Question 1

Place the following acquisition steps in chronological order, starting with the earliest:
I.Sign letter of intent
II.Final sale agreement
III.Ratification
IV.Main due diligence
V.Confidentiality agreement

Accepted Answer

The correct chronological order for acquisition steps typically starts with signing a confidentiality agreement (V) to protect sensitive information. Next, parties express their preliminary commitment through a letter of intent (I), followed by main due diligence (IV) to thoroughly examine the business details. The final sale agreement (II) is then drafted and signed, leading to ratification (III), which finalizes the transaction.

Question 2

Which of the following is NOT one of the benefits of obtaining a toehold?

Accepted Answer

A toehold does not eliminate competition from other potential acquirers. In fact, it may attract competition as other companies may see the potential of the target company and try to enter into a bidding war. The other three options are benefits of obtaining a toehold.

Question 3

Which of the following is FALSE about the friendly acquisition process?

Accepted Answer

The no-shop clause actually prohibits the target firm from seeking other potential acquirers or engaging in negotiations with other parties while the acquisition is in progress. It does not restrict the acquiring firm's ability to look at other targets.

Question 4

Which of the following is a document describing a target firm's important characteristics to potential acquirers?

Accepted Answer

An offering memorandum, also known as an information memorandum or a confidential information memorandum, is a document that provides detailed information about a target firm's financial and operational performance, management team, industry trends, and other important characteristics to potential acquirers. It is typically used in the M&A process to help potential acquirers make informed decisions about whether to pursue a deal with the target firm. A letter of intent is a non-binding agreement that outlines the key terms of a proposed transaction, while a prospectus is a document used to sell securities to the public. "Break form" is not a relevant term in M&A.

Question 5

When an acquiring firm bypasses current management and makes a direct offer to purchase shares from the shareholders, this action is termed a:

Accepted Answer

When an acquiring firm bypasses current management and makes a direct offer to purchase shares from the shareholders, this action is termed a tender offer. A hostile takeover, on the other hand, involves directly approaching the shareholders with an offer to buy the company without the consent or cooperation of current management. A leveraged buy-out (LBO) involves using borrowed funds to acquire a company, usually with the intention of taking it private. A corporate buy-out is a generic term that can refer to any type of acquisition or merger between two companies.

Question 6

Use the following statements to answer this question:
I.A letter of intent is a preliminary sale agreement.
II.The break fee is the amount paid after the diligence process is complete.

Accepted Answer

The answer of Use the following statements to answer this...

Question 7

Use the following statements to answer this question:
I.The friendly acquisition process involves investigating only the value of the firm using public information, not confidential information.
II.The data room provides specific information about the acquiring firm's valuation process.

Accepted Answer

I is incorrect because the friendly acquisition process often involves due diligence, where confidential information is shared under a confidentiality agreement, not just public information. II is incorrect because the data room typically contains information about the target firm, not the acquiring firm's valuation process.

Question 8

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:

Accepted Answer

A white knight is a friendly third party who has been sought out by a company in order to avoid a hostile takeover. A golden parachute is a contract clause that guarantees high compensation to top executives if the company is taken over. A poison pill is a strategy that makes the company less attractive to a potential acquirer by making the acquisition too expensive or difficult. An LBO is a type of acquisition where a company is purchased with a significant amount of borrowed money. None of these options specifically fit the requirement of seeking a friendly acquirer.

Question 9

Which of the following best describes a no-shop clause?

Accepted Answer

A no-shop clause is a provision in a merger or acquisition agreement that prevents the target company from seeking other buyers or negotiating with other parties after accepting an offer from the acquiring firm. It is designed to ensure that the deal goes through as planned and that the acquiring firm's due diligence and investment in the acquisition are not wasted. Therefore, option A accurately describes a no-shop clause, while options B and C are incorrect.

Question 10

Which of the following is NOT a purpose of a break fee?

Accepted Answer

The purpose of a break fee is primarily to deter potential acquirers from backing out of negotiations, by creating a financial penalty for doing so. It can also compensate the original acquirer for costs incurred during negotiations or reward them for generating competing bids. The break fee does not directly signal the high value of the target firm to the original acquiring firm.

Question 11

A large amount of trading following a hostile tender offer is a good sign for the acquirer because:

Accepted Answer

A large amount of trading following a hostile tender offer indicates that regular investors are selling their shares to specialists, who are likely to be arbitrageurs or hedge funds. This suggests that the acquirer will have a higher chance of successfully completing the offer, as the shares are moving into the hands of investors who are more interested in making a profit from the takeover than in holding onto the shares for the long-term.

Question 12

______ involve issuing special securities that entitle the holders to unusual rights and privileges if the issuing firm becomes the subject of a takeover bid.

Accepted Answer

Poison pills are a common defense mechanism used by companies to thwart hostile takeovers. The issuing firm will create special securities that, if triggered by a takeover bid, will give the holders unusual rights and privileges, effectively making the takeover much more expensive and difficult. For example, these securities might give the holder the right to purchase more shares at a discounted price or the right to vote on certain issues. This makes it less attractive for a potential acquiring company to pursue the takeover, as it would become much more expensive and complicated.

Question 13

Use the following statements to answer this question:
I.Each province is responsible for the mergers and acquisitions within its own jurisdiction.
II.The Ontario Securities Commission regulates most of the public deals in Canada.

Accepted Answer

I is correct because each province has its own securities regulator that is responsible for regulating mergers and acquisitions within its own jurisdiction. II is also correct because the Ontario Securities Commission (OSC) is the primary regulator of public deals in Canada.

Question 14

Arbitrageurs predict what happens in takeovers and attempt to earn profits by:

Accepted Answer

Arbitrageurs typically buy shares of the target firm after a tender offer announcement and sell them later for a higher price once the acquisition is completed. This is known as merger arbitrage and can result in profits if the acquisition goes through as expected. Selling acquiring firm shares before the tender offer announcement and buying them later at a lower price (short-selling) is also a strategy that can be used, but it carries more risk. Charging commissions for advice is not part of the arbitrage strategy itself, but rather a potential source of income for firms or individuals providing advisory services.

Question 15

Which of the following is NOT a reason why a takeover can be exempted from the Ontario Securities Act?

Accepted Answer

The Ontario Securities Act does not exempt a takeover on the basis that the acquirer is buying shares from fewer than five shareholders and paying a premium of less than 50 percent over the market price. This specific condition is not a recognized exemption under the Act.

Question 16

Which of the following is NOT an area of potential mutual benefit in a friendly acquisition transaction

Accepted Answer

Avoiding the use of incentive agreements does not represent a mutual benefit in friendly acquisition transactions. Incentive agreements are often used to align the interests of the management teams of the companies involved, thereby reducing agency costs and ensuring that both parties work towards the success of the acquisition.

Question 17

Which of the following actions precedes a firm from "obtaining a toehold":

Accepted Answer

Obtaining a toehold refers to the acquisition of a small percentage of the target firm's shares in the open market to gain a foothold for a potential takeover bid. Typically, a firm would purchase up to 10% of the target firm's shares to obtain a toehold. Therefore, choice C is the best option as it mentions purchasing up to 10% of the target firm's shares in the open market.

Question 18

Why is the two-part tender offer illegal in Canada?

Accepted Answer

The answer of Why is the two-part tender offer illegal...

Question 19

A no-shop clause is a promise from:

Accepted Answer

A no-shop clause is a promise from the potential target not to seek another buyer, thus demonstrating its commitment to completing the transaction. This clause is designed to prevent a bidding war and ensure that the potential acquirer has exclusive negotiating rights.

Question 20

Which one of the following is an example of a poison pill?

Accepted Answer

Selling new shares to existing shareholders at a discount, known as a "poison pill," dilutes the value of the firm and makes it less attractive to the acquiring company. This strategy is commonly used to deter hostile takeovers.

Quiz 15: Mergers and Acquisitions

Place the following acquisition steps in chronological order, starting with the earliest: I.Sign letter of intent II.Final sale agreement III.Ratification IV.Main due diligence V.Confidentiality agreement