Deck 5: Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Question 1

Confidentiality agreements are usually signed before any information is exchanged to protect the buyer and the seller from loss of competitive information.

Answer 1

True

Question 2

Rumors of impending acquisition can have a substantial deleterious impact on the target firm.

Answer 2

True

Question 3

Only acquiring firms perform due diligence.

Answer 3

False

Question 4

In contacting large,publicly traded firms,it is usually preferable to make initial contact through an intermediary and at the highest level of the company possible.

Question 5

Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price and meet possible working capital requirements until permanent financing can be found.

Question 6

Confidentiality agreements usually also cover publicly available information on the potential acquirer and target firms.

Question 7

The letter of intent often specifies the type of information to be exchanged as well as the scope and duration of the potential buyer's due diligence.

Question 8

"No shop" provisions are seldom found in letters of intent.

Question 9

So-called permanent financing for an acquisition usually consists of long-term unsecured debt.

Question 10

Letters of intent are usually legally binding on the potential buyer but rarely on the target firm.

Question 11

The appropriate approach for initiating contact with a target firm is essentially the same for large or small,public or private companies.

Question 12

The number of selection criteria should be as extensive as possible to ensure that all factors relevant to the firm's decision-making process are considered.

Question 13

Confidentiality agreements often cover both the buyer and the seller,since both are likely to be exchanging confidential information,although for different reasons.

Question 14

The targeted industry and the maximum size of the potential transaction are often the most important selection criteria used in the search process.

Question 15

The signing of a letter of intent usually precludes the target firm from suing the potential acquiring company if the acquirer eventually withdraws its initial offer.

Question 16

The first step in establishing a search plan for potential acquisition or merger targets is to identify the primary screening or selection criteria.

Question 17

A letter of intent formally stipulates the reason for the agreement,major terms and conditions,the responsibilities of both parties while the agreement is in force,a reasonable expiration date,and how all fees associated with the transaction will be paid.

Question 18

The actual price paid for a target firm is unaffected by the buyer's due diligence.

Question 19

Advertising in the business or trade press is generally a very efficient way to locate attractive acquisition target candidates.

Question 20

An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely limit the number of potential candidates.

Question 21

Total consideration refers to what is to be paid for the target firm and usually only consists of cash or stock,exclusively.

Question 22

Brokers or finders should never be used in the search process..

Question 23

There is no substitute for performing a complete due diligence on the target firm.

Question 24

Closing is a phase of the acquisition process that usually occurs shortly after the target has been fully integrated into the acquiring firm.

Question 25

Buyers routinely perform due diligence on sellers,but sellers rarely perform due diligence on buying firms.

Question 26

The actual purchase price paid for a target firm is determined doing the negotiation process and is often quite different from the initial offer price stipulated in a letter of intent.

Question 27

Seller financing represents a very important source of financing for buyers.

Question 28

The buyer's ability to obtain adequate financing is a closing condition common to most agreements of purchase and sale.

Question 29

It is usually in the best interests of the seller to allow the buyer unrestricted access to all seller employees and records doing due diligence in order to create an atmosphere of cooperation and goodwill.

Question 30

Fees charged by investment bankers are never negotiable.

Question 31

Elaborate multimedia presentations made to potential lenders in an effort to "shop" for the best financing are often referred to as the "road show."

Question 32

Buyers should not be concerned about performing an exhaustive due diligence since in doing so they could degrade the value of the target firm because of the disruptive nature of a rigorous due diligence.The buyer can be assured that all significant risks can be handled through the standard representations and warranties commonly found in agreements of purchase and sale.

Question 33

The purchase price for a target firm may be fixed at the time of closing,subject to future adjustment,or be contingent on future performance.

Question 34

Shrewd sellers often negotiate a break-up clause in an agreement of purchase and sale requiring the buyer to pay the seller an amount at least equal to the seller's cost associated with the transaction.

Question 35

The total purchase price paid by the buyer should also reflect the assumption of liabilities stated on the target's balance sheet,but it should exclude all off balance sheet liabilities.

