The acquisition of a coal mining business by a steel manufacturing company is an
example of a vertical merger. True or False
Answer:
All materials in a proxy contest must be filed with the SEC before they are sent to
shareholders.
True or False
Answer:
A firm’s credit rating is a poor measure of a firm’s default risk. True or False
Answer:
A private corporation is a firm whose securities are not registered with state or federal
authorities. True or False
Answer:
An analysis of markets should involve current and potential customers, as well as
current and potential competitors, but it should exclude suppliers. True or False
Answer:
Core competencies should be defined as narrowly as possible. True or False
Answer:
Rapid integration helps to realize the planned synergies and may contribute to a higher
present value for the merger or acquisition. True or False
Answer:
The constant growth valuation model is primarily applicable to firms in mature markets.
True or False
Answer:
Liquidation or breakup value is the projected price of the firm’s assets sold separately in
liquidating or breaking up the firm.
True or False
Answer:
Managing highly diverse and complex portfolios of businesses is both time consuming
and distracting. This is particularly true when the businesses are in largely related
industries. True or False
Answer:
Transactions may be partially taxable if the target shareholders receive some nonequity
consideration, such as cash or debt, in addition to the acquirer’s stock. True or False
Answer:
Under-performing operating units of large companies are often excellent candidates for
LBOs. True or False
Answer:
Pre-closing integration planning is likely to be easier in friendly than in hostile
transactions. True or False
Answer:
The acquirer may reduce the total cost of an acquisition by deferring some portion of
the purchase price. True or False
Answer:
Once the LBO has been consummated, the firm’s perceived ability to meet its
obligations to current debt and preferred stockholders often deteriorates because the
firm takes on a substantial amount of new debt. The firm’s pre-LBO debt and preferred
stock may be revalued in the market by investors to reflect this higher perceived risk,
resulting in a significant reduction in the market value of both debt and preferred equity
owned by pre-LBO investors. True or False
Answer:
Chapter 11 reorganization may involve a corporation, sole proprietorship, or
partnership. True or False
Answer:
Employee benefit levels in private firms are almost always mandated by state or federal
law and therefore cannot be changed. True or False
Answer:
The enterprise to EBITDA method of valuation can be compared more readily among
firms exhibiting different levels of leverage than for other measures of earnings, since
the numerator represents the total value of the firm and the denominator measures
earnings before interest. True or False
Answer:
A diversification strategy involves a firm moving into only those businesses which are
unrelated to the firm’s current core business. True or False
Answer:
Valuation of privately held businesses may involve substantial adjustment of the
discount or capitalization rate. True or False
Answer:
If the acquisition is structured as an asset purchase because the target is only a division
of a foreign company or because the seller agrees to sell assets, the U.S. buyer of the
assets must decide whether to acquire them directly or to use a new or existing foreign
company to do so. The choice will affect future U.S. and non-U.S. tax consequences.
True or False
Answer:
Although NOLs represent a potential source of value, their use must be monitored
carefully to realize the full value resulting from the potential for deferring income taxes.
True or False
Answer:
The projected cash flow of firms in highly cyclical industries can be distorted
depending on where the firm is in the business cycle. True or False
Answer:
The divesting firm is required to recognize a gain or loss for financial reporting
purposes equal to the difference between the book value of the consideration received
for the divested operation and its fair value. True or False
Answer:
Brokers or finders should never be used in the search process. True or False.
Answer:
Under a consent decree, the regulatory authorities agree to approve a proposed
transaction if the parties involved agree to take certain actions following closing. True
or False
Answer:
A type C reorganization is a stock-for-assets reorganization with the requirement that at
least 50% of the FMV of the target’s assets, as well as the assumption of certain
specified liabilities, are acquired solely in exchange for voting stock. True or False
Answer:
Tracking stocks are often created to give investors a pure play investment opportunity
in one of the parent’s subsidiaries. True or False
Answer:
The Sherman Act makes illegal all contracts, combinations, and conspiracies that
“unreasonably” restrain trade. True or False
Answer:
Potential sources of value rarely include factors not recorded on a firm’s balance sheet.
True or False
Answer:
Tender offers apply only for share for share exchanges. True or False
Answer:
The primary advantage of a holding company structure is the potential leverage that can
be achieved by gaining effective control of other companies’ assets at a lower overall
cost than would be required if the firm were to acquire 100 percent of the target’s
outstanding stock. True or False
Answer:
For non-rated firms, the analyst may estimate the pretax cost of debt for an individual
firm by comparing debt-to-equity or total capital ratios, interest coverage ratios, and
operating margins with those of similar rated firms. True or False
Answer:
Federal securities and antitrust laws are the only laws affecting corporate takeovers.
