage of the outstanding debt that is expected to be recovered in the event of a default. In this case, the EV of the company is 90M€ and the Senior Debt is 75M€. Since senior debt holders have priority over subordinated debt holders in the event of a default, the senior debt holders would be paid first from the Enterprise Value. This would leave 90M€ - 75M€ = 15M€ remaining to pay the subordinated debt holders. However, since the subordinated debt is 50M€, there would not be enough funds remaining to pay the subordinated debt. In fact, the expected recovery rate for the subordinated debt holders would be only 15M€ / 50M€ = 30%.

Question

Financial debt is sustainable when:

• Debt Cover Ratio < 1
• Debt Service Coverage Ratio > 1
• Interest Cover Ratio < 4
• None of the above

Answer

Financial debt is considered sustainable when the DSCR is higher than 1. Debt Service Coverage Ratio is a measure of a company's ability to generate enough cash flow to cover its debt obligations. A DSCR of higher than 1 indicates that the company is generating enough cash flow to cover its debt payments. A DSCR of less than 1, on the other hand, indicates that the company may have difficulty meeting its debt obligations and may be at risk of default.

Question

Expected return on senior unsecured debt is higher than that on convertible debt.

• True
• False

Answer

False. The expected return on senior unsecured debt is typically lower than that on convertible debt. Senior unsecured debt is a type of debt that is not secured by any collateral and is ranked higher in the capital structure than subordinated debt. This means that in the event of a default, holders of senior unsecured debt are paid before holders of subordinated debt. Convertible debt, on the other hand, is a type of debt that can be converted into equity at a predetermined price. Because of the conversion feature, convertible debt typically carries a lower interest rate than senior unsecured debt.

Question

Because of the shorter term of reimbursement and the granting of collateral, bridge loans are less risky that term loans.

• True
• False

Answer

False. Bridge loans are generally considered to be riskier than term loans due to their short-term nature and relatively high interest rates. While bridge loans may have a shorter term of reimbursement and may require collateral, they tend to have a faster application, approval, and funding process than traditional loans. In exchange for the convenience, these loans tend to have relatively short terms, high interest rates, and large origination fees. Bridge loans are best for borrowers who expect to repay the loan quickly, such as when they expect their current home to sell quickly.

Corporate Restructuring

Question

Often financial restructuring is linked to business turnaround. In such situations can equity investment risk be hedged by the purchasing of credits (e.g. bank debt) if the value of such credits is still at par (its nominal value)?

• True
• False

Answer

False. Financial restructuring is often linked to business turnaround, but purchasing credits (e.g. bank debt) at par value would not hedge the risk of an equity investment. Hedging involves taking an offsetting position in a related security to mitigate the risk of an investment. In this case, purchasing credits at par value would not offset the risk of an equity investment in a company undergoing financial restructuring and business turnaround. Instead, the risk of the equity investment could potentially be hedged through other means such as purchasing put options or short selling.

Case studies

Question

Food supplements and traditional foods are:

• One business with potential for differentiation or niche position
• One business with potential for substitution
• Separate businesses with potential for bundling
• Separate businesses

Answer

Food supplements and traditional foods can be considered as separate businesses with potential for bundling. While they are distinct products, they can be sold together to provide customers with a more complete nutritional solution. For example, a company may offer a bundle of traditional foods along with food supplements to provide customers with a balanced diet.

Question

Conventional meat burgers and plant-based "meat-like" burgers are:

• One business with potential for differentiation or niche position
• One business with potential for substitution
• Separate businesses with potential for bundling
• Separate businesses with potential for cost leadership shifts

Answer

They represent separate businesses with potential for bundling, if the clients are large supermarkets or restaurants which may offer both options to their clients.

However, it is important to mention that plant-based "meat-like" burgers are designed to mimic the taste and texture of conventional meat burgers and can be seen as a substitute product for supermarket or restaurant customers who are looking for a more environmentally friendly or health-conscious option.

Question

IKEA is an example of profitable change in business definition because it has introduced:

• A product design strengthening product identity
• An innovative product engineering model to minimize logistic costs
• A new logistic and retail model to improve distribution and customer service
• All of the above

Answer

All of the above. IKEA has introduced a product design that strengthens product identity, an innovative product engineering model to minimize logistic costs, and a new logistic and retail model to improve distribution and customer service. These changes have helped IKEA to become a profitable company with a strong brand identity.

Question

In the Houlihan Lokey case, RuffCo Inc. completed the acquisition of Peter Putter Inc. by obtaining from the Bank a bridge financing which was to be repaid:

• From the equity proceedds raised in the IPO
• By refinancing the bridge loan with a term loan
• From the cash flow of the combined entity
• All of the above

Answer

From the equity proceedds raised in the IPO.

Question

In the Houlihan Lokey case what were the factors contributing to the distressed of RuffCo Inc. (the Company) after completing the acquisition of Peter Putter Inc. and the IPO?

• The leaking news of Peter II, still not ready for the market
• The diverted money and attention away from RuffCo's core product line
• The test failure of Peter II in cold temperatures
• The high multiple paid for Peter Putter
• All of the above

Answer

All of the above.

Question

Which of the following applies to Smythson of Bond Street case?

• Bilateral sales process
• Controlled auction process
• Public auction
• None of the above

Answer

In a public auction process, the firm has been sold for 18M£ to Greenwill SA, the holding company for Tivoli Group, an Italian leather goods manufacturer.

Question

Smythson of Bond Street's acquisition by Tivoli Group is an excellent example of:

• Synergies realized by merging complementary assets
• A strategic acquisition turning weaknesses into strenghts
• Cross-border horizontal M&A
• All of the above

Answer

All of the above.

Question

What type of response B&B Italia's management should expect from its target audience when choosing the best marketing strategy mix for the company?

• Affective
• Behavioral
• Cognitive
• None of the above

Answer

By increasing consumers' sensitivity towards the industry, the managers should expect a cognitive response that would change their shopping habits. This leads to more interest, more research of information which means B&B product gets a higher involvement in the purchase decision process.

Other responses could be:

• Affective, linked to attitude and desire
• Behavioral, linked to impulsive purchases
• Cognitive, linked to awareness and interest

Open-ended questions

Introduction to M&A and IB services

Question

What is the Chinese wall in the context of M&A, and why is it important?

Answer

The Chinese wall refers to the separation of different divisions or departments within an investment bank to prevent the flow of confidential information between them. This is particularly important in the context of M&A, where investment bankers may have access to confidential information about a corporation that they are advising on a potential merger or acquisition.

The Chinese wall helps to prevent conflicts of interest and insider trading by ensuring that confidential information is not shared between different divisions or departments within the investment bank. For example, if an investment banker is advising a corporation on a potential merger, they may have access to confidential information about the corporation's financials, operations, or strategic plans. This information could be valuable to other divisions within the investment bank, such as traders or research analysts, but it would be inappropriate for them to have access to it. The Chinese wall helps to prevent this by ensuring that confidential information is kept separate and not shared between different divisions.

Question

What are some of the key roles and responsibilities of an investment banker in an M&A transaction?

Answer

An investment banker plays a crucial role in an M&A transaction by providing strategic advice and assistance to companies involved in the deal. Some of the key roles and responsibilities of an investment banker in an M&A transaction include:

• Providing strategic advice: Investment bankers help companies evaluate their strategic options and determine whether an M&A transaction is in their best interests. They may also help companies identify potential acquisition targets or merger partners.
• Assisting with valuation: Investment bankers help companies determine the value of potential acquisition targets or merger partners. This involves conducting financial analysis and due diligence to assess the target's financials, operations, and future prospects.
• Structuring the deal: Investment bankers help companies structure the terms of an M&A transaction in a way that is beneficial for all parties involved. This may involve negotiating the price and other terms of the deal, as well as determining how it will be financed.
• Facilitating the transaction: Investment bankers play a key role in facilitating an M&A transaction by coordinating with other parties involved in the deal such as lawyers, accountants, and regulators. They also help prepare necessary documentation and filings.

Question

What are some of the key roles and players in an investment bank, and how do they interact with each other?

Answer

Some of the key roles and players in an investment bank include investment bankers, who provide strategic advisory services and assist companies in raising capital; research analysts, who provide analysis and forecasts on companies, industries, and markets; salespeople, who act as intermediaries between clients and traders; traders, who provide liquidity for securities; and others such as asset managers, private client services professionals, and capital markets specialists.

These different roles and players interact with each other in various ways. For example, research analysts may provide their analysis and forecasts to investment bankers, salespeople, and traders to help them make informed decisions. Investment bankers may work closely with research analysts to gain insights into companies and markets. Salespeople may use research reports from analysts to help inform their clients' investment decisions. Traders may use research analysis to help inform their trading strategies.

Question

What are some of the different types of securities that an investment bank might deal with?

Answer

Investment banks deal with a variety of securities, including debt securities, equity securities, derivative securities, and hybrid securities. Here are some examples of the different types of securities that investment banks might deal with:

Debt securities: These are financial instruments that represent a loan made by an investor to a borrower, such as a government or corporation. Examples of debt securities include bonds, notes, and commercial paper.

Equity securities: These are financial instruments that represent ownership in a company. Examples of equity securities include common stock and preferred stock.

Derivative securities: These are financial instruments that derive their value from an underlying asset, such as a stock or commodity. Examples of derivative securities include options, futures, and swaps.

Hybrid securities: These are financial instruments that combine characteristics of both debt and equity securities. Examples of hybrid securities include convertible bonds and preferred stock.

Question

What is an IPO, and what role do investment banks play in this process?

Answer

An initial public offering (IPO) is the process of offering shares of a private corporation to the public in a new stock issuance for the first time. The purpose of an IPO is to raise equity capital from public investors. Investment banks play a crucial role in the IPO process by serving as intermediaries between corporations and investors. Here are some of the roles that investment banks play in the IPO process:

• Underwriting: Investment banks provide underwriting services for new stock issues when a company decides to go public and seeks equity funding. Underwriting involves the investment bank purchasing an agreed-upon number of shares of the new stock, which it then resells through a stock exchange. Part of the investment bank's job is to evaluate a company and determine a reasonable price at which to offer stock shares. IPOs, especially for larger companies, commonly involve a pool of banks (syndicate). This way, the risk of underwriting is spread across several banks, reducing the exposure of any single bank and requiring a relatively lower financial commitment to the IPO.
• Financial Advisory: Investment banks also provide financial advisory services to companies going public. This includes helping the company prepare for the IPO, advising on the timing and pricing of the offering, and assisting with regulatory compliance.
• Coordination: The IPO process requires coordination across a large team of involved parties, including the company’s management, legal counsel, auditors, underwriters, and underwriters’ legal counsel. Investment banks play a key role in coordinating these parties and ensuring that the IPO process runs smoothly.
• Marketing: Investment banks also help market the IPO to potential investors. This involves creating a prospectus that provides information about the company and the offering, and distributing it to potential investors.
• Stabilization: After the IPO, investment banks may engage in stabilizing activities to support the stock price. This may involve purchasing additional shares in the market to maintain stability and prevent excessive volatility.

Question

What are some of the key factors that make M&A transactions relevant?

Answer

M&A transactions are relevant for several factors. They involve a crossroad of skills and academic tools such as strategy, finance, marketing, accounting, language, and culture. They also involve key assets of a business such as brand, know-how, technology, HR, cost structure, organization, management, financial structure, shareholders’ value and objectives. M&A transactions are essential to business development and are part of a company’s life cycle. They are influenced by economic cycles and macro-economic factors.

Question

What are some of the key roles and players in the M&A marketplace?

Answer

The M&A marketplace is divided into two parts by the Chinese wall. On one side are the insiders who have private information about the corporation, such as the corporation itself and investment bankers. On the other side is the area with public information, which includes investors, brokers, portfolio managers, institutional sales, analysts, and others.

Question

How does information flow between investment bank divisions and clients?

Answer

Information flows between investment bank divisions and clients through various channels such as research reports, strategic advice from investment bankers, sales and trading services from salespeople and traders, and capital markets services from equity capital markets, fixed income markets, and syndicate teams.

Question

What is the role of research in investment banks?

Answer

Research plays an important role in investment banks by providing quantitative, strategic, and tactical research on companies and their industries. This includes forecasting stock price performance and corporate financial results for companies within their coverage responsibility. Research can also provide global economic analysis for clients as well as employees of the investment bank. This includes analyzing economic data such as leading economic indicators and assessing the likelihood, timing, and impact of interest rate changes.

Question

What are some of the roles of sales & trading within an investment bank?

Answer

Sales & trading within an investment bank provides execution and liquidity to institutional investors by offering a full array of cash, financing, derivative, and research products across various asset classes. Sales forces identify clients' needs and utilize the firm's resources to meet these needs while traders provide liquidity for securities around the globe.

Question

What are some of the strategic advisory services provided by investment bankers?

Answer

Investment bankers can provide strategic advisory services on matters such as mergers & acquisitions; sales of companies or assets; divestitures such as spin-offs or equity carve-outs; restructuring such as financial or strategic restructuring; stock buybacks; or other strategic matters.

Question

What were some of the factors that contributed to merger waves?

Answer

The factors that contributed to merger waves included shocks in different sectors such as technological change, deregulation, and escalating commodity prices; ample liquidity available in the market and low cost of capital; overvaluation of acquirer share prices relative to target share prices. It is important to anticipate M&A waves because financial markets reward firms pursuing promising opportunities early on and penalize those that follow later in the cycles.

Types of acquisitions/takeovers and motivation for M&A

Question

Describe what are the most common factors influencing cross-border M&A decisions. Provide one or more examples of advantages and synergies in cross-border acquisitions among recent deal you read of.

Answer

There are several factors that can influence cross-border M&A decisions. Some of the most common factors include:

• Market conditions: Companies may pursue cross-border M&A to enter new markets or diversify their operations in response to saturation or slowdown in their core markets.
• Regulatory environment: Companies may pursue cross-border M&A to mitigate regulatory uncertainty or high repatriation costs in their home markets.
• Technology and productivity enhancement synergies: Companies may pursue cross-border M&A to access new technologies or enhance their productivity through synergies with the target company.
• Value creation: Companies may pursue cross-border M&A to create value through economies of scale, cost savings, or increased market power.
• Strategic reasons: Companies may pursue cross-border M&A for strategic reasons, such as to acquire new capabilities or expand their product or service offerings.

One example of an advantage/synergy in cross-border acquisitions is the acquisition of Arm Holdings by NVIDIA Corporation in 2020. NVIDIA, a US-based technology company, acquired Arm Holdings, a UK-based semiconductor and software design company, for $40 billion. The acquisition allowed NVIDIA to gain access to Arm's technology and expertise in the semiconductor industry, which complemented NVIDIA's existing business in the graphics processing unit (GPU) market. The acquisition also allowed NVIDIA to expand its presence in the UK and Europe, which could help the company gain access to new markets and customers.

Another example is Microsoft's acquisition of Activision Blizzard. The acquisition is worth $68.7 billion, making it Microsoft's largest acquisition in the company's history. The acquisition allows Microsoft to expand its presence in the gaming industry and gain access to new markets and customers, as well as becoming the third largest gaming company by revenue. Moreover, Microsoft will take over many of Activision's publishing studios, which have talented and dedicated gaming developers, allowing them to give gamers access to more games and devices.

Question

What are some of the key considerations for a company when deciding whether to pursue organic growth or growth through M&A?

Answer

When deciding whether to pursue organic growth or growth through M&A, a company must consider a number of factors. Organic growth refers to growing the business through internal means such as expanding operations, increasing sales, or developing new products. Growth through M&A, on the other hand, involves acquiring another company or merging with it to achieve growth.

Some of the key considerations for a company when deciding between these two options include the potential for synergies, the availability of suitable acquisition targets, the cost of capital, the company's existing capabilities and resources, and the potential risks and challenges associated with each option. For example, if a company has strong internal capabilities and resources, it may be able to achieve growth more effectively through organic means. On the other hand, if there are significant potential synergies to be gained through an acquisition or merger, this may be a more attractive option.

Question

What is the difference between a friendly takeover and a hostile takeover? How does the process differ between the two?

Answer

A friendly takeover is when the target company is willing to be acquired and actively cooperates with the acquiring company. In a friendly takeover, the target company may provide access to confidential information to facilitate the due diligence process, and the two companies work together to structure the deal to their mutual satisfaction.

In contrast, a hostile takeover is when the target company has no desire to be acquired and actively resists the acquiring company's attempts to take control. In a hostile takeover, the acquiring company may have to slowly acquire a significant stake in the target company through open market purchases before making a tender offer for the remaining shares. The target company may also employ various defensive tactics to try to prevent the takeover.

Question

What are some of the defensive tactics that a target company might employ in a hostile takeover situation?

Answer

Here are some defensive tactics that can be used in a hostile takeover:

• Shareholder Rights Plan (Poison Pill): can take different forms, but often gives non-acquiring shareholders the right to buy 50% more shares at a discount price in the event of a takeover;
• Selling the Crown Jewels: the selling of a target company’s key assets that the acquiring company is most interested in to make it less attractive for takeover. It can involve a large dividend to remove excess cash from the target’s balance sheet;
• White Knight: look for another friendly acquirer.

Question

What are some of the motivations for cross-border M&A?

Answer

Mergers and acquisitions (M&As) can be motivated by a variety of factors from a buyer's perspective. Here are some of the motivations behind M&As from a buyer's perspective:

• Acquire new technology/expertise: A buyer may be motivated to acquire a company in order to gain access to new technology or expertise that can help them improve their products or services.
• Economies of scale: A buyer may be motivated to acquire a company in order to achieve economies of scale, which can help them reduce costs and increase efficiency.
• Market share: A buyer may be motivated to acquire a company in order to increase their market share and gain a competitive advantage in their industry.
• Diversification: A buyer may be motivated to acquire a company in order to diversify their product base or gain access to new markets.
• Access to unique assets: A buyer may be motivated to acquire a company in order to gain access to unique assets that cannot be obtained through other methods.
• Incentives for managers: Sometimes, mergers are primarily motivated by the personal interests and goals of the top management of a company. For example, a company created as a result of a merger guarantees more power and prestige that can be viewed favorably by managers.
• Synergies: perhaps it's the most important reason for M&As in general. The value of the combined assets of the two companies is greater than the sum of the stand alone value of the same assets.

Question

What is the difference between a horizontal, vertical, and conglomerate merger?

Answer

A horizontal merger is when two firms in the same industry combine, often to achieve economies of scale or scope. A vertical merger is when one firm acquires a supplier or another firm that is closer to its existing customers, often to control supply or distribution channels. A conglomerate merger is when two firms in unrelated businesses combine, often to diversify the company by combining uncorrelated assets and income streams.

Question

What are some of the different types of takeover?

Answer

Some of the different types of takeover include friendly takeovers where the target company is willing to be acquired; hostile takeovers where the target company has no desire to be acquired; cash transactions where shareholders receive cash for their shares; share transactions where shareholders receive shares or a combination of cash and shares; and going-private transactions where a majority shareholder makes an offer for the remaining listed shares.

Question

What are some ways in which shareholder value can be increased?

Answer

There are different ways in which shareholder value can be increased. These include solo ventures or organic growth; partnering through marketing/distribution alliances, joint ventures, licensing, franchising, and equity investments; mergers and acquisitions; minority investments in other firms; financial restructuring; and operational restructuring. The choice among these alternatives depends on the goals of the company, the compatibility between the company and a potential target, the availability of organizational resources to manage a complex deal such as an M&A, and the potential synergies.

Question

How can value be created through M&A?

Answer

Value can be created through M&A by generating synergies through economies of scale or scope; improving efficiency by accessing production assets at a lower cost; acquiring strategic or critical assets such as know-how or technology; entering new markets or tapping new customers; diversifying risk by combining uncorrelated assets and income streams; or achieving other strategic goals. M&A can also create value by allowing companies to reorganize their assets, increase shareholder value, and achieve other financial benefits.

Strategic approach to M&A and key competitive analysis frameworks

Question

What are some of the key factors that can influence the success or failure of an M&A transaction?

Answer

<!-- There are many factors that can influence the success or failure of an M&A transaction. Some of the key factors include:

• Strategic fit: The strategic fit between the two companies involved in the transaction is crucial for its success. This includes factors such as complementary products or services, compatible corporate cultures, and shared strategic goals.
• Synergies: The potential for synergies, or cost savings and revenue enhancements resulting from the combination of the two companies, is another important factor. Synergies can arise from economies of scale, increased market power, or the sharing of resources and capabilities.
• Valuation: The price paid for the target company is another key factor that can influence the success of an M&A transaction. If the acquiring company overpays for the target, it may be difficult to realize sufficient value from the transaction to justify the price.
• Integration: The integration of the two companies after the transaction is completed is another critical factor. This involves combining operations, systems, and processes, as well as managing cultural differences and addressing any employee concerns.

• External factors: External factors such as market conditions, regulatory environment, and economic trends can also influence the success or failure of an M&A transaction. For example, a downturn in the economy or increased regulatory scrutiny could make it more difficult to realize value from the transaction. --> Factors influencing cross-border M&A decisions can vary depending on the specific deal and the companies involved. However, here are some of the most common factors that can influence cross-border M&A decisions:

• Market access: A company may be motivated to acquire a company in another country in order to gain access to new markets and customers.

• Synergies: A company may be motivated to acquire a company in another country in order to achieve synergies, such as cost savings, revenue growth, or increased efficiency.
• Diversification: A company may be motivated to acquire a company in another country in order to diversify their product base or gain access to new markets.
• Economies of scale: A company may be motivated to acquire a company in another country in order to achieve economies of scale, which can help them reduce costs and increase efficiency.
• Access to unique assets/technology: A company may be motivated to acquire a company in another country in order to gain access to unique assets that cannot be obtained through other methods.
• Regulatory environment: The regulatory environment in a foreign country can also be a factor in cross-border M&A decisions. For example, a company may be more likely to pursue a cross-border acquisition if the regulatory environment in the target country is favorable to foreign investment.

Question

What is the life cycle of a company in relation to M&A?

Answer

At the beginning of a company's life cycle, it is private and financed mostly with seed capital and venture capital through private placement. Then, with an initial public offering (IPO), the company becomes public. Once the company is public, it can engage in M&A activities such as mergers, acquisitions, divestitures, leveraged buyouts (LBOs), follow-on equity offerings, and stock buybacks.

M&A Process: sell-side and buy-side activities

Question

Describe the main phases in a sell-side M&A process. As financial advisor or investment banker, which activities would you indicate to your client (the seller) as the most important and delicate in the sale process, if the selected potential buyer is a strategic investors?

Answer

A sell-side M&A process typically involves several phases:

<!--
1. Preparation: In this phase, the seller and their financial advisor or investment banker prepare for the sale by gathering and organizing information about the company, including its financials, operations, and market position. They may also develop marketing materials and identify potential buyers. 2. Marketing: In this phase, the seller and their financial advisor or investment banker reach out to potential buyers to gauge their interest in acquiring the company. This may involve sending out teasers and confidential information memorandums (CIMs) to potential buyers and answering any questions they may have. 3. Due Diligence: Once a potential buyer has expressed interest in acquiring the company, they will typically conduct due diligence to verify the information provided by the seller and assess the risks and opportunities associated with the acquisition. This may involve reviewing the company's financials, operations, legal and regulatory compliance, and other relevant information. 4. Negotiation: After due diligence is completed, the buyer and seller will enter into negotiations to determine the terms of the acquisition, including the purchase price and any conditions or contingencies. This may involve several rounds of back-and-forth discussions until both parties reach an agreement. 5. Closing: Once an agreement has been reached, the buyer and seller will finalize the transaction by signing a definitive agreement and transferring ownership of the company to the buyer.

As a financial advisor or investment banker representing the seller in a sell-side M&A process where the selected potential buyer is a strategic investor, some of the most important and delicate activities in the sale process would include:

• Identifying potential strategic buyers: It's important to identify potential strategic buyers who may be interested in acquiring the company and who can offer synergies that can enhance its value.
• Preparing marketing materials: The marketing materials should highlight the strategic value of the company to potential strategic buyers and emphasize any synergies that can be realized through an acquisition.
• Managing due diligence: Due diligence can be a complex and time-consuming process, so it's important to manage it effectively to ensure that all relevant information is provided to the buyer in a timely manner.
• Negotiating favorable terms: Negotiating favorable terms for the seller is crucial in any M&A transaction. This may involve negotiating a higher purchase price or more favorable conditions or contingencies.

Overall, it's important for the financial advisor or investment banker to provide guidance and support to their client throughout the entire sell-side M&A process to ensure a successful outcome. --> The main phases during an M&A process regarding the sell-side are the followings:

• Assess and Value Opportunity: the seller prepares for the sale by identifying their objectives, assessing their financials and operations, and determining their valuation. The seller may also engage a financial advisor or investment banker to help with the sale process.
• Packaging and Marketing: the seller creates marketing materials and reaches out to potential buyers. This may involve creating a teaser or executive summary, preparing a confidential information memorandum (CIM), and identifying potential buyers through research and outreach. Buyers Scouting and Screening: a list of potential buyers is defined and prospective buyers are approached. Then according to company-specific screening criteria, the remaining buyers receive the Information Memorandum and sign the NDA.
• LOI and DD: top prospective buyers are invited to the data room in order to disclose legal and financial documents of the target to perform the DD, following which they will be invited to submit a bid or a letter of intent.
• Final negotiations and closing: After selecting the final buyer, the final offer will be presented and the drafting of the purchase agreement starts. Other details can be discussed such as representation and warranties, indemnities, earnout, etc…

As a financial advisor or investment banker, some of the most important and delicate activities to indicate to the seller during the sale process include:

• Valuation: Helping the seller determine a realistic valuation for their business is crucial to attracting potential buyers and achieving a successful sale.
• Marketing strategy: Developing a targeted marketing strategy and identifying potential buyers is important to ensure that the seller reaches the right audience and receives competitive offers.
• Negotiation: Negotiating the terms of the sale and ensuring that the seller receives a fair price for their business is a delicate process that requires careful attention to detail and strong negotiation skills.
• Due diligence: Conducting thorough due diligence on potential buyers and ensuring that the seller is prepared to answer any questions or concerns that may arise during the process is important to avoid delays or complications in the sale.
• Regulatory compliance: Ensuring that the sale process complies with all relevant regulations and laws is important to avoid any legal issues or complications that may arise during or after the sale.

Question

What are some of the motives behind M&As from a buyer's perspective?

Answer

From a buyer's perspective, some motives behind M&As include acquiring strategic or critical assets such as know-how or technology; realizing synergies through economies of scale or scope; entering new markets or tapping new customers; diversifying risk by combining uncorrelated assets and income streams; improving efficiency by accessing production assets at a lower cost; or achieving other strategic goals.

Strategic alliances as an alternative to M&A

Question

Discuss the advantages and disadvantages of a partnering arrangement compared to a merger or acquisition.

Answer

• Advantages: the partnering arrangement is less risky, because you don’t pay a price. In a strategic alliance, you get only what you need (certain know-how or distribution channels). If you have to buy a company only for a strategic asset, it can be very costly.
• Disadvantages: a partnering arrangement is more complicated in terms of governance and we need to be very specific in terms of responsibilities. You share the knowledge to the counterpart. The strategic alliance can be broken up (this is a risk). If you buy a company instead, you break up the company only if you want.

Question

Under what circumstances might it make sense to enter into a business alliance with a potential merger target before actually proposing a merger?

Answer

It would be in the case of high uncertainty and when you want to check the existence of potential synergies.

Question

What do you believe are some of the major reasons business alliances often fail to satisfy expectations?

Answer

The lack of commitment by the parties (free riders in the relationship), the lack of good governance, the lack of compatible goals and the impossibility to really measure the contribution of each of the partners.

Question

Do you believe that the likelihood of a firm achieving its business plan objectives is greater through a business alliance than through a merger, acquisition, or a solo venture?

Answer

There is no a rule, it depends on the situation. It depends where we need to go, what we need to have in order to get there, what we are missing, if the target makes sense as an acquisition, what resources are required and how much time (time to market) requires to create a new venture.

Question

Suppose two firms, each of which was generating operating losses, wanted to create a joint venture. The potential partners believed that significant operating synergies could be created by combining the two businesses resulting in a marked improvement in operating performance. How should the ownership distribution of the JV be determined?

Answer

Let’s assume that the measure is EBITDA, because both have positive revenues but they are losing money. How do they negotiate their shares in the alliance? We can evaluate what will be the effect on the business and on sales if the firm owns all the assets (its assets + partner’s assets). We need to measure also the financial needs and know-how and the impact on cost-structure if joining the JV. So, always consider who is contributing with what, and what will be the impact on cost, EBITDA or revenues by joining together.

A potential disadvantage is the disclosure of secrets regarding the know-how.

Question

Should the majority owner always be the one managing the daily operations of the business?

Answer

No, it depends in the competences, skills, connections the partner has. Think about Hermes: the Chinese designer had the minority participation in the partnership, but the business was really managed by her, because she had the culture, the skills and the connections.

Strategic vs. financial investors

Question

Explain the main differences between strategic and financial buyers, deepening in particular the transaction efficiency topics.

Answer

Strategic buyers and financial buyers have different goals and approaches when acquiring a company. A strategic buyer is a corporation that operates in the same or an adjacent market as the target company and seeks to create synergies with their existing business. They are interested in how the acquired firm aligns with their long-term business plans and may be willing to pay a premium for companies that fit well into their existing operations.

On the other hand, a financial buyer views the acquisition as an investment and aims to grow the company and resell it at a higher value. They are interested in making an investment in a company and realizing considerable returns from it. Typical financial buyers are Private Equity Firms that use leverage to try and realize large financial returns.

In terms of transaction efficiency, strategic buyers may have an advantage because they may already have the expertise to continue the business’ operations. In contrast, a financial buyer may have the money they need to acquire a given firm, but may not have the necessary knowledge or expertise to successfully operate it. Hence, they may need to retain top-level management from the acquisition target.

Target valuation and LBOs

Question

Illustrate the Venture Capital valuation method and its general rationale for startup valuation, as seen in class with the HPV case. Feel free to use a numeric example if it might help with the explanation.

Answer

TODO

Traditional vs. distressed M&A

Question

Explain what are the motivation for distressed investors to invest money of loss-making companies with high debt level.

Answer

Distressed investors are motivated to invest in loss-making companies with high debt levels because they see an opportunity to turn the company around and generate a profit. They search for value in the liabilities of troubled firms, often hoping to participate in the restructuring of a company’s balance-sheet. These investors have expertise in identifying undervalued assets and restructuring companies to unlock value. They may also be able to negotiate better terms with creditors and inject new capital into the company to stabilize its operations.

Distressed investing can be a high-risk, high-reward strategy. If the investor is successful in turning around the company, they can generate significant returns on their investment. However, there is also a risk that the company may not recover and the investor may lose their investment.

Question

Provide an example of traditional or distressed M&A operation that you heard of in recent news. Illustrate your example using one of the frameworks studied in class.

Answer

One recent example of a traditional M&A operation that can be analyzed using the AIDA model is the acquisition of Whole Foods by Amazon in 2017.

• Awareness: Amazon’s acquisition of Whole Foods generated significant awareness among consumers and the media. The acquisition was widely reported in the news and generated a lot of buzz on social media.
• Interest: The acquisition also generated interest among consumers, as it represented a major move by Amazon into the brick-and-mortar grocery space. Many consumers were curious to see how Amazon would integrate its online retail expertise with Whole Foods’ physical stores.
• Desire: The acquisition also created desire among consumers, as it promised to bring Amazon’s convenience and technology to the grocery shopping experience. Many consumers were excited about the prospect of being able to order groceries online and have them delivered or pick them up at a Whole Foods store.
• Action: Finally, the acquisition led to action, as many consumers began shopping at Whole Foods or using Amazon’s grocery delivery services. The acquisition helped to drive traffic to Whole Foods stores and increase sales for both companies.

The acquisition of Whole Foods by Amazon can be seen as a successful example of an M&A operation that effectively leveraged the AIDA model to generate awareness, interest, desire, and action among consumers.

The investor perspective

Question

What are some of the key differences between stocks and bonds as forms of corporate securities?

Answer

Stocks and bonds are two common forms of corporate securities that represent different types of claims on a company's assets and income. Stocks represent ownership in a company and entitle stockholders to participate in its profits through dividends or capital appreciation. Bonds, on the other hand, are debt securities that promise to repay principal with interest to bondholders.

Some of the key differences between stocks and bonds include their risk profiles, potential returns, and rights associated with ownership. Stocks are generally considered to be riskier than bonds because their value can fluctuate significantly based on market conditions and company performance. However, they also offer potentially higher returns through capital appreciation or dividends. Bondholders have a fixed claim on a company's assets and income through interest payments but do not participate in its profits beyond this fixed return.

Another key difference between stocks and bonds is the rights associated with ownership. Stockholders have voting rights that allow them to participate in corporate decision-making such as electing directors or approving major transactions. Bondholders do not have voting rights but have priority over stockholders in terms of claims on a company's assets in the event of bankruptcy or liquidation.

Question

What are corporate securities?

Answer

Corporate securities include bonds which promise to repay principal with interest to bondholders; stocks which represent ownership in a company and entitle stockholders to participate in its profits; or other securities such as convertibles or warrants.

Question

How can a deal be financed in an M&A transaction?

Answer

A deal can be financed in an M&A transaction through various means such as equity financing through venture capital or private placement; fixed income financing through bonds or loans; convertibles such as traditional or zero-coupon bonds; refinancing; warrants; or other derivative structures.

Corporate Restructuring

Question

How can M&A be seen as a form of corporate restructuring?

Answer

M&A can be seen as a form of corporate restructuring because it involves combining different companies through mergers or purchasing companies through acquisitions. It can also involve selling companies through disposals or splitting companies through de-mergers or spin-offs. These actions can help to reorganize a company's assets and increase shareholder value.

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Authors: Giacomo, Henri, Antonio, Bing