Question 1

Answer: Bidders use merger arbitrage as a way of lowering their takeover costs.

Accepted Answer

Merger arbitrage is a strategy used by investors to profit from the price difference between the current market price of a target company's stock and the price that a proposed acquisition values the company at. It does not involve bidders or affect their takeover costs directly.

Question 2

A letter of intent:
A) Is legally required in all U.S. deals
B) Sets forth more detailed terms than a term sheet
C) Is more common in closely held acquisitions
D) None of the above

Accepted Answer

B

Question 3

A reverse merger takes longer to complete than a typical merger.

Accepted Answer

A reverse merger is generally faster and less complex than a typical merger or an initial public offering (IPO) because it involves a private company merging into a public shell company, thereby bypassing many of the lengthy regulatory and financial processes associated with traditional mergers and IPOs.

Question 4

Targets can use an asset sell-off to avoid legitimate liabilities.

Accepted Answer

Asset sell-offs by targets are typically scrutinized under legal frameworks to ensure they do not evade legitimate liabilities, such as debts or legal responsibilities.

Question 5

Pursuant to Basic v. Levinson:
A) Targets must immediately announce all overtures from potential bidders
B) Bidders must announce all overtures to targets
C) Targets may not release false information on deal progress
D) None of the above

Accepted Answer

Basic v. Levinson established that companies must not release false or misleading information regarding potential mergers or acquisitions, as it could affect stock prices and investor decisions.

Question 6

With an SPAC bidding shareholders are quite familiar with the target to be acquired when they purchase the SPAC's shares in its IPO.

Accepted Answer

When investors buy shares in a SPAC (Special Purpose Acquisition Company) during its IPO, they generally do not know the specific target company the SPAC intends to acquire, as the SPAC is created solely to raise capital through an IPO to acquire an existing company, which is identified after the IPO.

Question 7

In risk arbitrage the following is true:
A) Investors may expect the bidder's stock price to fall
B) Investors may expect the target's stock price to rise
C) Both a and b
D) Neither a or b

Accepted Answer

Risk arbitrage involves betting on the outcome of mergers and acquisitions. Investors often expect the bidder's stock price to fall due to the costs associated with the acquisition, and they expect the target's stock price to rise as the offer price is typically at a premium to the market price.

Question 8

Contingent value rights may provide some guarantee if the acquirer's shares fall below some level.

Accepted Answer

Contingent value rights (CVRs) are financial instruments that can provide additional compensation to shareholders if certain conditions, such as the acquirer's share price falling below a specified level, are met after a merger or acquisition.

Question 9

The merger between Exxon and Mobil is an example of:
A) Vertical merger
B) Horizontal merger
C) Conglomerate merger
D) Reverse merger

Accepted Answer

The merger between Exxon and Mobil, both of which were oil companies, is an example of a horizontal merger because it involved two companies in the same industry combining.

Question 10

Answer: In a short-form merger:
A) Bidders only submit a two-page filing with the SE
B) Deals usually close within two weeks
C) The standard stockholder approval process can be bypassed
D) A 51% approval by shareholders is required

Accepted Answer

In a short-form merger, the standard stockholder approval process can be bypassed if a parent company owns a significant percentage of the subsidiary, allowing the merger to proceed without the usual vote from minority shareholders.

Question 11

Following Smith v. Van Gorkom:
A) Targets must immediately announce all overtures from potential bidders
B) Directors are more likely to seek outside fairness opinions
C) We have seen more use of debt financing
D) None of the above

Accepted Answer

Following Smith v. Van Gorkom, directors are more likely to seek outside fairness opinions to ensure they meet their fiduciary duties by adequately evaluating the fairness of a transaction, thus avoiding potential legal liabilities for making uninformed decisions.

Question 12

Chartejee and Yan's research has showed:
A) Mergers don't pay
B) Contingent value rights are used when the parties have asymmetric information
C) Conglomerate mergers are more likely to yield negative returns

Accepted Answer

Contingent value rights (CVRs) are often used in mergers and acquisitions as a way to bridge valuation gaps between parties, especially when there is asymmetric information. CVRs provide payments to the sellers if certain predefined conditions are met post-merger, thus addressing the concerns related to information asymmetry.

Question 13

Under a typical Lehman formula dealmakers may earn 5% of the first $1 million of the takeover price.

Accepted Answer

The Lehman formula, often used in investment banking for calculating the commission on large transactions, typically starts with a 5% fee on the first $1 million of the transaction value.

Question 14

When a company sells off all its assets, it falls under the regulation of the Investment Company Act of 1940.

Accepted Answer

The answer of When a company sells off all its...

Question 15

Private equity firms are frequent LBO dealmakers.

Accepted Answer

Private equity firms often engage in leveraged buyout (LBO) transactions as a core part of their investment strategy, using borrowed funds to acquire companies.

Question 16

SPACs have not been popular since the 1990s.

Accepted Answer

SPACs (Special Purpose Acquisition Companies) have gained significant popularity in recent years, especially around 2020 and 2021, as a way for companies to go public with less regulatory scrutiny compared to traditional IPOs.

Question 17

In a de facto merger:
A) Bidders may be able to avoid all the target's liabilities
B) Bidders own at least 30% of the target's stock
C) Only California law applies
D) The bidder is considered to have acquired the target even if no formal acquisition took place True or False Questions

Accepted Answer

In a de facto merger, the bidder is considered to have acquired the target even if no formal acquisition process took place. This concept recognizes the substance over the form of the transaction, where the acquiring company effectively takes over another company, including its operations, assets, and liabilities, without going through the traditional merger process.

Question 18

In a freeze-out:
A) Minority shareholders cannot hold up a merger
B) Certain members of management are prevented from entering company facilities
C) Targets are prevented from receiving a takeover premium
D) None of the above

Accepted Answer

In a freeze-out (also known as a squeeze-out), minority shareholders are forced to sell their shares, often in the context of a merger or acquisition, preventing them from holding up the process. This allows the majority shareholder(s) or acquiring company to consolidate ownership without the consent of minority shareholders.

Question 19

One of the advantages of an asset acquisition is that it may not be necessary to solicit approval from its own shareholders.

Accepted Answer

In an asset acquisition, a company purchases the assets of another company, and typically, this process does not require approval from the acquiring company's shareholders, unlike a stock purchase or merger which often does.

Quiz 1: Introduction

Answer: Bidders use merger arbitrage as a way of lowering their takeover costs.

A letter of intent:

A reverse merger takes longer to complete than a typical merger.

Targets can use an asset sell-off to avoid legitimate liabilities.

Pursuant to Basic v. Levinson:

With an SPAC bidding shareholders are quite familiar with the target to be acquired when they purchase the SPAC's shares in its IPO.

In risk arbitrage the following is true:

Contingent value rights may provide some guarantee if the acquirer's shares fall below some level.

The merger between Exxon and Mobil is an example of:

Answer: In a short-form merger:

Following Smith v. Van Gorkom:

Chartejee and Yan's research has showed:

Under a typical Lehman formula dealmakers may earn 5% of the first $1 million of the takeover price.

When a company sells off all its assets, it falls under the regulation of the Investment Company Act of 1940.

Private equity firms are frequent LBO dealmakers.

SPACs have not been popular since the 1990s.

In a de facto merger:

In a freeze-out:

One of the advantages of an asset acquisition is that it may not be necessary to solicit approval from its own shareholders.