Chapter 23

Question 1

What does M&A stand for?

Answer 1

Merger and Acquisition

Question 2

What are the two main methods of payment in M&A?

Answer 2

• Cash
• Stock of the acquirer

Question 3

In M&A, what is the notation for the acquiring firm?

Answer 3

A

Question 4

In M&A, what is the value of the target firm denoted as?

Answer 4

VT

Question 5

What is the perceived value of the target firm by the acquirer?

Answer 5

VT*

Question 6

What does VT’ represent in M&A?

Answer 6

Cost A is willing to pay to get T

Question 7

What is the formula for M&A synergy?

Answer 7

∆V = VT* - VT

Question 8

What is the merger premium formula in M&A?

Answer 8

VT’ - VT

Question 9

What is the NPV formula in M&A?

Answer 9

NPV = VT* - VT’

Question 10

What is the value of the merged firm represented as?

Answer 10

VAT = VA + VT + ∆V

Question 11

True or False: Synergy is affected by the method of payment.

Answer 11

False

Question 12

True or False: The value of the merged firm is affected by the method of payment.

Answer 12

False

Question 13

What happens to original shareholders of the target firm with cash payment?

Answer 13

They do not remain in the merged firm

Question 14

With stock payment, how many times are original shareholders of the target firm paid?

Answer 14

Twice

Question 15

What is a targeted repurchase also known as?

Answer 15

Greenmail

Question 16

What is the purpose of standstill agreements?

Answer 16

Stop the corporate raider from further action for a period of time

Question 17

What do poison pills (share rights plans) do?

Answer 17

Trigger rights plan that splits shares of other shareholders when a hostile takeover occurs

Question 18

What is a leveraged buyout?

Answer 18

A third party issues junk bonds to take the target firm private

Question 19

What is a management buyout?

Answer 19

Management team issues junk bonds to take the target firm private

Question 20

What is a white knight in M&A?

Answer 20

A friend, who is a large firm, takes over the firm before a corporate raider

Question 21

What are golden parachutes in the context of M&A?

Answer 21

Generous packages offered to target firm’s top management to abandon the firm

Question 22

What does the term ‘crown jewels’ refer to in M&A defensive tactics?

Answer 22

Selling off the best asset to a competitor

Question 23

What is the principal-agent relationship?

Answer 23

Managers are agents of shareholders; shareholders are principals of managers

Question 24

What is the core issue of corporate governance?

Answer 24

How to motivate managers to serve the best interest of shareholders

Question 25

What can cause an agency problem in a firm?

Answer 25

Managers do not maximize the firm value

Question 26

True or False: Hostile takeovers can be considered as a means of governance.

Answer 26

True

Question 27

Why might a firm become a target of a hostile takeover?

Answer 27

The firm is severely undervalued

Question 28

What can lead to a firm being severely undervalued?

Answer 28

* Bad luck * Bad economy * Agency problem

Question 29

What happens to the target's agency problem after a takeover?

Answer 29

It is solved when incompetent managers are fired

Question 30

What is the typical outcome for shareholders of target companies in a takeover?

Answer 30

They tend to earn excess returns

Question 31

Shareholders of target companies gain more in a _______ than in a straight takeover.

Answer 31

tender offer

Question 32

What is a potential reason that shareholders of bidding firms do not earn much excess return?

Answer 32

Management may not be acting in stockholders’ best interest

Question 33

What is a competitive takeover market?

Answer 33

A market where multiple bidders may drive up prices without new information