The U.S. Securities Act of 1933 requires that all securities offered to the public must be
registered with the government. True or False
Answer:
The methodology for valuing cross-border transactions using discounted cash flow
analysis is substantially different from that employed when both the acquiring and
target firms are within the same country. True of False
Answer:
Alliances and joint ventures are likely to receive more intensive scrutiny by regulators
because of their tendency to be more anti-competitive than M&As. True or False
Answer:
Preferred stock exhibits some of the characteristics of long-term debt in that its
dividend is generally constant and preferred
stockholders are paid before common shareholders in the event the firm is liquidated.
True or False
Answer:
Like the recent transactions method, comparable company valuation estimates do not
require the addition of a purchase price premium. True or False
Answer:
An acquisition plan defines the objectives to be achieved by acquiring another firm,
management’s preferences as to how the acquisition process should be managed,
resources required, and the roles and responsibilities of those responsible for
implementing the plan. True or False
Answer:
Very few closely held businesses are family owned. True or False
Answer:
If a creditor is owed a large amount of money, it could become a major or even the
controlling shareholder in the reorganized firm. True or False
Answer:
The primary advantage of the cost of capital method is its relative computational
simplicity. True or False
Answer:
By law, corporate liquidation can only be conducted outside of the U.S. bankruptcy
court.
True or False
Answer:
Total consideration refers to what is to be paid for the target firm and usually only
consists of cash or stock, exclusively. True or False
Answer:
Because they can be potentially so lucrative to sellers, earn-outs are sometimes used to
close the gap between what the seller wants and what the buyer might be willing to pay.
True or False
Answer:
Under purchase price accounting, the excess of the purchase price paid over the book
value of equity of the target firm is assigned only to the tangible assets up to their fair
market value or to goodwill. True or False
Answer:
If the buyer believes that the seller has overstated revenue in a specific accounting
period, the buyer can reconstruct revenue by examining usage levels, in the same
accounting period, of the key inputs required to produce the product or service. True or
False
Answer:
Market-based valuation measures are meaningful only for firms with a stable earnings,
cash flow, or sales history. True or False
Answer:
Automatic stays are granted by the court only when the debtor files for bankruptcy.
True or False
Answer:
The seller’s preference for stock or cash will reflect their desire for liquidity, the
attractiveness of the acquirer’s shares, and whether the seller is organized as a joint
venture corporation. True or False
Answer:
In a reverse triangular merger, the acquirer retains the target’s tax attributes. True or
False
Answer:
A debt-for-equity swapoccurs when creditors surrender a portion of their claims on the
firm in exchange for an ownership position in the firm. True or False
Answer:
To qualify for a 1031 exchange, the property must be an investment property or one that
is used in a trade or business (e.g., a warehouse, store, or commercial office building).
True or False
Answer:
Whenever an investor accumulates 5% or more of a public company’s stock, it must
make a so-called 13(d) filing with the SEC. True or False
Answer:
For developed countries, such as Western Europe, the interest rate parity theory
provides a useful framework for estimating forward currency exchange rates (i.e.,
future spot exchange rates). True or False
Answer:
Subchapter S Corporation shareholders, and LLC members, are taxed at their personal
tax rates. True or False
Answer:
The Herfindahl-Hirschman Index is a measure of industry concentration used by U.S.
antitrust regulators in determining whether to accept or reject a proposed merger. True
or False
Answer:
The growth in LBO activity is not simply a U.S. phenomenon. Western Europe has seen
a veritable explosion in private equity investors taking companies private, reflecting
ongoing liberalization in the European Union as well as cheap financing and industry
consolidation. True or False
Answer:
The replacement cost approach to valuation estimates what it would cost to replace the
target firm’s assets at current market prices using professional appraisers less the
present value of the firm’s liabilities. True or False
Answer:
The primary shortcoming of industry concentration ratios is the frequent inability of
antitrust regulators to define accurately what constitutes an industry, the failure to
reflect ease of entry or exit, foreign competition, and the distribution of firm size. True
or false
Answer:
The NPV of an acquisition of a manufacturer operating at full capacity may have a
lower value than if the NPV is adjusted for a decision made at a later date to expand
capacity. If the additional capacity is fully utilized, the resulting higher level of future
cash flows may increase the acquisition’s NPV. In this instance, the value of the real
option to expand is the difference between the NPV with and without expansion. True
or False
Answer:
When a public company is subject to an LBO, it is said to be going private, because
more than 50% of the equity of the firm has been purchased by a small group of
investors and is no longer publicly traded. True or False
Answer:
Alliance agreements must be flexible enough to be revised when necessary and contain
mechanisms for breaking deadlocks, transferring ownership interests, and dealing with
the potential for termination. True or False
Answer:
Projecting future annual debt-to-equity ratios depends on knowing the firm’s debt
repayment schedules and projecting growth in the market value of shareholders’ equity.