Question 36

Even though time is critical,it is always critical to build a relationship with the CEO of the target firm before approaching her with an acquisition proposal.

Question 37

Discretionary assets are undervalued or redundant assets not required to run the acquired business and which can be used by the buyer to recover a portion of the purchase price.

Question 38

Bridge financing refers to the temporary financing obtained by the buyer to pay all or a portion of the purchase price until so-called permanent financing can be arranged.

Question 39

Due diligence is the process of validating assumptions underlying the initial valuation of the target firm as well as the uncovering of factors that had not previously been considered that could enhance or detract from the value of the target firm.

Question 40

More and more firms are identifying potential target companies on their own without the use of investment bankers.

Question 41

All of the following are true of buyer due diligence except for

A) Due diligence is the process of validating assumptions underlying valuation.
B) Can be replaced by appropriate representations and warranties in the agreement of purchase and sale.
C) Primary objectives are to identify and to confirm sources and destroyers of value
D) Consists of operational, financial, and legal reviews.
E) Endeavors to identify the "fatal flaw" that could destroy the deal

Question 42

There is no need for the seller to perform due diligence on its own operations to ensure that its representations and warranties in the definitive agreement are accurate.

Question 43

Loan covenants are promises made by the borrower that certain acts will be performed and others will be avoided.

Question 44

All of the following statements are true about letters of intent except for

A) Are always legally binding
B) Spells out the initial areas of agreement between the buyer and seller
C) Defines the responsibilities and rights of the buyer and seller while the letter of intent is in force
D) Includes an expiration date
E) Includes a "no shop" provision

Question 45

The purchase price may be fixed at the time of closing,subject to future adjustment,or it may be contingent on future performance of the target business.

Question 46

The negotiation process consists of all of the following concurrent activities except for

A) Refining valuation
B) Deal structuring
C) Integration planning
D) Due Diligence
E) Developing the financing plan

Question 47

Each of the following is true about the acquisition search process except for

A) A candidate search should start with identifying the primary selection criteria.
B) The number of selection criteria should be as lengthy as possible.
C) At a minimum, the primary criteria should include the industry and desired size of transaction.
D) The size of the transaction may be defined in terms of the maximum purchase price the acquirer is willing to pay.
E) A search strategy entails the use of electronic databases, trade publications, and querying the acquirer's law, banking, and accounting firms for qualified candidates.

Question 48

In a merger,the acquiring firm assumes all liabilities of the target firm.Assumed liabilities include all but which of the following?

A) Current liabilities
B) Long-term debt
C) Warranty claims
D) Fully depreciated operating equipment
E) Off-balance sheet liabilities

Question 49

Total consideration is a legal term referring to the composition of the purchase price paid by the buyer for the target firm.It may consist of which of the following:

A) Cash
B) Cash and stock
C) Cash, stock, and debt
D) A, B, and C
E) A and B only

Question 50

The actual price paid by the buyer for the target firm is determined when

A) The initial offer is made
B) As a result of the negotiation process
C) When the letter of intent is signed
D) Following the completion of due diligence
E) Once a financing plan has been approved

Question 51

Which of the following is generally not true of a financing contingency?

A) It is a condition of closing in the agreement of purchase and sale
B) Trigger the payment of break-up fees if not satisfied.
C) Protects both the lender and seller
D) Primarily protects the buyer
E) Primarily protects the seller

Question 52

Confidentiality agreements are rarely required when target and acquiring firms exchange information.

Question 53

The financing plan may be affected by the discovery during due diligence of assets that can be sold to pay off debt accumulated to finance the transaction.

Question 54

All of the following are true about a confidentiality agreement except for

A) Often applies to both the buyer and the seller
B) Stipulates the type of seller information available to the buyer and how the information can be used
C) Limits the use of information about the seller that is publicly available
D) Includes a termination date
E) Limits the ability of either party to disclose publicly the nature of discussion between the buyer and seller

Question 55

Buyers generally want to complete due diligence on the seller as quickly as possible.

Question 56

The screening process represents a refinement of the search process and commonly utilizes which of the following as selection criteria

A) Market share, product line, and profitability
B) Product line, profitability, and growth rate
C) Profitability, leverage, and growth rate
D) Degree of leverage, market share, and growth rate
E) All of the above

Question 57

Initial contact should be made through an intermediary as high up in the organization for which of the following firms

A) Companies with annual revenue of less than $25 million
B) Medium sized companies between $25 and $100 million in annual revenue
C) Large, publicly traded firms
D) Small, privately owned firms
E) Small, privately owned competitors

Question 58

Earnouts are generally very poor ways to create trust and often represent major impediments to the integration process.

Question 59

Which of the following are commonly used sources of financing for M&A transactions?

A) Asset based lending
B) Cash flow based lending
C) Seller financing
D) A and B only
E) All of the above

Question 60

The closing often involves getting all the necessary third-party consents and regulatory and shareholder approvals.

Question 61

Integration planning is included in which of the following activities?

A) Development of a business plan
B) The search process
C) Development of a financing plan
D) Post-closing integration
E) None of the above

Question 62

Conduct an external and internal analysis of Oracle.Briefly describe those factors that influenced the development of Oracle's business strategy.Be specific.

Question 63

Which of the following is not true of the financing plan?

A) It is rarely affected by the discovery during due diligence of target assets not required to operate the business.
B) It may include both stock and debt.
C) It may include a combination of stock, debt, and cash.
D) It serves as a reality check on the buyer.
E) None of the above.

Question 64

The financing plan is included in which phase of the acquisition process?

A) The development of the business plan
B) The negotiation phase
C) The integration planning phase
D) The development of the acquisition plan
E) None of the above

Question 65

Closing is included in which of the following activities?

A) Development of a business plan
B) Development of an acquisition plan
C) The search process
D) The negotiation process
E) None of the above

Question 66

Which of the following is generally not true of integration planning?

A) Is of secondary importance in the acquisition process.
B) Is crucial to the ultimate success of the merger or acquisition
C) Represents an opportunity to earn trust among all parties to the transaction
D) Involves developing effective communication strategies for employees, customers, and suppliers.
E) Is often neglected in the heat of negotiation.

Question 67

All of the following are true of closing except for

A) Consists of obtaining all necessary shareholder, regulatory, and third party consents
B) Requires significant upfront planning
C) Is rarely subject to last minute disagreements
D) Involves the final review and signing of such documents as the agreement of purchase and sale, loan agreements (if borrowing is involved), security agreements, etc.
E) Fulfillment of the so-called closing conditions

Question 68

The development of search criteria is included in which of the following activities?

A) Development of a business plan
B) Development of the acquisition plan
C) Post-closing integration
D) Post-closing evaluation of the acquisition process
E) None of the above

Question 69

Case Study Short Essay Examination Questions
Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction
Cingular outbid Vodafone to acquire AT&T Wireless, the nation's third largest cellular telephone company, for $41 billion in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100 U.S. markets and span 49 of the 50 U.S. states. While Cingular's management seemed elated with their victory, investors soon began questioning the wisdom of the acquisition.
By entering the bidding at the last moment, Vodafone, an investor in Verizon Wireless, forced Cingular's parents, SBC Communications and BellSouth, to pay a 37 percent premium over their initial bid. By possibly paying too much, Cingular put itself at a major disadvantage in the U.S. cellular phone market. The merger did not close until October 26, 2004, due to the need to get regulatory and shareholder approvals. This gave Verizon, the industry leader in terms of operating margins, time to woo away customers from AT&T Wireless, which was already hemorrhaging a loss of subscribers because of poor customer service. By paying $11 billion more than its initial bid, Cingular would have to execute the integration, expected to take at least 18 months, flawlessly to make the merger pay for its shareholders.
With AT&T Wireless, Cingular would have a combined subscriber base of 46 million, as compared to Verizon Wireless's 37.5 million subscribers. Together, Cingular and Verizon control almost one half of the nation's 170 million wireless customers. The transaction gives SBC and BellSouth the opportunity to have a greater stake in the rapidly expanding wireless industry. Cingular was assuming it would be able to achieve substantial operating synergies and a reduction in capital outlays by melding AT&T Wireless's network into its own. Cingular expected to trim combined capital costs by $600 to $900 million in 2005 and $800 million to $1.2 billion annually thereafter. However, Cingular might feel pressure from Verizon Wireless, which was investing heavily in new mobile wireless services. If Cingular were forced to offer such services quickly, it might not be able to realize the reduction in projected capital outlays. Operational savings might be even more difficult to realize. Cingular expected to save $100 to $400 million in 2005, $500 to $800 million in 2006, and $1.2 billion in each successive year. However, in view of AT&T Wireless's continued loss of customers, Cingular might have to increase spending to improve customer service. To gain regulatory approval, Cingular agreed to sell assets in 13 markets in 11 states. The firm would have six months to sell the assets before a trustee appointed by the FCC would become responsible for disposing of the assets.
SBC and BellSouth, Cingular's parents, would have limited flexibility in financing new spending if it were required by Cingular. SBC and BellSouth each borrowed $10 billion to finance the transaction. With the added debt, S&P put SBC, BellSouth, and Cingular on credit watch, which often is a prelude in a downgrade of a firm's credit rating.
:
What is the total purchase price of the merger?

