Deck 5: Implementation: Search Through Closing: Phases 310 of the Acquisition Process

Question 1

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

Answer 1

True

Question 2

Material adverse change clauses (MACs) are a means for the parties to the contract to determine who will bear the risk of adverse events that occur between the signing of an agreement and the closing. MACs are frequently not stated in dollar terms. How might MACs affect the negotiating strategies of the parties to the agreement during the period between signing and closing?

Answer 2

Buyers typically will use these clauses to drive the acquisition price down to exploit changing market conditions or adverse events affecting the target firm. By not defining the magnitude of the change in dollar terms, the buyer has more leeway to invoke the clause. A seller may also want to avoid quantifying a MAC in order to have greater flexibility to argue that an event does not constitute a material change. In both instances, the final purchase price is likely to be lower than that designated in the agreement of purchase and sale.

Question 3

Find a transaction currently in the news. Speculate as to what criteria the buyer may have employed to identify
the target company as an attractive takeover candidate. Be specific.

Answer 3

The answer depends on the firms selected by the students.

Question 4

Identify at least three criteria that might be used to select a manufacturing firm as a potential acquisition candidate. A financial services firm? A high technology firm?

Question 5

are the potential threats to Google's current vision and business strategy?

Question 6

corporate vision can be described narrowly or broadly. Google's website describes its mission/vision as organizing the world's information and making it universally accessible and useful. What does this mission statement tell you about what Google believes its core competence to be and what markets needs it is targeting? How useful do you find this mission in setting Google's strategy? (Hint: Discuss the advantages and disadvantages of a broad versus narrow vision statement for a corporation.) If you were the CEO of Google, what might your vision for its future be? Explain the rationale for your answer.

Question 7

is pre-closing integration planning important?

Question 8

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 9

the context of M&A, synergy represents the incremental cash flows generated by combining two businesses. Identify the potential synergies you believe could be realized in Google's acquisition of Nest that could be achieved by leveraging other Google products and services. Be specific. Identify synergies Google is not likely to realize by operating the firm as a wholly-owned largely autonomous subsidiary. Speculate as to why Google has chosen to operate Nest in this manner.

Question 10

What are the differences between total consideration, total purchase price/enterprise value, and net purchase price? How are these different concepts used?

Question 11

acquiring firms perform due diligence.

Question 12

Despite disturbing discoveries during due diligence, Mattel acquired The Learning Company (TLC), a leading developer of software for toys, in a stock-for-stock transaction valued at $3.5 billion on May 13, 1999. Mattel had determined that TLC's receivables were overstated, a $50 million licensing deal had been prematurely put on the balance sheet, and that TLC's brands were becoming outdated. TLC also had substantially exaggerated the amount of money put into research and development for new software products. Nevertheless, driven by the appeal of rapidly becoming a big player in the children's software market, Mattel closed on the transaction aware that TLC's cash flows were overstated. After restructuring charges associated with the acquisition, Mattel's consolidated 1999 net loss was $82.4 million on sales of $5.5 billion. Mattel's stock fell by more than 35 percent during 1999 to end the year at about $14 per share. What could Mattel have done to better protect its interests? Be specific.

Question 13

In mid-2008, Fresenius, a German manufacturer of dialysis equipment, acquired APP Pharmaceuticals for $4.6 billion. The deal includes an earn-out, under which Fresenius will pay as much as $970 million, if APP reaches certain future financial targets. What is the purpose of the earn-out? How does it affect the buyer and seller?

Question 14

Describe Google's investment strategy? What are the factors driving their investment strategy? How might shareholders eventually react to this strategy? How might this investment strategy hurt the firm long-term?

Question 15

What is the purpose of the buyer and seller performing due diligence?

Question 16

Describe what you believe to be Google's business strategy? Would you describe their strategy as cost leadership, differentiation, focus or a hybrid strategy? Explain your answer. To what extent do you believe it is driven by changes in the firm's external environment? To what extent have factors internal to the firm driven Google's business strategy?

Question 17

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 18

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

Question 19

Identify alternative ways to make ''first contact'' with a potential acquisition target. Why is
confidentiality important? Under what circumstances might a potential acquirer make its intentions public?

Question 20

In a rush to complete its purchase of health software producer HBO, McKesson did not perform adequate due
diligence but rather relied on representations and warranties in the agreement of sale and purchase. Within six
months following closing, McKesson announced that it would have to reduce revenue by $327 million and net
income by $191.5 million for the past 3 fiscal years to correct for accounting irregularities. The company's
stock fell by 48 percent. Assume HBO's financial statements had been declared to be in accordance with GAAP,
would McKesson have been justified in believing that HBO's revenue and profit figures were 100 percent
accurate?

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

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 27

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

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

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 33

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 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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

Question 42

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 43

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

Question 44

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 45

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

Question 46

Fees charged by investment bankers are never negotiable.

Question 47

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 48

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 49

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 50

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

Question 51

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 52

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

Question 53

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 54

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 55

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 56

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 57

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

Question 58

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

Question 59

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 60

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

Question 61

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 62

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 63

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

Question 64

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 65

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 66

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 67

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 68

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 69

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 70

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

Question 71

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 72

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 73

A data room is a method commonly used by sellers to limit buyer due diligence.

Question 74

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

Question 75

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 76

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 77

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 78

Total consideration is a legal term referring to the composition of what is paid for the target company and can
consist of cash, stock, debt or some combination of all three.

Question 79

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 80

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