True or False
Answer:
A spin-off may create shareholder wealth for all of the following reasons except for
a. Spin-offs are generally not taxable if properly structured
b. The spin-off’s management and board is independent of the former parent
c. Investors will be better able to value the spin-off
d. The cost of capital of the spin-off is generally higher than when it was part of the
parent
e. The spin-off may be subsequently acquired by another firm
Answer:
All of the following are true of reverse mergers except for.
a. May be used to take a private firm public
b. May represent an effective alternative to an IPO
c. Commonly use private equity placements for financing
d. Requires 2 years of audited financial statements to take a private firm public
e. A and B
Answer:
Prior to the Bankruptcy Abuse Protection and Consumer Protection Act of 2005
(BAPCPA), commercial enterprises used Chapter 11 Reorganization to continue
operating a business and to repay creditors through a court-approved plan of
reorganization. True or False
Answer:
Which of the following are generally not considered motives for mergers?
a. Desire to achieve economies of scale
b. Desire to achieve economies of scope
c. Desire to achieve antitrust regulatory approval
d. Strategic realignment
e. Desire to purchase undervalued assets
Answer:
Foreign direct investment in U.S. companies that may threaten national security is
regulated by which of the following:
a. Hart-Scott-Rodino Antitrust Improvements Act
b. Defense Production Act
c. Sherman Act
d. Federal Trade Commission Act
e. Clayton Act
Answer:
Around the announcement date of a merger, acquiring firm shareholders normally earn
a. 30% positive abnormal returns
b. 20% abnormal returns
c. Zero to slightly negative returns
d. 100% positive abnormal returns
e. 10% positive abnormal returns
Answer:
All of the following are true of tender offers except for
a. Tender offers consist only of offers of cash for target stock
b. Are generally considered an expensive takeover tactic
c. Are extended for a specific period of time
d. Are sometimes over subscribed
e. Must be filed with the SEC
Answer:
All of the following factors are considered by U.S. antitrust regulators except for
a. Market share
b. Potential adverse competitive effects
c. Barriers to entry
d. Purchase price paid for the target firm
e. Efficiencies created by the combination
Answer:
Which of the following is generally not true about leveraged buyouts?
a. Borrowed funds are used to pay for all or most of the purchase price, perhaps as
much as 90%
b. Tangible assets of the target firm are often used as collateral for loans.
c. Bank loans are often secured by the target firm’s intangible assets
d. Secured debt is often referred to as junk bond financing.
e. C and D only
Answer:
All of the following are generally true about creating new organizations except for
a. Learn from prior organizational strengths and weaknesses
b. Business needs should drive structure and not the reverse
c. Centralized organizations facilitate the pace of the integration
d. The structure employed during the integration must be the one used in the long-run
e. Senior managers should be given responsibility for selecting their own subordinates
Answer:
Which of the following government agencies can discipline firms with inappropriate
governance practices?
a. Securities and Exchange Commission
b. Federal Trade Commission
c. The Department of Justice
d. A & C only
e. A, B, & C
Answer:
The 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
Answer:
Which of the following is not true of mergers?
a. Liabilities and assets transfer automatically
b. May be subject to transfer taxes.
c. No minority shareholders remain.
d. May be time consuming due to need for shareholder approvals.
e. May have to pay dissenting shareholders appraised value of stock
Answer:
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.
Answer:
Which of the following represent advantages of the comparable companies’ valuation
method?
a. Uses the most accurate market-based valuation at a point in time
b. Valuations need to be adjusted to reflect control premiums
c. Adjusts for risk of future cash flows
d. Adjusts for the timing of future cash flows
e. A & B only
Answer:
A diligent buyer must ensure that the target is in compliance with the labyrinth of labor
and benefit laws, including those covering all of the following except for
a. Sexual harassment
b. Age discrimination,
c. National security
d. Drug testing
e. Wage and hour laws.
