Question 1

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

Accepted Answer

The answer of Earnouts tend to shift risk from the...

Question 2

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.

Accepted Answer

Bidders often use a mix of cash and non-cash payment options, such as stocks, bonds, or other securities, to make their bids more attractive to shareholders. This allows shareholders to choose the form of payment that best meets their needs and preferences.

Question 3

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.

Accepted Answer

Offering multiple payment options is likely to encourage more target firm shareholders to participate in the tender offer as it provides flexibility and choice. However, there may be some administrative and logistical challenges associated with managing multiple payment options.

Question 4

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.

Accepted Answer

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

Question 5

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.

Accepted Answer

The value of an earnout payment can be subject to a cap to limit the risk for the buyer. However, the cap should be set at a reasonable level so as not to discourage the seller from working hard to exceed the payment threshold.

Question 6

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.

Accepted Answer

Balance sheet adjustments are more commonly used in stock purchases when there is a significant elapsed time between the agreement on price and the actual closing date, to account for changes in the company's financial position during this period.

Question 7

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.

Accepted Answer

The answer of A fixed exchange collar agreement may involve...

Question 8

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.

Accepted Answer

The answer of Buyers and sellers generally view purchase price...

Question 9

Which of the following may be used as acquisition vehicles?

Accepted Answer

All of the options listed can be used as acquisition vehicles. A partnership can allow for joint ownership and management of the acquired company, a limited liability corporation provides liability protection for the owners and can also allow for flexibility in tax treatment, a corporate shell can be used to acquire a company without taking on its liabilities or obligations, and an ESOP (Employee Stock Ownership Plan) allows employees to acquire ownership of the company through stock purchase or allocation. Thus, all options are valid as acquisition vehicles.

Question 10

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

Accepted Answer

Stock purchases can involve an exchange of cash, debt securities, or a combination of cash and stock in addition to acquiring stock.

Question 11

In a statutory merger,

Accepted Answer

In a statutory merger, all known and unknown assets and liabilities are automatically transferred to the buyer except for those the seller agrees to retain. This is known as the "all-or-nothing" rule, which means that everything owned by the target company is automatically owned by the buyer after the merger. However, the seller can negotiate for certain assets or liabilities to be excluded from the transfer. The total consideration received by the target's shareholders is not automatically taxable, as the tax implications would depend on various factors such as the nature of the consideration received, the tax laws of the relevant jurisdictions, and the structure of the transaction.

Question 12

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.

Accepted Answer

Convertible preferred stock allows sellers to receive dividends and also convert the stock into common shares if the price of the acquirer's stock increases, providing upside potential.

Question 13

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.

Accepted Answer

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

Question 14

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.

Accepted Answer

When an acquirer buys most of the operating assets of a target firm, the target is generally left with few or no assets to continue operating independently. Therefore, the target is forced to liquidate its remaining assets and pay the after-tax proceeds to its shareholders.

Question 15

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

Accepted Answer

Using stock as a form of payment involves determining the value of the stock, which can fluctuate, and agreeing on the number of shares to be exchanged. This can be more complex than using cash, which has a set value and can be easily exchanged.

Question 16

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

Accepted Answer

Offering sellers consulting contracts to defer a portion of the purchase price is not inherently illegal. It can be a legitimate business strategy for structuring deals, especially in mergers and acquisitions, as long as it complies with applicable laws and tax regulations.

Question 17

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.

Accepted Answer

Both the acquirer and target boards of directors have a fiduciary responsibility to act in the best interest of their shareholders and to ensure that the terms of any merger or acquisition are fair and reasonable. If there is a material change in the value of the offer or in the target's operations, they have a duty to renegotiate the terms to ensure that shareholders are adequately compensated.

Question 18

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.

Accepted Answer

Collar agreements do indeed often provide for adjustments to the exchange ratio based on the acquirer's share price at a certain point in time. This allows for some protection for both the acquirer and the target company in case of market fluctuations.

Question 19

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

Accepted Answer

All of the above should be considered important components of the deal structuring process. The legal structure of the acquiring and selling entities can have a significant impact on the transaction, including liability and tax implications. Post closing organization needs to be considered to ensure a smooth transition and integration. The tax status of the transaction can also have a significant impact on the cost and benefits of the deal. Finally, deciding what is being purchased, i.e., stock or assets, can also have significant legal and financial implications.

Question 20

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

Accepted Answer

One of the characteristics of a joint venture corporation is that profits and losses are typically divided proportionately to the ownership shares of the partners. Option A states that profits and losses can be divided disproportionally, which is not a typical characteristic of a JV corporation.

Quiz 11: Structuring the Deal: