Question 1

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 2

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

Accepted Answer

This is a common structure for Lehman formula deals, although the percentage and threshold amounts may vary.

Question 3

Private equity firms are frequent LBO dealmakers.

Accepted Answer

Private equity firms are known for their expertise in leveraged buyouts (LBOs), making them frequent dealmakers in this area.

Question 4

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 Exxon and Mobil merger is an example of a horizontal merger because two companies in the same industry and at the same level of production and distribution merged together.

Question 5

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 6

LBOs are:
A)Also called going-private transactions
B)Financed primarily with debt
C)Have not been that common since the 1980s
D)All of the above
E)Both a and b
F)Both b and c

Accepted Answer

LBOs or Leveraged Buyouts refer to transactions in which a company is acquired using a significant amount of debt. Such transactions are usually structured in a way where the assets of the target company are used as collateral for the debt. LBOs are often called going-private transactions because they usually involve a private equity firm acquiring a publicly-traded company and taking it private. Although LBOs were quite popular during the 1980s, they have continued to be a common means of financing acquisitions of companies even today.

Question 7

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 that they have conducted a thorough analysis of a proposed transaction and have acted in good faith and with informed judgment. However, there is no requirement for targets to immediately announce all overtures from potential bidders or for there to be more use of debt financing.

Question 8

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

Pursuant to Basic v Levinson, targets may not release false information on deal progress, but there is no requirement for immediate announcement of all overtures from potential bidders, nor for bidders to announce all overtures to targets.

Question 9

SPACs have not been popular since the 1990s.

Accepted Answer

SPACs have recently become popular again, particularly in 2020 and 2021 with many high-profile companies going public through SPAC mergers.

Question 10

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

While SPACs typically disclose a general business focus or industry sector, the specific target to be acquired is not identified until after the IPO. Shareholders are generally not familiar with the specific target when they purchase the SPAC's shares.

Question 11

In a de facto merger:
A)Bidders may be able to avoid all of 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

Accepted Answer

In a de facto merger, the bidder is treated as if they have acquired the target, even if no formal acquisition took place. The other choices are incorrect. Bidders do not need to own a specific percentage of the target's stock for a de facto merger to occur, and California law may not necessarily be the only applicable law. While bidders may be able to avoid some of the target's liabilities in a de facto merger, they cannot avoid all of them.

Question 12

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 and b

Accepted Answer

In risk arbitrage, investors take advantage of price discrepancies between a bidder's and a target's securities during a merger or acquisition. The price discrepancies arise due to the uncertainty regarding the outcome of the transaction. If the market believes that the deal will be successful, the target's stock price may rise, and the bidder's stock price may fall. On the other hand, if the market believes that the deal will not be successful, the target's stock price may fall, and the bidder's stock price may rise. Therefore, both options A and B may be true in risk arbitrage.

Question 13

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 14

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

Accepted Answer

The regulation of the Investment Company Act of 1940 applies to companies that are primarily engaged in the business of investing, reinvesting, and trading in securities. Selling off all of its assets would likely make a company fall under this definition and therefore be subject to the Act's regulations.

Question 15

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

Accepted Answer

The answer of A letter of intent:
A)Is legally required in...

Question 16

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

Accepted Answer

A reverse merger typically takes less time to complete than a typical merger because the process involves a private company merging with a publicly traded company, which already has a pre-existing structure and is subject to regulatory requirements.

Question 17

In a short-form merger:
A)Bidders only submit a two-page filing with the SEC
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

Short-form mergers allow the standard stockholder approval process to be bypassed, meaning that a 51% approval by shareholders is not required. Instead, the majority shareholder(s) can approve the merger without seeking approval from other shareholders. This typically speeds up the merger process and reduces costs. The SEC filing and closing timeline may vary, but are not relevant to the best choice.

Question 18

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, the acquiring company purchases specific assets and liabilities of the target company, rather than the entire company itself. As a result, it may not be necessary to solicit approval from the target company's shareholders, as they are not directly affected by the transaction. However, certain regulatory approvals may still be required.

Question 19

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

Accepted Answer

Merger arbitrage is typically used by investors, not bidders, to profit from the price discrepancies in the stocks of companies involved in a merger or acquisition.

Question 20

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

Accepted Answer

Contingent value rights (CVRs) are a type of financial instrument that entitles the holder to receive additional consideration in the form of cash or securities if certain triggering events occur. Typically, these events are related to the performance of a specific asset or business that is being acquired. In the case of a decline in the acquirer's shares, CVRs may provide some protection as they offer additional upside potential if the shares recover in value.

Quiz 1: Introduction

In a freeze-out:

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

Private equity firms are frequent LBO dealmakers.

The merger between Exxon and Mobil is an example of:

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

LBOs are:

Following Smith v.Van Gorkom:

Pursuant to Basic v Levinson:

SPACs have not been popular since the 1990s.

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 a de facto merger:

In risk arbitrage the following is true:

Chartejee and Yan's research has showed:

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

A letter of intent:

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

In a short-form merger:

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

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

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