Question 70

Which of the following is not typically true of post-closing evaluation of an acquisition?

A) It is important not to change the performance benchmarks against which the acquisition is measured
B) It is critical to ask the tough questions
C) It is an opportunity to learn from mistakes
D) It is commonly done
E) It is frequently avoided by acquiring firms because of the potential for embarrassment.

Question 71

What other benefits for Oracle,and for the remaining competitors such as SAP,do you see from further industry consolidation? Be specific.

Question 72

Which of the following statements are true about due diligence?

A) The seller should perform due diligence on its own operations.
B) The seller should perform due diligence on the buyer.
C) The seller should perform due diligence on the lender used by the buyer to finance the transaction.
D) A & B
E) A, B, & C

Question 73

The negotiation process consists of all of the following except for

A) Refining valuation
B) Due diligence
C) Closing
D) Developing a financing plan
E) Deal structuring

Question 74

Refining the target valuation based on new information uncovered during due diligence is most likely to affect which of the following

A) Total consideration
B) The search process
C) The business plan
D) The acquisition plan
E) The target's business plan

Question 75

Which of the following do not represent typical closing documents in an asset purchase?

A) Letter of intent
B) Listing of any liabilities to be assumed by the buyer
C) Loan and security agreements if the transaction is to be financed with debt
D) Complete descriptions of all patents, facilities, and investments
E) Listing of assets to be acquired

Question 76

In what way do you think the Oracle strategy was targeting key competitors? Be specific.