Other laws usually have little impact. True or False
Answer:
Accounts receivable represent an undesirable form of collateral from the lender’s point
of view because they are often illiquid. True or False
Answer:
Divestitures, spin-offs, equity carve-outs, split-ups, and bust-ups are commonly used
strategies to exit businesses. True or False
Answer:
What is the core competence underlying Honda Corporation product offering?
a. Product distribution
b. Marketing
c. Internal combustion engine design
d. Exterior design
e. Organizational structure
Answer:
British Petroleum and Russia’s Rosneft Swap Shares
Extending its already close ties with Russia, British Petroleum PLC announced an
agreement to exchange shares with Russia’s largest oil company, OAO Rosneft, on
January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft
also announced the formation of a JV to develop three massive offshore exploration
blocks that Rosneft owns in northern Russia. The two firms said they will jointly
explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4
and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV
will be two-thirds owned by Rosneft, with the remainder owned by BP.
Reflecting Europe’s escalating dependence on Russia for an increasing share of its
energy usage, particularly for clean-burning natural gas, the agreement is backed by
Britain’s prime minister, David Cameron, and Russia’s prime minister, Vladimir Putin.
Russia holds one-fifth of the world’s proven reserves of natural gas, and, by some
estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the
world.
The deal comes in the wake of BP’s sale of assets to raise funds to cover the costs of the
Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40
billion. Rosneft, which had announced in late 2010 that it was seeking a partner for
exploiting its Arctic leases, indicated that BP’s experience in dealing with such
problems gives it an edge over other potential partners. Rosneft also regards BP’s
deep-water drilling technology and experience as cutting edge. BP’s expertise received
another vote of confidence when Australia granted BP licenses to initiate extensive
drilling activity off its coast several days after the Rosneft announcement.
The share exchange gives Rosneft a 5% interest in BP’s voting shares, making it BP’s
single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft.
Each stake is valued at about $7.8 billion. Both firms agreed to hold each other’s equity
for at least two years before selling any stock. BP’s shares currently pay a dividend
about twice that of Rosneft’s. BP and Rosneft have stated publicly that they believe
investors have significantly undervalued their firms. The Russian government has a
particularly strong interest in seeing the value of its holdings appreciate, since it
announced plans to privatize a number of largely state-owned enterprises, including
Rosneft, in 2014 in order to raise funds.
At the time of the announcement, BP’s market capitalization was about $154 billion.
With almost 90% of its shares owned by the Russian government and Sherbank,
Russia’s biggest retail savings bank, the firm’s stock trading in public markets tends to
be limited and not reflective of Rosneft’s true value. However, the terms of the share
exchange imply a market capitalization for Rosneft of about $81 billion.
The transaction represents the first time there has been a cross-shareholding between
major international oil firms and a major government-owned national oil company.
Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases
but merely the right to develop them. This structure is similar to Russian oil company
Gazrpom’s agreement with France’s Total SA and Norway’s Statoil for the development
of the Shtokman gas field in early 2008.
Rosneft became Russia’s leading extraction and refining company after purchasing
assets of former privately owned oil giant Yukos at state-sponsored auctions, in which
the global community decried what appeared to be the Russian government
expropriation of the privately owned assets. In 2006, Rosneft conducted one of the
largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading
System and the London Stock Exchange. With the shares priced at $7.55 each, the
offering raised about $10.7 billion. Most of the proceeds went to the Russian
government. BP began its relationship with Rosneft by buying $1 billion in shares in
the firm’s initial public offering, equivalent to 1.3%. Thus, the recent agreement brings
BP’s ownership interest in Rosneft to 10.8%.
Previous attempts to invest in Russia and to create partnerships between Russian state
oil companies and Western oil firms have failed due to outright expropriation by the
Russian government or heavy-handed tactics employed by certain Russian billionaires
(so-called oligarchs) with close ties to the Russian government. For example, Russian
officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to
state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which
each was to contribute assets valued at $1.5 billion, but it was later dissolved due to
disagreements between BP and large Russian investors. TNK-BP, BP’s 50
percentowned JV with a group of Russian billionaire business people, has also had a
troubled history. The JV that contributes a quarter of BP’s global production and nearly
a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of
its control. BP chief executive Bob Dudley had served as chief executive of that JV for
five years until he was expelled by BP’s Russian partners during the disagreement.