Answer:
Which of the following may be used as acquisition vehicles?
a. Partnership
b. Limited liability corporation
c. Corporate shell
d. ESOP
e. All of the above
Answer:
Which one of the following factors is not considered in calculating the firm’s cost of
capital?
a. cost of equity
b. interest rate on debt
c. the firm’s marginal tax rate
d. book value of debt and equity
e. the firm’s target debt to equity ratio
Answer:
Financially distressed firms often are characterized by all of the following except for:
a. Underinvestment in operations
b. Employee layoffs
c. High levels of research and development spending
d. Declining product quality
e. Slower payments to suppliers
Answer:
All 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
Answer:
A merger which is expected to produce synergy
a. Should be rejected because the synergy will dilute the combined firm’s earnings per
share
b. Should be rejected because the first year’s cash flow is negative
c. Has a negative NPV
d. Should be pursued because it creates value
e. Reduces target firm revenues
Answer:
The acquirer’s sales force sells very complex software solutions to its customers. The
target firm manufactures commodity hardware products. Customers of the two firms
sometimes buy both products. The benefits of integrating the sales force of both the
acquirer and target firms includes all of the following except for
a. Generates significant cost savings by eliminating duplicate sales representatives
b. Eliminates related sales support expenses
c. Minimizes potential customer confusion by enabling customers to deal with a single
sales representative
d. Facilitates communication of a consistent brand image
e. Makes product cross-selling more effective
Answer:
A firm decides to distribute all of the shares it holds in a subsidiary to its shareholders.
The distribution would be called a
a. Divestiture
b. Split-up
c. Spin-off
d. Split-up
e. Equity carveout
Answer:
All of the following are true about voluntary liquidations except for
a. They can be conducted outside of court in a private auction.
b. They can be done within the protection of the bankruptcy court.
c. Creditors normally prefer liquidations to be conducted by the bankruptcy court..
d. A trustee is assigned to sell the debtor firm’s assets as quickly as possible while
obtaining the best possible price.
e. If the insolvent firm is willing to accept liquidation and all creditors agree, legal
proceedings are not necessary.
Answer:
The scrupulous application of GAAP ensures both consistency in comparing one firm’s
financial
performance with another and the accuracy of the data. True or False
Answer:
Target is a wholly owned subsidiary of MegaCorp Inc. MegaCorp supplies a number of
services to target. Target sells some of its products to other MegaCorp subsidiaries.
Target also buys products from other MegaCorp subsidiaries that are used as inputs in
producing Target’s products. Which of the following adjustments should the acquirer
make to Target’s financial statements before valuing the firm?
a. Deduct the actual cost of services required by Target that are being supplied by the
parent without charge from target’s cost of sales.
b. Deduct the difference between the cost of products purchased from other MegaCorp
subsidiaries at below market prices and the actual market prices for such products from
Target’s cost of sales.
c. Deduct the difference between the cost of products purchased from other MegaCorp
subsidiaries at above market prices and the actual cost of such products if purchased
from other sources from Target’s cost of sales
d. A and B only.
e. None of the above.
Answer:
A holding company may be used as a post-closing organizational structure for all but
which of the following reasons?
a. A portion of the purchase price for the target firm included an earn-out
b. The target firm has a substantial amount of unknown liabilities
c. The acquired firm’s culture is very different from that of the acquiring firm
d. Profits from operations are not taxable
e. The transaction involves a cross border transaction
Answer:
Asset based lending is commonly used to finance leveraged buyouts. Which of the
following is not true about such financing?
a. The borrower generally pledges tangible assets as collateral.
b. Lenders look at the target firm’s assets as their primary protection.
c. Bank loans are secured frequently by receivables and inventory.
d. Loans maturing in more than one year are often referred to as term loans.
e. The target firm’s most liquid assets generally secure longer-term loans.
Answer:
All of the following questions are relevant for conducting a self-assessment or internal
analysis of the firm except for
a. What are the firm’s critical strengths and weaknesses as compared to the competition?
b. Can the firm’s critical strengths be easily duplicated and surpassed by the
competition?
c. Can the firm’s critical strengths be used to gain strategic advantage in the firm’s
chosen market?
d. What are the least important factors customers consider in making purchasing
decisions?
e. Can the firm’s key weaknesses be exploited by the competition?
Answer:
Tribune Company Acquires the Times Mirror Corporation
in a Tale of Corporate Intrigue
Background: Oh, What Tangled Webs We Weave. .
.
CEO Mark Willes had reason to be optimistic about the future. Operating profits had
grown at a double-digit rate, and earnings per share had grown at a 55% annual rate
between 1995 to 1999. Many shareholders appeared to be satisfied. However, some
were not. Although pleased with the improvement in profitability, they were concerned
about the long-term growth prospects of the firm. Reflecting this disenchantment,
Times Mirror’s largest shareholder, the Chandler family, was contemplating the sale of
the company and along with it the crown jewel Los Angeles Times. It had been assumed
for years that the Chandler family trusts made a sale of Times Mirror out of the
question. The Chandler’s super voting stock (i.e., stock with multiple voting rights)
allowed them to exert a disproportionate influence on corporate decisions. The
Chandler Trusts controlled more than two-thirds of voting shares, although the family
owned only about 28% of the total shares of the outstanding stock.
