Deck 23: Investment Banking and M&A

Question 1

A group of investment banks that join together to help underwrite an issue is called

A)a syndicate.
B)book runners.
C)specialists.
D)a selling group.

Answer 1

a syndicate.

Question 2

Due diligence

A)is a legal requirement.
B)refers to the process of ensuring no gaping problems in the transaction have been overlooked.
C)is only a requirement in A activity; it is not a requirement in underwriting new issues.
D)is both A and B.

Answer 2

is both A and B.

Question 3

In the underwriting process, the due diligence is handled by the

A)lead manager.
B)selling broker.
C)book runner.
D)specialist.

Answer 3

lead manager.

Question 4

The Glass-Steagall Act of 1933

A)prohibited investment banks from lending money.
B)prohibited investment banks from engaging i activity.
C)established a regulatory agency for the investment banking industry.
D)prohibited commercial banks in the U.S. from engaging in investment banking activities.

Question 5

Which of the following is not one of the services investment bankers provide in mergers and acquisitions?

A)due diligence
B)book building
C)bridge financing
D)valuation services

Question 6

The largest equity market in the world as of 2007 is in

A)Japan.
B)Europe.
C)Latin America.
D)the United States.

Question 7

In 2007, most of the profits of Goldman Sachs' investment banking division were the result of its

A)underwriting activity.
B)credit swaps activity.
C)option writing activity.
D)financial advisory activity.

Question 8

In 2007, which of Goldman Sachs' three divisions was the largest?

A)derivatives
B)asset management and securities services
C)trading and principal investments
D)investment banking

Question 9

A printed financial advertisement of an upcoming offering is called a

A)prospectus.
B)tombstone.
C)red herring.
D)book.

Question 10

The largest financial market in the world as of 2007 is in

A)Japan.
B)the United States.
C)Europe.
D)Asia.

Question 11

Which of the following positions is not typically found in the investment banking hierarchy?

A)managing director
B)analyst
C)book builder
D)director

Question 12

In order to be a global leader in the investment banking industry, an investment bank primarily needs to have

A)the most world-wide diversification.
B)the largest market value.
C)the best human talent.
D)the largest capital base.

Question 13

Although the distribution of compensation was highly skewed, in 2007, Goldman Sachs' employee compensation amounted to

A)$500,000 per employee.
B)$250,000 per employee.
C)$600,000 per employee.
D)$400,000 per employee.

Question 14

Which of the following is not associated with the underwriting process?

A)syndicate
B)venture capitalist
C)book runner
D)lead manager

Question 15

Which of the following is not a main function of underwriters today?

A)reputation and signaling
B)origination
C)placement
D)providing venture capital

Question 16

In 2008, most global banks have their principal investment banking operations headquartered in

A)London.
B)New York City.
C)their home country's financial capital.
D)Tokyo.

Question 17

The highest job title that Goldman Sachs conveys to an employee is that of

A)analyst.
B)managing director.
C)director.
D)associate.

Question 18

What percentage of its worst-performing staff do many investment banks lay off each year?

A)5%
B)1%
C)10%
D)25%

Question 19

A major provider of investment bank ratings is

A)Standard and Poor's.
B)Deal Logic.
C)MSCI BARRA.
D)Dunn and Bradstreet.

Question 20

A major result of the repeal of the Glass-Steagall Act was

A)an increase in the number of IPOs.
B)the formation of major financial conglomerates.
C)an increase in the number of investment banks in the U.S.
D)the failure of many U.S. commercial banks.

Question 21

From 2005 to 2007, bonds issued by Freddie Mac, Fannie Mae, and the Federal Farm Credit System accounted for what percent of the bond market?

A)25%
B)50%
C)75%
D)33%

Question 22

The typical merger and acquisition advice will cost the firms involved about how much, as a percent of the acquisition size?

A)0.25% - 0.50%
B)1.00% - 1.25%
C)1.25% - 1.75%
D)0.50% - 1.00%

Question 23

Which of the following statements regarding hostile takeovers is true?

A)The U.S. is the only country that permits hostile takeovers.
B)In 2006, a law was passed prohibiting hostile takeover activity in the U.S.
C)From 1983 to 1989, hostile takeovers represented about 50% of the total activity in any given year.
D)Hostile takeovers, though rare, can be very large.

Question 24

M&A activity in the U.S. is what percentage of activity world-wide?

A)50%
B)10%
C)25%
D)33%

Question 25

The primary reason that new corporate bond issues typically have a credit rating of BBB or better is that

A)the SEC will not approve a new bond issue that is below investment grade.
B)reputable investment banks refuse to underwrite junk bond issues.
C)there is no demand in the public markets for bonds that are below investment grade.
D)it is usually cheaper for smaller firms to borrow from commercial banks than to tap the public market.

Question 26

Which of the following statements regarding the underwriting industry in 2005 - 2007 is true?

A)Both the debt and the equity underwriting markets were highly competitive.
B)Most investment bankers seemed to prefer to underwrite debt issues.
C)Although no investment bank controlled more than 10% of the equity underwriting market, there are only three major players in the debt underwriting market, Goldman
Sachs among them.
D)Both B and C are true statements.

Question 27

About how much more do investment banks charge to underwrite non-investment grade bonds than they do to underwrite investment-grade bonds?

A)five times as much
B)twice as much
C)three times as much
D)four times as much

Question 28

The underwriting spread will be higher,

A)the riskier the issue.
B)for convertible debt than for equity.
C)the larger the issue.
D)Both B and C are true.

Question 29

Rank the following in terms of their issuing costs, from highest to lowest: I. Preferred equity
II. Convertible debt
III. Initial public offerings
IV. Seasoned public offerings

A)I, II, IV, III
B)III, IV, I, II
C)II, III, I, IV
D)III, IV, II, I

Question 30

Takeover activity seems to be higher

A)in bull markets.
B)when interest rates are low.
C)in bear markets.
D)both A and B.

Question 31

The underwriting spread includes

A)all the direct costs associated with the underwriting, including the cost of obtaining a rating from a credit rating agency, if applicable.
B)only the fees paid to the underwriter, but not other direct and indirect costs incurred by the issuer.
C)all the costs associated with the issue, both direct and indirect.
D)all the direct costs associated with the underwriting, but none of the indirect costs.

Question 32

Briefly describe the three main functions of investment bankers today.

Question 33

Which of the following statements about Goldman Sachs' underwriting activity in 2007 is true?

A)Its fees for underwriting debt were slightly higher than the fees it charged for underwriting equity.
B)The firm underwrote four times as much equity as it did debt in 2007.
C)Approximately 50% of its underwriting activity business was in the U.S.
D)Approximately 50% of its financial advisory activities were outside of the U.S.

Question 34

Most smaller firms that are engaging in an initial public offering (offering $100 million) choose an investment banker by

A)asking for competitive bids and choosing the lowest bidder.
B)going with the largest investment banking house it can afford in the belief it will make their IPO more prestigious.
C)looking at the total package of services being offered and choosing the one that best meets its needs.
D)a referral from the commercial bank with which it has an established relationship.

Question 35

What agency conflict do both the target firm and the acquiring firm have to be
cognizant of when involved in a merger or an acquisition? Explain briefly.

Question 36

The gross spread is

A)the difference between what the issuing firm receives and what the security's close price is on the first day of trading.
B)the difference between the issue costs of a seasoned new offering and an initial public offering.
C)the difference between the price at which an issue is offered to the public and its close price on the first day of trading.
D)the amount of money the underwriter receives from the issuing proceeds.

Question 37

Which of the following statements is true about U.S. underwriting activity from 2005 to 2007?

A)Although the number of equity offerings and debt offerings were about equal, the underwriting fees generated were higher for equity.
B)There were only about half as many equity offerings as debt offerings, but the size of the offerings were twice as large.
C)There were only about half the number of equity offerings as debt offerings, but the underwriting fees generated were higher for equity.
D)There were twice as many equity offerings as debt offerings, but the proceeds raised in the debt offerings were larger.

Question 38

An underwriting syndicate agreed to sell a new issue of 500,000 shares of common stock for the Bravo Corporation. It estimated that the stock would sell for $35 a share, and the syndicate
Agreed to pay Bravo $34.50 a share. Fixed expenses incurred by the syndicate were $60,000.
When the stock was brought to market, the shares sold for $34.625. What was the syndicate's
Gain or loss on this transaction?

A)$75,000 loss
B)$22,500 loss
C)$2,500 gain
D)$137,500 gain

Question 39

For IPOS that are less than $100 million, the gross spread is generally fixed at about

A)7%.
B)9%.
C)5%.
D)6%.

Question 40

What are three reasons that the underwriting spread is higher for riskier securities?

Question 41

A 1996 paper by Lee, Lochhead, Ritter, and Zhao reported that in the early 1990s, direct costs other than the underwriting spread amounted to how much for large offerings?

A)$1.5 million
B)$2.0 million
C)$1.0 million
D)$0.5 million

Question 42

Given that the competitive underwriting process used by utilities seems to result in
cheaper fees, what are some of the reasons that non-regulated corporations don't use
the competitive underwriting process?

Question 43

Which of the following has the highest issue costs, all else equal?

A)junk bonds
B)convertible debt
C)initial public offerings
D)seasoned equity offerings

Question 44

Which of the following has the lowest issue costs, all else equal?

A)junk bonds
B)convertible debt
C)seasoned equity offerings
D)initial public offerings

Question 45

The most effective takeover prevention strategy is the

A)poison pill.
B)fair value provision.
C)blowfish defense.
D)staggered board.

Question 46

The empirical evidence suggest that, on average,

A)shareholders of both the acquiring firm and the target firm lose; management of the acquiring firm gains.
B)shareholders of both the acquiring firm and the target firm gain unless the acquisition is a hostile takeover.
C)shareholders of the acquiring firm gain, and shareholders of the target firm lose.
D)shareholders of the target firm gain, and shareholders of the acquiring firm lose.

Question 47

The type of acquisition in which the acquiring entity is financing most of the buyout with debt is called a

A)leveraged buyout.
B)reverse merger.
C)tender offer.
D)hostile takeover.

Question 48

Which of the following statements is true?

A)It is usually in the acquiring shareholders' best interest if a takeover is successful.
B)It is often, but not always, in the acquiring management's best interest if a takeover is successful.
C)It is usually in the target management's best interest if a takeover is successful.
D)It is usually in the target shareholders' best interest if their firm's management is successful in fighting off a hostile takeover attempt.

Question 49

How does the underwriter selection process differ among regulated offerings, IPOs,
and SEOs?

Question 50

Which of the following is not considered to be a source of value in a merger or acquisition?

A)larger firm size
B)expropriation
C)reduced competition
D)scale synergies

Question 51

When the management of a potentially target company buys other companies so that they will be more difficult to take over, it is called

A)greenmail.
B)a poison pill.
C)a blowfish defense.
D)a scorched earth defense.

Question 52

What costs, other than underwriting fees, does a firm typically incur with a new
security issue?

Question 53

If a firm has to pay a credit rating agency for a rating on its bond issue, why would it
opt to do so?

Question 54

When the acquiring entity in a leveraged buyout is the firm's existing management team, it is called a(n)

A)tender offer.
B)management buyout.
C)inside offer.
D)hostile takeover.

Question 55

Which of the following statements about who receives the net value changes in a merger or acquisition is true?

A)If the acquirer purchases the target firm at a price greater than the one that existed before the acquirer entered the picture, then the target firm shareholders will receive all of the
Merger benefits.
B)If the acquirer purchases the target firm at a price that is equal to the value of all the net merger benefits, then all the benefits accrue to the target shareholders, and the
Shareholders of the acquiring firm are indifferent.
C)If the acquirer purchases the target firm at a price that is equal to the value of all the net merger benefits, then all the benefits accrue to the target shareholders, and the
Shareholders of the acquiring firm lose money.
D)If the acquirer purchases the target at the price that existed before the acquirer entered the picture, then all gains and losses associated with the acquisition accrue to the target firm's
Shareholders.

Question 56

Which of the following is one of the two most important sources of value in a leveraged buyout?

A)ability to keep existing management in place
B)interest tax shields associated with debt
C)synergies
D)reduced competition

Question 57

A company that offers a friendly takeover to a company that is threatened by a hostile takeover is referred to as

A)a savior.
B)a black knight.
C)a white knight.
D)a good raider.

Question 58

The cost of obtaining a credit rating for a new bond issue can range from

A)$75,000 to $100,000.
B)$25,000 to $50,000.
C)$5,000 to $25,000.
D)$50,000 to $75,000.

Question 59

Which of the following statements about shareholder proposals is true?

A)Only shareholders who own at least 10% of a firm's shares can submit a shareholder proposal.
B)A shareholder proposal involves a large shareholder who solicits the right to vote the shares of other shareholders of the corporation for the purpose of ousting the current
Board of directors.
C)Even if a shareholder proposal is passed by a majority vote of the shareholders, management may still legally ignore it.
D)Both A and B are true statements.

Question 60

The range of underwriting spreads for SEOs, based on 2005 - 2007 data, is approximately

A)8% to 12%.
B)0.5% to 2%.
C)2% to 6%.
D)5% to 8%.

Question 61

How can the loyalty of employees of a target firm result in an increased value of the
resultant firm when the target firm is acquired?

Question 62

About 20% of the takeovers from 1980 to 2003 occurred by means of a

A)hostile takeover.
B)tender offer.
C)negotiated merger.
D)management buyout.

Question 63

According to the empirical data on U.S. M&A transactions from 1980 to 2003, what percent of acquisitions were abandoned?

A)5% to 10%
B)20% to 25%
C)10% to 15%
D)15% to 20%

Question 64

What are the two most important sources of value in a leveraged buyout?

Question 65

Empirical data on U.S. transactions from 1980 to 2003 indicate that target firms were usually

A)twice the size of the acquiring firm.
B)one-quarter the size of the acquiring firm.
C)half the size of the acquiring firm.
D)the same size as the acquiring firm.

Question 66

What is a "golden parachute"? Is it in the best interest of the shareholders of a firm that
is a targeted acquisition? Explain?