On news of the agreement, BP’s partners in the TNK-BP JV stated that BP had not
notified them adequately and that the Rosneft deal violated their “right of first refusal”
as stated in the JV agreement. The partners were successful in getting a court injunction
in the United Kingdom to block the implementation of the JV in February 2011.
TNK-BP at the time of this writing is considering a legal claim against BP for damages
of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its
main vehicle for investment in Russia. These developments raise serious questions
about the longer-term viability of the BP-Rosneft JV.
Discussion Questions:
1) Speculate as to the purpose of the share swap between BP and Resnoft.
2) What is the purpose of the 2-year lockup period during which neither partner can sell
its stock? How might the lock-up period impact the value of each firm’s holdings?
3) Would you expect the share exchange to be dilutive to BP shareholders in the
short-run? In the long-run. Explain your answer.
4) Why would you expect the publicly traded Rosneft shares not to reflect the true value
of the
firm?
5) How would you estimate the market capitalization for Rosneft based on the terms of
the share exchange? Show your work.
6) How can BP best protect their interests in the JV with Rosneft in the highly uncertain
political
and economic environment of Russia?
Answer:
Which of the following is not true of purchase accounting?
a. Total purchase price paid for the target firm is reflected on the books of the combined
companies
b. All liabilities are transferred at the NPV of their future cash payments
c. The cost of the acquired entity becomes the new basis for recording the acquirer’s
investment in the assets of the target company.
d. Goodwill equals the difference between the purchase price paid for the target firm
and the book value of acquired assets.
e. Goodwill must be reduced if it is believed to be impaired.
Answer:
The board of directors of a large conglomerate has decided that the investment
opportunities for the firm are limited and that greater value could be created for the
shareholders if the firm were divided into four independent businesses. Following
approval by shareholders, the firm executed this strategy which is best described as a
a. Split-up
b. Split-off
c. Spin-off
d. Equity carveout
e. Reverse merger
Answer:
Which of the following is generally not considered a characteristic of a financial buyer?
a. Focus on short-to-intermediate returns
b. Concentrate on actions that enhance the ability of target firm’s ability to generate
cash flow to satisfy debt service requirements
c. Intend to own the business for very long periods of time
d. Manage the business to maximize return to equity investors
e. All of the above
Answer:
Post-merger financial performance of the new firm is often about the same as which of
the following?
a. Joint ventures
b. Strategic alliances
c. Licenses
d. Minority investments
e. All of the above
Answer:
A good mission statement should be
a. Very broadly defined
b. Very narrowly defined
c. Reference the firm’s targeted markets, product or service offering, distribution
channels and management’s core operating beliefs
d. Describe only the purpose of the corporation
e. A and C only
Answer:
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
Answer:
Nokia’s Gamble to Dominate the Smartphone Market Falters
The ultimate success or failure of any M&A transaction to satisfy expectations often is
heavily dependent on the answer to a simple question. Was the justification for buying
the target firm based on a sound business strategy? No matter how bold, innovative, or
precedent-setting a bad strategy is, it is still a bad strategy.
In a bold move that is reminiscent of the rollout of Linux, Nokia, a Finnish phone
handset manufacturer, announced in mid-2008 that it had reached an agreement to
acquire Symbian, its supplier of smartphone operating system software.1 Nokia also
announced its intention to give away Symbian’s software for free in response to
Google’s decision in December 2008 to offer its Android operating system at no cost to
handset makers.
This switch from a model in which developers had to pay a license fee to create devices
using the Symbian operating system software to a free (open source) model was
designed to supercharge the introduction of innovative handheld products that relied on
Symbian software. Any individual or firm can use and modify the Symbian code for
any purpose for free. In doing so, Nokia is hoping that a wave of new products using
Symbian software would blunt the growth of Apple’s proprietary system and Google’s
open source Android system.
Nokia is seeking to establish an industry standard based on the Symbian software, using
it as a platform for providing online services to smartphone users, such as music and
photo sharing. According to Forrester Research, the market for such services is
expected to reach $92 billion in 2012 (almost twice its size when Nokia acquired
Symbian), with an increasing portion of these services delivered via smartphones.
In its vision for the future, Nokia seems to be positioning itself as the premier supplier
of online services to the smartphone market. Its business strategy or model is to
dominate the smartphone market with handsets that rely on the Symbian operating
system. Nokia hopes to exploit economies of scale by spreading any fixed cost
associated with online services over an expanding customer base. Such fixed expenses
could include a requirement by content service providers that Nokia pay a minimum
level of royalties in addition to royalties that vary with usage.
Similarly, the development cost incurred by service providers can be defrayed by
selling into a growing customer base. The implementation strategy involved the
acquisition of the leading supplier of handset operating systems and subsequently to
give away the Symbian software free. The success or failure of this vision, business
strategy, and implementation strategy depends on whether Symbian can do a better job
of recruiting other handset makers, service providers, and consumers than Nokia’s
competitors.
The strategy to date seems to be unraveling. At the time of the acquisition, Symbian
supplied almost 60 percent of the operating system software for smartphones
worldwide. Market researcher Ovum estimates that the firm’s global market share fell to
less than 50 percent in 2010 and predicts the figure could decline to one-third by 2015,
reflecting the growing popularity of Google’s Android software.2 Android has had
excellent success in the U.S. market, leapfrogging over Apple’s 24 percent share to
capture 27 percent of the smartphone market, according to the NPD Group.
Research-In-Motion (RIM), the maker of the Blackberry, remained the U.S. market
share leader in 2010 at 33 percent.
Dell Computer’s Drive to Eliminate the Middleman
Historically, personal computers were sold either through a direct sales force to
businesses (e.g., IBM), through company-owned stores (e.g., Gateway), or through
independent retail outlets and distributors to both businesses and consumers (e.g.,
CompUSA). Retail chains and distributors constituted a large percentage of the
customer base of other PC manufacturers such as Compaq and Gateway. Consequently,
most PC manufacturers were saddled with the large overhead expense associated with a
direct sales force, a chain of company-owned stores, a demanding and complex
distribution chain contributing a substantial percentage of revenue, or some
combination of all three.
Michael Dell, the founder of Dell Computer, saw an opportunity to take cost out of the
distribution of PCs by circumventing the distributors and selling directly to the end
user. Dell Computer introduced a dramatically new business model for selling personal
computers directly to consumers. By starting with this model when the firm was
formed, Dell did not have to worry about being in direct competition with its
distribution chain.
Dell has changed the basis of competition in the PC industry not only by shifting much
of its direct order business to the internet but also by introducing made-to-order
personal computers. Businesses and consumers can specify online the features and
functions of a PC and pay by credit card. Dell assembles the PC only after the order is
processed and the customer’s credit card has been validated. This has the effect of
increasing customer choice and convenience as well as dramatically reducing Dell’s
costs of carrying inventory.
The Dell business model has evolved into one focused relentlessly on improving
efficiency. The Dell model includes setting up super-efficient factories, keeping parts in
inventory for only a few days before they are used, and selling computers based on
common industry standards like Intel chips and Microsoft operating systems. By its
nature, the Dell model requires aggressive expansion. As growth in the PC market
slowed in the late 1990s, the personal computer became a commodity. Since computers
had become so powerful, there was little need for consumers to upgrade to more
powerful machines. To offset growth in its primary market, Dell undertook a furious
strategy to extend the Dell brand name into related electronics markets. The firm started
to sell “low end” servers to companies, networking gear, PDAs, portable digital music
players, an online music store, flat-panel televisions, and printers. In late 2002, the firm
began to sell computers through the retail middleman Costco.
Michael Dell believes that every product should be profitable from the outset. His focus
on operating profit margins has left little for product innovation. Dell’s budget for new
product R&D has averaged 1.3% of revenues in recent years, about one-fifth of what
IBM and Hewlett-Packard spend. Rather than be viewed as a product innovator, Dell is
pursuing a “fast follower” strategy in which the firm focuses on taking what is currently
highly popular and making it better and cheaper than anyone else. While not a product
innovator, Dell has succeeded in process innovation. The company has more than 550
business process patents, for everything from a method of using wireless networks in
factories to a configuration of manufacturing stations that is four times as productive as
a standard assembly line.
Dell’s expansion seems to be focused on its industry lead in process engineering and
innovation resulting in super efficient factories. The current strategy seems to be to
move into commodity markets, with standardized technology that is widely available.
In such markets, the firm can apply its finely honed skills in discipline, speed, and
efficiency. For markets that are becoming more commodity-like but still require some
R&D, Dell takes on partners. For example, in the printer market, Dell is applying its
brand name to Lexmark printers. In storage products, Dell has paired up with EMC
Corp. to sell co-branded storage machines. As these markets become more
commodity-like, Dell will take over manufacturing of these products. This is what
happened at the end of 2003 when it took over production of low-end storage
production from EMC. In doing so, Dell was able to cut production costs by 25%.
The success of Michael Dell’s business model is evident. Its share of the global PC
market in 2003 topped 16%; the company accounts for more than one-third of the
hand-held device market. At the end of 2003, Dell’s price-to earnings ratio exceeded
IBM, Microsoft, Wal-Mart, and General Electric. Dell has had some setbacks. In 2001,
the firm scrapped a plan to enter the mobile-phone market; in 2002 Dell wrote off its
only major acquisition, a storage-technology company purchased in 1999 for $340
million. Dell also withdrew from the high-end storage business, because it decided its
technology was not ready for the market.
Discussion Questions:
1) Who are Dell’s primary customers? Current and potential competitors? Suppliers?
How would you assess Dell’s bargaining power with respect to its customers and
suppliers? What are Dell’s strengths/weaknesses versus it current competitors?
2) In your opinion, what market need(s) was Dell able to satisfy better than his
competition?
3) How would you characterize Dell’s original business strategy (i.e., cost leadership,
differentiation, niche, or some combination? Give examples to illustrate your
conclusions. How has Dell’s strategy evolved over time? Give examples to illustrate
your answer.
4) How would you describe Dell’s current implementation strategy (i.e., solo venture,
shared growth/shared control, merger/acquisition, or some combination)? On what core
competencies is Michael Dell relying to make this strategy work?
Answer:
Which of the following represent commonly used techniques for integrating corporate
cultures?
a. Employees are encouraged to share the same overall goals
b. “Best practices” in one department are employed in other departments
c. Multiple businesses share the same service such as the legal department
d. Employees are co-located
e. All of the above
Answer:
According to the management entrenchment theory,
a. Management resistance to takeover attempts is an attempt to increase the proposed
purchase price premium
b. Management resistance to takeover attempts is an attempt to extend their longevity
with the target firm
c. Shareholders tend to benefit when management resists takeover attempts
d. Management attempts to maximize shareholder value
e. Describes the primary reason takeover targets resist takeover bids
Answer:
Which of the following is not true of a forward triangular cash merger?
a. It is considered by the IRS as a purchase of target assets.
b. It is generally followed by a liquidation of the target firm.
c. Target shareholders must recognize a gain or loss as if they had sold their shares.
d. The target’s tax attributes carry over to the buyer.
e. Taxes are paid by the target firm on any gain on the sale of its assets and again by
shareholders who receive a liquidating dividend.
Answer:
The enterprise value to EBITDA method is useful because more firms are likely to have
negative earnings than negative EBITDA. True or False
Answer:
Which of the following is true only of a consolidation?
a. More than two firms are involved in the combination
b. One party to the combination disappears
c. All parties to the combination disappear
d. The entity resulting from the combination assumes ownership of the assets and
liabilities of the acquiring firm only.
e. One company becomes a wholly owned subsidiary of the other.
Answer:
Which of the following is not true of the financing plan?
a. It is rarely affected by the discovery during due diligence of target assets not required
to operate the business.
b. It may include both stock and debt.
c. It may include a combination of stock, debt, and cash.
d. It serves as a reality check on the buyer.
e. None of the above.
Answer:
Which of the following is not considered a tax-free reorganization?
a. Type A transactions
b. Type B transactions
c. Type C Transactions
d. Forward triangular merger
e. Cash purchase of assets
Answer:
All of the following are true about experience curves except for
a. Applicable primarily to differentiation strategies
b. Applicable primarily to cost leadership strategies
c. Reflect declining average unit costs due to increasing accumulated production levels
d. Reflect both economies of scale and the introduction of more efficient production
methods as output increases
e. Often found in commodity-type industries
Answer:
Which of the following is not true about attractive LBO candidates?
a. Most assets tend to be encumbered
b. Have low leverage
c. Have predictable cash flow
d. Have assets that are not critical to the ongoing operation of the firm
e. Are in mature, moderately growing industries
Answer:
Using the cost of capital method to value an LBO involves all of the following steps
except for which of the following?
a. Adjusting the discount rate to reflect changing risk.
b. Adding the present value of future tax savings to the present value of annual free cash
flows to equity.
c. Calculating a terminal value.
d. Projecting annual debt-to-equity ratios.
e. Projecting annual cash flows.
