Deck 11: Structuring the Deal:

Question 1

structuring is fundamentally about satisfying as many of the primary objectives of the parties involved and deciding how risk will be shared.

Answer 1

True

Question 2

Deutsche-Telekom board decided against a divestiture of T-Mobile or an initial public offering to pursue a reverse merger. What other alternatives to merging its wholly-owned subsidiary T-Mobile with another firm could Deutsche-Telekom have pursued? Be specific. What are the advantages and disadvantages of the other options?

Answer 2

Common restructuring strategies that could have been used as an alternative to a reverse merger include a spin-off, split-off or equity carve-out. These options are discussed in Chapters 1 and in considerable detail in Chapter 16.
A spin-off involves the payment of the stock of T-Mobile held by Deutsche-Telekom to its shareholders as a dividend. Procedurally, it is relatively straight forward as the board of directors has the sole right to declare the type (cash or stock) and timing of dividends. Properly structured the dividend would be tax-free to Deutsche-Telekom's shareholders. The distribution would have the added advantage of giving the receiving shareholder the right to determine what to do with the shares: hold or sell. Spin-offs can be complicated by significant amounts of intercompany loans between the parent and the subsidiary. If the parent burdens the subsidiary with excessive amounts of debt before spinning off the unit, the spun-off unit may be forced into bankruptcy. Under fraudulent conveyance laws, the parent may be forced to take back the unit and to pay-off its creditors.
A split-off is similar to a spin-off, in that a firm's subsidiary becomes an independent firm and the parent firm does not generate any new cash. However, unlike a spin-off, the split-off involves an offer to exchange parent stock for stock in the parent firm's subsidiary at an exchange ratio determined by the parent firm. Split-offs most often arise when a portion of the parent firm's shareholders prefer to own the shares of a subsidiary of the parent rather than the parent's shares.
The subsidiary equity carve-out is a transaction in which the parent creates a wholly owned, independent subsidiary, with stock and a management team that are different from the parent's, and issues a portion of the subsidiary's stock to the public. Usually, only a minority share of the parent's ownership in the subsidiary is issued to the public. The cash raised may be retained in the subsidiary or transferred to the parent as a dividend, a stock repurchase, or an intercompany loan. Equity carve-outs exhibit characteristics similar to spin-offs. Both result in the subsidiary's stock's being traded separately from the parent's stock. A potentially significant drawback to the carve-out is the creation of minority shareholders. Equity carve-outs provide an opportunity to raise funds for reinvestment in the subsidiary, paying off debt, or paying a dividend to the parent firm. A carve-out frequently is a prelude to a divestiture, since it provides an opportunity to value the business by selling stock in a public stock exchange. Carve outs can create significant tax liabilities for the parent.

Question 3

7 In early 2008, a year marked by turmoil in the global credit markets, Mars Corporation was able to negotiate a
reverse breakup fee structure in its acquisition of Wrigley Corporation. This structure allowed Mars to walk away
from the transaction at any time by paying a $1 billion fee. Speculate as to the motivation behind Mars and
Wrigley negotiating such a fee structure?

Answer 3

2008 represented a period in which it often was difficult to get financing for transactions. The breakup
fee, which normally applies to the seller to discourage them from seeking another buyer once a contract is
signed, allowed Mars to back out of the deal if it could not obtain adequate financing. The fee structure
compensated Wrigley for any costs it may have incurred in terms of legal, accounting, and investment banking
fees as well as the loss of key employees, customers, or suppliers due to the pending change in ownership.

Question 4

is the form of acquisition used in this deal? Why might this form have been chosen? What are the advantages and disadvantages of the form of acquisition used in this case study?

Question 5

forms of acquisition represent common alternatives to a merger? Under what circumstances might these
alternative structures be employed?

Question 6

are the primary disadvantages and advantages of a reverse merger strategy?

Question 7

Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading
developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC's receivables were overstated because product returns from distributors were not deducted from receivables and its allowance for bad debt was inadequate. A $50 million licensing deal also had been prematurely put on the balance sheet. Finally, TLC's brands were becoming outdated. TLC had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly becoming a big player in the children's software market, Mattel closed on the transaction aware that TLC's cash flows were overstated. Despite being aware of extensive problems, Mattel proceeded to acquire The Learning Company. Why? What could Mattel to better protect its interests? Be specific.

Question 8

acquisition vehicle is the legal structure used to acquire the target.

Question 9

Employee stock ownership plans cannot be legally used to acquire companies.

Question 10

1 What are the advantages and disadvantages of a purchase of assets from the perspective of the buyer and seller?

Question 11

what way might the use of the T-Mobile/MetroPCS impact value?

Question 12

is the form of payment used in this deal? Why might this form have been selected? What are the advantages and disadvantages of the form of payment used in this deal?

Question 13

6 Comment of the following statement. A premium offered by a bidder over a target's share price is not necessarily
a fair price; a fair price is not necessarily an adequate price?

Question 14

late 2008, Deutsche Bank announced that would buy the commercial banking assets (including a number of
branches) of Netherland's ABN Amro for $1.13 billion. What liabilities, if any, would Deutsche Bank have to (or want to) assume? Explain your answer.

Question 15

of payment refers only to the acquirer's common stock used to make up the purchase price paid to target shareholders.

Question 16

are the key assumptions implicit in the Deutsche-Telekom restructuring strategy for T-Mobile?

Question 17

legal structures as holding company, joint venture, and limited liability corporations are suitable only for acquisition vehicles but not post closing organizations.

Question 18

are the reasons some acquirers choose to undertake a staged or multi-step takeover?

Question 19

are the advantages and disadvantages of a statutory merger?

Question 20

2 What are the advantages and disadvantages of a purchase of stock from the perspective of the buyer and seller?

Question 21

In a statutory merger, only assets and liabilities shown on the target firm's balance sheet automatically transfer to the acquiring firm.

Question 22

Decisions made in one area of a deal structure rarely affect other areas of the overall deal structure.

Question 23

Because they can be potentially so lucrative to sellers, earn-outs are sometimes used to close the gap between what the seller wants and what the buyer might be willing to pay.

Question 24

Statutory mergers are governed by the statutory provisions of the state in which the surviving entity is chartered.

Question 25

Asset purchases require the acquiring company to buy all or a portion of the target company's assets and to assume at least some of the target's liabilities in exchange for cash or stock.

Question 26

Sellers may find a sale of assets attractive because they are able to maintain their corporate existence and therefore ownership of tangible assets not acquired by the buyer and intangible assets such as licenses, franchises, and patents.

Question 27

Rights to intellectual property, royalties from licenses and employment agreements are often used to close the gap on price between what the seller wants and what the buyer is willing to pay because the income generated is tax free to the recipient.

Question 28

Earn-outs tend to shift risk from the seller to the buyer in that a higher price is paid only when the seller has met or exceeded certain performance criteria.

Question 29

In a balance sheet adjustment, the buyer increases the total purchase price by an amount equal to the decrease in net working capital or shareholders' equity of the target company.

Question 30

of payment may consist of something other than cash, stock, or debt such as tangible and intangible assets.

Question 31

acquired company should be fully integrated into the acquiring company if an earn-out is used to consummate the transaction.

Question 32

appropriate deal structure is that which satisfies, without regard to risk, as many of the primary objectives of the parties involved as necessary to reach overall agreement.

Question 33

form of payment does not affect whether a transaction is taxable to the seller's shareholders.

Question 34

Staged transactions may be used to structure an earn-out, to enable the target to complete the development of a technology or process, to await regulatory approval, to eliminate the need to obtain shareholder approval, and to minimize cultural conflicts with the target.

Question 35

acquirer may reduce the total cost of an acquisition by deferring some portion of the purchase price.

Question 36

holding company structure is the preferred post-closing organization if the acquiring firm is interested in integrating the target firm immediately following acquisition.

Question 37

Stock purchases involve the exchange of the target's stock for cash, debt, stock of the acquiring company, or some combination.

Question 38

assumption of seller liabilities by the buyer in a merger may induce the seller to demand a higher selling price.

Question 39

buyers and sellers cannot reach agreement on price, other mechanisms can be used to close the gap. These include balance sheet adjustments, earn-outs, rights to intellectual property, and licensing fees.

Question 40

the form of acquisition is a statutory merger, the seller retains all known, unknown or contingent liabilities.

Question 41

When the target is a foreign firm, it is often appropriate to operate it separately from the rest of the acquirer's operations because of the potential disruption from significant cultural differences.

Question 42

Whether cash is the predominant form of payment will depend on a variety of factors. These include the acquirer's current leverage, potential near-term earnings per share dilution of issuing new shares, the seller's preference for cash or acquirer stock, and the extent to which the acquirer wishes to maintain control over the combined firms.

Question 43

A corporate structure is the preferred post-closing organization when an earn-out is involved in acquiring the target firm.

Question 44

By acquiring the target firm through the JV, the corporate investor limits the potential liability to the extent of their investment in the JV corporation.

Question 45

A partnership or JV structure may be appropriate acquisition vehicle if the risk associated with the target firm is
believed to be high.

Question 46

Decision-making in JVs and partnerships is likely to be faster than in a corporate structure. Consequently, JVs and partnerships are more commonly used if speed is desired during the post-closing integration.

Question 47

A financial buyer may use a holding company structure because they expect to sell the firm within a relatively short time period.

Question 48

The reverse triangular merger involves the acquisition subsidiary being merged with the target and subsidiary surviving.

Question 49

Non-U.S. buyers intending to make additional acquisitions may prefer a holding company structure.

Question 50

Acquirer stock is a rarely used form of payment in large transactions.

Question 51

The seller's preference for stock or cash will reflect their desire for liquidity, the attractiveness of the acquirer's shares, and whether the seller is organized as a joint venture corporation.

Question 52

Sellers who are structured as C corporations generally prefer to sell assets for cash than acquirer stock because of more favorable tax treatment.

Question 53

The acquisition vehicle refers to the legal structure created to acquire the target company.

Question 54

A bidder may choose to use cash rather than to issue voting shares if the voting control of its dominant shareholder is threatened as a result of the issuance of voting stock to acquire the target firm.

Question 55

The forward triangular merger involves the acquisition subsidiary being merged with the target and the target surviving.

Question 56

If the acquirer is interested in integrating the target business immediately following closing, the holding structure may be most desirable.

Question 57

A post-closing organization must always be a C corporation.

Question 58

A holding company is an example of either an acquisition vehicle or post-closing organization.

Question 59

In an earnout agreement, the acquirer must directly control the operations of the target firm to ensure the target firm adheres to the terms of the agreement.

Question 60

ESOP structures are rarely used vehicles for transferring the owner's interest in the business to the employees in small, privately owned firms.

Question 61

Earnouts tend to shift risk from the seller to the acquirer in that a higher price is paid only when the seller or acquired firm has met or exceeded certain performance criteria. True of False

Question 62

Bidders may use a combination of cash and non-cash forms of payment as part of their bidding strategies to broaden the appeal to target shareholders.

Question 63

The risk to the bidder associated with bidding strategy of offering target firm shareholders multiple payment options is that the range of options is likely to discourage target firm shareholders from participating in the bidder's tender offer for their shares.

Question 64

An earnout agreement is a financial contract whereby a portion of the purchase price of a company is to be paid to the buyer in the future contingent on the realization of a previously agreed upon future earnings level or some other performance measure.

Question 65

The value of an earnout payment is never subject to a cap so as not to discourage the seller from working diligently to exceed the payment threshold.

Question 66

Balance sheet adjustments most often are used in purchases of stock when the elapsed time between the agreement on price and the actual closing date is short.

Question 67

A fixed exchange collar agreement may involve a fixed exchange ratio as long as the acquirer's share price remains within a narrow range, calculated as of the effective date of the signing of the agreement of purchase and sale.

Question 68

Buyers and sellers generally view purchase price adjustments as a form of insurance against any erosion or accretion in assets, such as plant and equipment.

Question 69

Which of the following may be used as acquisition vehicles?

A) Partnership
B) Limited liability corporation
C) Corporate shell
D) ESOP
E) All of the above

Question 70

Stock purchases involve the exchange of the target's stock for acquirer stock only.

Question 71

a statutory merger,

A) Only known assets and liabilities are automatically transferred to the buyer.
B) Only known and unknown assets are transferred to the buyer.
C) All known and unknown assets and liabilities are automatically transferred to the buyer except for those the seller agrees to retain.
D) The total consideration received by the target's shareholders is automatically taxable.
E) None of the above.

Question 72

The use of convertible preferred stock as a form of payment provides some downside protection to sellers in the form of continuing dividends, while providing upside potential if the acquirer's common stock price increases above the conversion point.

Question 73

The multiple option bidding strategy introduces a certain level of uncertainty in determining the amount of cash the acquirer will have to ultimately pay out to target firm shareholders, since the number choosing the all cash or cash and stock option is not known prior to the completion of the tender offer.

Question 74

If an acquirer buys most of the operating assets of a target firm, the target generally is forced to
liquidate its remaining assets and pay the after-tax proceeds to its shareholders.

Question 75

Using stock as a form of payment is generally less complicated than using cash from the buyer's point of view.

Question 76

Offering sellers consulting contracts to defer a portion of the purchase price is illegal in most states.

Question 77

Both the acquirer and target boards of directors have a fiduciary responsibility to demand that the merger terms be renegotiated if the value of the offer made by the bidder changes materially relative to the value of the target's stock or if their has been any other material change in the target's operations.

Question 78

Collar agreements provide for certain changes in the exchange ratio contingent on the level of the acquirer's share price around the effective date of the merger.

Question 79

Which of the following should be considered important components of the deal structuring process?

A) Legal structure of the acquiring and selling entities
B) Post closing organization
C) Tax status of the transaction
D) What is being purchased, i.e., stock or assets
E) All of the above

Question 80

Which of the following is not a characteristic of a joint venture corporation?

A) Profits and losses can be divided between the partners disproportionately to their ownership shares.
B) New investors can become part of the JV corporation without having to dissolve the original JV corporate structure.
C) The JV corporation can be used to acquire other firms.
D) Investors' liability is limited to the extent of their investment.
E) The JV corporation may be subject to double taxation.