Question 77

Oracle's Efforts to Consolidate the Software Industry
Key Points:
•Industry-wide trends, coupled with the recognition of its own limitations, compelled Oracle to alter radically its business strategy.
•A rapid series of acquisitions of varying sizes enabled the firm to respond rapidly to the dynamically changing business environment.
•Increasingly, the major software competitors seem to be pursuing very similar strategies.
•The long-term winner often is the firm most successfully executing its chosen strategy.
_____________________________________________________________________________________________
Oracle 's completion of its $7.4 billion takeover of Sun Microsystems on January 28, 2010 illustrated how in somewhat more than five years the firm has been able to dramatically realign its focus. Once viewed as the premier provider of proprietary database and middleware services (accounting for about three-fourths of the firm's revenue), Oracle is now seen as a leader in enterprise resource planning, customer relationship management, and supply chain management software applications. What spawned this rapid and dramatic transformation?
The industry in which Oracle competes has undergone profound and lasting changes. In the past, the corporate computing market was characterized by IBM selling customers systems that included most of the hardware and software in a single package. Later, minicomputer manufacturers pursued a similar strategy in which they would build all of the crucial pieces of a large system, including its chips, main software, and networking technology. The traditional model was upended by the rise of more powerful and standardized computers based on readily available chips from Intel and an innovative software market. Customers could choose the technology they preferred (i.e., "best of breed") and assemble those products in their own data centers networks to support growth in the number of users and the growing complexity of user requirements. Such enterprise-wide software (e.g., human resource and customer relationship management systems) became less expensive as prices of hardware and software declined under intensifying competitive pressure as more and more software firms entered the fray.
Although the enterprise software market grew rapidly in the 1990s, by the early 2000s, market growth showed signs of slowing. This market consists primarily of large Fortune 500 firms with multiple operations across many countries. Such computing environments tend to be highly complex and require multiple software applications that must work together on multiple hardware systems. In recent years, users of information technology have sought ways to reduce the complexity of getting the disparate software applications to work together. Although some buyers still prefer to purchase the "best of breed" software, many are moving to purchase suites of applications that are compatible.
In response to these industry changes and the maturing of its database product line, which accounted for three-fourths of its revenue, Oracle moved into enterprise applications with its 2004 $10.3 billion purchase of PeopleSoft. From there, Oracle proceeded to acquire 55 firms, with more than one-half focused on strengthening the firm's software applications business. Revenues almost doubled by 2009 to $23 billion, growing through the 2008-2009 recession.
Oracle, like most successful software firms, generates substantial and sustainable cash flow as a result of the way in which business software is sold. Customers buy licenses to obtain the right to utilize a vendor's software and periodically renew the license in order to receive upgrades. Healthy cash flow minimized the need for Oracle to borrow. Consequently, it was able to sustain its acquisitions by borrowing and paying cash for companies rather than having to issue stock and potentially diluting existing shareholders.
In helping to satisfy its customers' challenges, Oracle has had substantial experience in streamlining other firms' supply chains and in reducing costs. For most software firms, the largest single cost is the cost of sales. Consequently, in acquiring other software firms, Oracle has been able to apply this experience to achieve substantial cost reduction by pruning unprofitable products and redundant overhead during the integration of the acquired firms. Oracle's existing overhead structure would then be used to support the additional revenue gained through acquisitions. Consequently, most of the additional revenue would fall to the bottom line.
For example, since acquiring Sun, Oracle has rationalized and consolidated Sun's manufacturing operations and substantially reduced the number of products the firm offers. Fewer products results in less administrative and support overhead. Furthermore, Oracle has introduced a "build to order" mentality rather than a "build to inventory" marketing approach. With a focus on "build to order," hardware is manufactured only when orders are received rather than for inventory in anticipation of future orders. By aligning production with actual orders, Oracle is able to reduce substantially the cost of carrying inventory; however, it does run the risk of lost sales from customers who need their orders satisfied immediately. Oracle has also pared down the number of suppliers in order to realize savings from volume purchase discounts. While lowering its cost position in this manner, Oracle has sought to distinguish itself from its competitors by being known as a full-service provider of integrated software solutions.
Prior to the Sun acquisition, Oracle's primary competitor in the enterprise software market was the German software giant SAP. However, the acquisition of Sun's vast hardware business pits Oracle for the first time against Hewlett-Packard, IBM, Dell Computer, and Cisco Systems, all of which have made acquisitions of software services companies in recent years, moving well beyond their traditional specialties in computers or networking equipment. In 2009, Cisco Systems diversified from its networking roots and began selling computer servers. Traditionally, Cisco had teamed with hardware vendors HP, Dell, and IBM. HP countered Cisco by investing more in its existing networking products and by acquiring the networking company 3Com for $2.7 billion in November 2009. HP had purchased EDS in 2008 for $13.8 billion in an effort to sell more equipment and services to customers often served by IBM. Each firm seems to be pursuing a "me too" strategy in which they can claim to their customers that they and they alone have all the capabilities to be an end-to-end service provider. Which firm is most successful in the long run may well be the one that successfully integrates their acquisitions the best.
Investors' concern about Oracle's strategy is that the frequent acquisitions make it difficult to measure how well the company is growing. With many of the acquisitions falling in the $5 million to $100 million range, relatively few of Oracle's acquisitions have been viewed as material for financial reporting purposes. Consequently, Oracle is not obligated to provide pro forma financial data about these acquisitions, and investors have found it difficult to ascertain the extent to which Oracle has grown organically (i.e., grown the revenue resulting from prior acquisitions) versus simply by acquiring new revenue streams. Ironically, in the short run, Oracle's acquisition binge has resulted in increased complexity as each new acquisition means more products must be integrated. The rapid revenue growth from acquisitions may indeed simply be masking underlying problems brought about by this growing complexity.
and Answers:
How would you characterize the Oracle business strategy (i.e.,cost leadership,differentiation,niche,or some combination of all three)? Explain your answer.

Question 78

Which of the following is true about integration planning? Without integration planning,integration is not likely to

A) Provide anticipated synergies
B) Proceed without significant disruption to the target business' operations
C) Proceed without significant disruption to the acquirer's operations
D) Be completed without experiencing substantial customer attrition
E) All of the above

Question 79

Case Study Short Essay Examination Questions
Cingular Acquires AT&T Wireless in a Record-Setting Cash Transaction
Cingular outbid Vodafone to acquire AT&T Wireless, the nation's third largest cellular telephone company, for $41 billion in cash plus $6 billion in assumed debt in February 2004. This represented the largest all-cash transaction in history. The combined companies, which surpass Verizon Wireless as the largest U.S. provider, have a network that covers the top 100 U.S. markets and span 49 of the 50 U.S. states. While Cingular's management seemed elated with their victory, investors soon began questioning the wisdom of the acquisition.
By entering the bidding at the last moment, Vodafone, an investor in Verizon Wireless, forced Cingular's parents, SBC Communications and BellSouth, to pay a 37 percent premium over their initial bid. By possibly paying too much, Cingular put itself at a major disadvantage in the U.S. cellular phone market. The merger did not close until October 26, 2004, due to the need to get regulatory and shareholder approvals. This gave Verizon, the industry leader in terms of operating margins, time to woo away customers from AT&T Wireless, which was already hemorrhaging a loss of subscribers because of poor customer service. By paying $11 billion more than its initial bid, Cingular would have to execute the integration, expected to take at least 18 months, flawlessly to make the merger pay for its shareholders.
With AT&T Wireless, Cingular would have a combined subscriber base of 46 million, as compared to Verizon Wireless's 37.5 million subscribers. Together, Cingular and Verizon control almost one half of the nation's 170 million wireless customers. The transaction gives SBC and BellSouth the opportunity to have a greater stake in the rapidly expanding wireless industry. Cingular was assuming it would be able to achieve substantial operating synergies and a reduction in capital outlays by melding AT&T Wireless's network into its own. Cingular expected to trim combined capital costs by $600 to $900 million in 2005 and $800 million to $1.2 billion annually thereafter. However, Cingular might feel pressure from Verizon Wireless, which was investing heavily in new mobile wireless services. If Cingular were forced to offer such services quickly, it might not be able to realize the reduction in projected capital outlays. Operational savings might be even more difficult to realize. Cingular expected to save $100 to $400 million in 2005, $500 to $800 million in 2006, and $1.2 billion in each successive year. However, in view of AT&T Wireless's continued loss of customers, Cingular might have to increase spending to improve customer service. To gain regulatory approval, Cingular agreed to sell assets in 13 markets in 11 states. The firm would have six months to sell the assets before a trustee appointed by the FCC would become responsible for disposing of the assets.
SBC and BellSouth, Cingular's parents, would have limited flexibility in financing new spending if it were required by Cingular. SBC and BellSouth each borrowed $10 billion to finance the transaction. With the added debt, S&P put SBC, BellSouth, and Cingular on credit watch, which often is a prelude in a downgrade of a firm's credit rating.
:
What are some of the reasons Cingular used cash rather than stock or some combination to acquire AT&T Wireless? Explain your answer.

Question 80

Which of the following is not true of the acquisition process?

A) It always follows a predictable sequence of steps.
B) It sometimes deviates from the sequence outlined in this chapter.
C) It involves a negotiation phase
D) It involves the development of a business plan
E) None of the above