Answer:
Cadbury Buys Adams in a Sweet Deal
Cadbury Schweppes PLC is a confectionary and beverage company headquartered in
London, England. Cadbury Schweppes (Cadbury) acquired Adams Inc., a chewing gum
manufacturer, from Pfizer Corporation in 2003 for $4.2 billion. The acquisition enables
Cadbury to gain access to new markets, especially in Latin America. The purchase also
catapulted Cadbury to the top spot in the global confectionary market. Adams’s major
brands are in the fastest growing segments of the global market and complement
Cadbury’s existing chocolate business.
Cadbury bought 100 percent of the business of the Adams Division of Pfizer. The
decision whether to transfer assets or stock depended on which gave Cadbury and
Pfizer optimum tax advantages. Furthermore, many employees had positions with both
the parent and the operating unit. In addition, the parent supplied numerous support
services for its subsidiary. While normal in the purchase of a unit of a larger company,
this purchase was complicated by Adams operating in 40 countries representing 40
legal jurisdictions.
Cadbury and Pfizer representatives agreed on a single asset and stock sale and purchase
agreement (i.e., the master agreement), which transferred the relevant U.S. assets and
stock in Adams’s subsidiaries to Cadbury. The master agreement contained certain
overarching terms, including closing conditions, representations and warranties,
covenants, and indemnification clauses that applied to all legal jurisdictions. However,
the master agreement required Pfizer or Adams to enter into separate local
“implementation” agreements. This was done to complete the transfer of either Adams’s
assets in non-U.S. jurisdictions or shares in non-U.S. Adams’s subsidiaries to local
Cadbury subsidiaries depending on which provided the most favorable tax advantages
and where necessary to accommodate differences in local legal conditions. The parties
entered into more than 20 such agreements to transfer asset and stock ownership. All
the agreements used the master agreement as a template. Written in English, the various
contracts were governed by New York law, the state in which Pfizer is headquartered,
except where there was a requirement that the law governing the contract be that of the
local country.
A team of 5 Cadbury in-house lawyers and 40 outside attorneys conducted the legal
review. Cadbury staff members carried out separate environmental due diligence
exercises, because Adams had long-standing assets in the form of plant and machinery
in each of 22 factories in 18 countries. Cadbury filed with antitrust regulators in a
number of European and non-European countries, including Germany, the Czech
Republic, Turkey, Greece, Italy, Portugal, Spain, the United Kingdom, South Africa,
and Brazil. The requirements varied in each jurisdiction. It was necessary to obtain
regulatory clearance before closing in countries where prenotification was required. The
master agreement was conditional on antitrust regulatory approval in the United States,
Canada, and Mexico, Adams’s largest geographic markets.
Cadbury wanted all 12,900 Adams employees across 40 countries to transfer to it with
the business. However, because not all of them were fully dedicated Adams employees
(i.e., some had both Adams and Pfizer functions), it was necessary to determine on a
site-by-site basis which employees should remain with Pfizer and which should transfer
to Cadbury. Partly due to the global complexity of the deal, the preclosing and closing
meetings lasted three full days and nights. The closing checklist was 129 pages long
(Birkett, 2003).
Discussion Questions
1) Discuss how cross-border transactions complicate the negotiation of the agreement
of purchase and sale as well as due diligence. Be specific.
2) How does the complexity described in your answer to the first question add to the
potential risk of the transaction? Be specific.
3 ) What conditions would you, as a buyer, suggest be included in the agreement of
purchase and sale that might minimize the potential risk mentioned in your answer to
the second question? Be specific.
Answer:
The financing plan is included in which phase of the acquisition process?
a. The development of the business plan
b. The negotiation phase
c. The integration planning phase
d. The development of the acquisition plan
e. None of the above
Answer:
For financial reporting purposes, goodwill resulting from an acquisition
a. Must equal the fair market value of the target firm’s assets
b. Immediately impacts the acquirer’s profits
c. Is expensed over 20 years
d. Is reviewed annually or whenever there is reason to believe it has lost value and
amortized to the extent its value has declined
e. Never affects the profits of the acquirer
Answer: