TERM 6 – MERGER & ACQUISITION – FINAL EXAM
All Questions 1-12 carry equal marks (5 marks each)
SEC – A
(Answer the Qs 1 – 5 with respect to the case.
Answers should not exceed 5 lines for each questions)
BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology
believed to be crucial to the successful implementation of BigCo’s business strategy. Upstart
is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years
of age. HiTech has a reputation for developing highly practical solutions to complex technical
problems and getting the resulting products to market very rapidly. HiTech employees are
accustomed to a very informal work environment with highly flexible hours and compensation
schemes. Decision-making tends to be fast and casual, without the rigorous review process
often found in larger firms. This culture is quite different from BigCo’s more highly structured
and disciplined environment. Moreover, BigCo’s decision making tends to be highly
centralized.
While Upstart’s stock is publicly traded, its six co-founders and senior managers jointly
own about 60 percent of the outstanding stock. In the four years since the firm went public,
Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although
they desire to sell the firm, the co-founders are interested in remaining with the firm in
important management positions after the transaction has closed. They also expect to continue
to have substantial input in both daily operating as well as strategic decisions.
Upstart competes in an industry that is only tangentially related to BigCo’s core business.
Because BigCo’s senior management believes they are somewhat unfamiliar with the
competitive dynamics of Upstart’s industry, BigCo has decided to create a new corporation,
New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose
core technical competencies are more related to Upstart’s than those of BigCo. Both BigCo
and HiTech are interested in preserving Upstart’s highly innovative culture. Therefore, they
agreed during negotiations to operate Upstart as an independent operating unit of New
Horizons. During negotiations, both parties agreed to divest one of Upstart’s product lines not
considered critical to New Horizon’s long-term strategy immediately following closing.
New Horizons issued stock through an initial public offering. While the co-founders are
interested in exchanging their stock for New Horizon’s shares, the remaining Upstart
shareholders are leery about the long-term growth potential of New Horizons and demand cash
in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the
co–founders’ shares and to purchase the remaining shares for cash. Once the tender offer was
completed, New Horizons owned 100 percent of Upstart’s outstanding shares.
Questions:
1. To acquire Upstart Corporation which is the acquisition vehicle used? Why was this
legal structure used?
2. What is the form of payment? Why was it used?
3. What was the form of acquisition? How does this form of acquisition protect the
acquiring company’s rights to HiTech’s proprietary technology?
4. How would the use of purchase accounting affect the balance sheets of the combined
companies?
5. Was the transaction non-taxable, partially taxable, or wholly taxable to HiTech
shareholders? Why?
SEC – B
(Answer the Qs 6 – 9 with respect to the case.
Answers should not exceed 5 lines for each questions)