In May 1999 the Tribune Chairman John Madigan contacted Willes and made an offer
for the company, but Willes, with the help of his then-chief financial officer (CFO),
Thomas Unterman, made it clear to Madigan that the company was not for sale. What
Willes did not realize was that Unterman soon would be serving in a dual role as CFO
and financial adviser to the Chandlers and that he would eventually step down from his
position at Times Mirror to work directly for the family. In his dual role, he worked
without Willes’ knowledge to structure the deal with the Tribune.
Following months of secret negotiations, the Chicago-based Tribune Company and the
Times Mirror Corporation announced a merger of the two companies in a cash and
stock deal valued at approximately $7.2 billion, including $5.7 billion in equity and
$1.5 billion in assumed debt. The transaction, announced March 13, 2000, created a
media giant that has national reach and a major presence in 18 of the nation’s top 30
U.S. markets, including New York, Los Angeles, and Chicago. The combined company
has 22 television stations, four radio stations, and 11 daily newspapersincluding the Los
Angeles Times, the nation’s largest metropolitan daily newspaper and flagship of the
Times Mirror chain.
Transaction Terms: Tribune Shareholders Get Choice of Cash or Stock
The Tribune agreed to buy 48% of the outstanding Times Mirror stock, about 28 million
shares, through a tender offer. After completion of the tender offer, each remaining
Times Mirror share would be exchanged for 2.5 shares of Tribune stock. Under the
terms of the transaction, Times Mirror shareholders could elect to receive $95 in cash or
2.5 shares of Tribune common stock in exchange for each share of Times Mirror stock.
Holders of 27.2 million shares of Times Mirror stock elected to receive Tribune stock,
whereas holders of 10.6 million elected to receive cash. Because the amount of cash
offered in the merger was limited and the cash election was oversubscribed, Times
Mirror shareholders electing to receive cash actually received a combination of cash
and stock on a pro rata basis (Table 1).
Newspaper Advertising Revenues Continue to Shrink
Most U.S. newspapers are mired in the mature or declining phase of their product life
cycle. For the past half-century, newspapers have watched their portion of the
advertising market shrink because of increased competition from radio and television.
By the early 1990s, all major media began taking a significant hit in their advertising
revenue streams as businesses discovered that direct mail could target their message
more precisely. Moreover, consolidation among major retailers further reduced the size
of advertising dollar pool. The same has happened with numerous large supermarket
chain mergers. Newspaper advertising revenues also have been threatened by increasing
competition from advertising and editorial content delivered on the internet. Finally,
newspapers simply have become less attractive places to advertise as readership
continues to decline as a result of an aging population and new generations that do not
see newspapers as relevant.
Times Mirror: A Largely Traditional Business Model
As essentially a traditional newspaper, Times Mirror publishes five metropolitan and
two suburban daily newspapers, a variety of magazines, and professional information
such as flight maps for commercial airline pilots. The Los Angeles Times, a southern
California institution founded in 1881, is Times Mirror’s largest holding and operates
some two dozen expensive foreign news bureausmore than any other newspaper in the
country. The Los Angeles Times has more than 1200 Los Angeles Times reporters and
editors around the world (CNNfn, March 13, 2000).
Tribune Company Profile: The Face of New Media?
Unlike the Times Mirror, Tribune has built its strategy around four business groups:
broadcasting, publishing, education, and interactive. The Tribune is also an equity
investor in America Online and other leading internet companies, underscoring the
company’s commitment to new-media technologies. Applying leading edge new-media
technology has allowed the Tribune to transform they way it does business, and the
technology commitment creates the opportunity for future growth. The internet has
been the greatest driver for change, and the Tribune’s interactive business group
continues to focus on capitalizing on emerging Web technologies. Throughout the
company, new technologies have been applied aggressively to create new products,
improve existing products, and make operations more efficient. The Tribune’s
non-newspaper revenues accounted for more than half of its earnings by 2000.
Anticipated Synergy
Cost Savings: Opportunities Abound
Cost savings are expected because of the closing of selected foreign and domestic news
bureaus, a reduction in the cost of newsprint through greater volume purchases, the
closing of the Times Mirror corporate headquarters, and elimination of corporate staff.
Such savings are expected to reach $200 million per year (Table 2).
Revenue: Great Potential . . . But Is It Achievable?
The combined companies will have a major presence in 18 of the nation’s top 30 U.S.
advertising markets, including New York, Los Angeles, and Chicago. The combined
companies provide unprecedented opportunities for advertisers to reach major market
consumers in any media formbroadcast, newspapers, or interactive. In addition, the
combined companies will benefit consumers by giving them rich and diverse choices
for obtaining the news, information, and entertainment they want anytime, anywhere.
These factors provide an increased ability to capture national advertising in the most
important U.S. population centers. The significantly greater breadth of the combined
firm’s geographic coverage is expected to boost advertising revenues from about 3% to
6% annually.
Integration Challenges: Cultural Warfare?
Based on the current, traditional culture found at theLos Angeles Times and other Times
Mirror properties, integration following the merger was likely to be slow and painful.
Concerns among journalists about spreading their talents thin across three or four
mediaprint, television, online, and radioin the course of a day’s work raised the stress
level. Although the Tribune has been able to make the transition to a largely multimedia
company more rapidly than the more traditional newspapers, it has been costly. For
example, development losses in 1999 were $3035 million at Chicagotribune.com and an
estimated $45 million in 2000. The bleeding was expected to continue for some time
and to constitute a major distraction for the management of the new company.
Financial Analysis
The present values of the Tribune, Times Mirror, and the combined firms are $8.5
billion, $2.4 billion, and $16.5 billion, respectively; the estimated present value of
synergy is $5.6 billion (Table 3). This assumes that pretax cost savings are phased in as
follows: $25 million in 2000, $100 million in 2001, and $200 million thereafter. The
cost savings are net of all expenses related to realizing such savings such as severance,
lease buyouts, and legal fees. Table 4 describes how the initial offer price could have
been determined and the postmerger distribution of ownership between Times Mirror
and Tribune shareholders.
Epilogue
Only time will tell if actual returns to shareholders in the combined Tribune and Times
Mirror company exceed the expected financial returns provided in the valuation models
in this case study. Times Mirror shareholders earned a substantial 102% purchase price
premium over the value of their shares on the day the merger was announced. Some
portion of those undoubtedly “cashed out” of their investment following receipt of the
new Tribune shares. However, for those former Times Mirror shareholders continuing
to hold their Tribune stock and for Tribune shareholders of record on the day the
transaction closed, it is unclear if the transaction made good economic sense.
Discussion Questions:
1) In your judgment, did it make good strategic sense to combine the Tribune and Times
Mirror
corporations? Why? / Why not?
2) Using the Merger Evaluation table given in the case, determine the estimated equity
values of Tribune, Times Mirror and the combined firms. Why is long-term debt
deducted from the total present value estimates in order to obtain equity value?
3) Despite the merger having closed in mid-2000, the full effects of synergy are not
expected until 2002. Why? What factors could account for the delay?
4) The estimated equity value for the Times Mirror Corporation on the day the merger
was announced was about $2.8 billion. Moreover, as shown in the offer price evaluation
table, the equity value estimated using discounted cash flow analysis is given has $2.4
billion. Why is the minimum offer price shown as $2.8 billion rather than the lower
$2.4 billion figure? How is the maximum offer price determined in the Offer Price
Evaluation Table? How much of the estimated synergy value generated by combining
the two businesses is being transferred to the Times Mirror shareholders? Why?
5) Does the Times Mirror-Tribune Corporation merger create value? If so, how much?
What percentage of this value goes to Times Mirror shareholders and what percentage
to Tribune shareholders? Why?
Answer:
Poorly executed integration often results in high employee turnover. The costs of such
turnover include which of the following?
a. Declining morale among those that remain
b. Retraining costs
c. Declining productivity
d. Deteriorating customer service
e. All of the above
Answer:
Corporate shells have value because they enable the buyer to
a. Avoid the cost of going public
b. Exploit intangible value such as brand name
c. A and D only
d. Provide limited liability
e. A, B, and D only
Answer:
All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act
except for
a. Acquisitions involving firms of a certain size cannot be completed until certain
information is supplied to the FTC
b. Only the acquiring firm is required to file with the FTC
c. An acquiring firm may agree to divest certain businesses following the completion of
a transaction in order to get regulatory approval.
d. The Act is intended to give regulators time to determine whether the proposed
combination is anti-competitive.
e. The FTC may file a lawsuit to block a proposed transaction
Answer:
Which of the following are examples of intangible assets that may have value to the
acquiring company?
a. Patents
b. Trade names
c. Customer lists and relationships
d. Covenants not to compete
e. All of the above
Answer:
Intangible assets often constitute a substantial source of value to the acquiring firm.
Which of the following are not generally considered intangible assets?
a. Patents and technical know-how
b. Warranty and contingent claims
c. Trademarks and customer lists
d. Covenants not to compete and franchises
e. Copyrights and software
Answer: