Series 79 - M&A Cards Flashcards
(111 cards)
1
Q
What is the primary role of a sell-side adviser?
A
- perform a comprehensive valuation analysis
- populates the data room and discusses final bids and valuation with buy-side adviser
2
Q
How does a sell-side adviser reduce execution risk?
A
-sell-side adviser can reduce M&A execution risk by offering stapled financing to financial sponsor buyers
3
Q
If a sell-side banker is executing due diligence on a potential buyer, what will they do/not do?
A
- They will NOT generally interview company’s customers
- They will meet with auditors, consultants and company management
4
Q
A buy side adviser hired by a client to increase its presence in a certain industry would likely be tasked with ____:
A
doing a valuation on each of the targets in that space
5
Q
When determining an appropriate valuation, what will a sell side adviser generally not be concerned with?
A
a company’s dividend payout ratio
6
Q
What is 338(h)(10) and how is it used?
A
- it is used for equity purchases
- the buyer treats a transaction as an equity purchase for GAAP purposes and an asset purchase for tax purposes
- benefit is that the buyer can increase (step up) the tax basis of the assets to their purchase price - the higher cost basis benefits the acquirer by creating higher depreciation expenses
7
Q
What is very important in an LBO and what valuation methodologies are used/not used?
A
- IRR is particularly important in an LBO
- valuations used include precedent transactions, DCF, and comparable company analysis
- banker will not look at debt/capitalization ratios
8
Q
What kind of model is best to examine a deal’s IRR?
A
-LBO
9
Q
What impacts the IRR greatly?
A
-timing of cash flows
10
Q
What types of companies tend not to use LBO valuation models?
A
-LBO valuation is typically not relevant to venture capital firms because VC firms generally make equity investments
11
Q
If a majority shareholders or firm principal wanted to generate liquidity (i.e., for retirement, trust for his children, purchase a home), what would he consider?
A
- may consider a dividend recap, an IPO or a sale to a strategic buyer
- should not consider an acquisition or “bolt-on” because these would reduce liquidity and may require additional years of service
12
Q
Order of M&A Documents in FIRST Round:
A
(1) Engagement Letter
(2) Teaser
(3) Confidentiality Agreement CA
(4) Confidential Information Memorandum (CIM)
(5) Initial Bid Procedures Letter
(6) First-Round Bid (AKA indication of interest (IOI), statement of interest, letter of intent)
13
Q
What is the role of the engagement letter?
A
-discloses fees that the advisory firm is receiving for its work
14
Q
What is the role of the teaser?
A
1-2 page document providing investment highlights and basic information about the target
- CA comes with teaser and if the buyer is interested in the company, then it will sign and return the CA to signal interest
- includes sell-side adviser’s contact information
15
Q
What is the role of the Confidentiality Agreement?
A
- legal agreement provided with teaser describing how information disclosed in the sale process can be used
- prohibits discussion that you are involved in the process
- DELIVERED WITH TEASER
16
Q
What is the role of the Confidential Information Memorandum?
A
50 to 60 page document providing significant information about the target, its industry and investment opportunity
- received AFTER the CA is signed
- primary first round due diligence document
- first round pitchbook made by sell side advisor
17
Q
What is the role of the Initial Procedures Letter?
A
- instructions for submitting first round bids
- first round bidsa re also called IOIs (indications of interest)
18
Q
What is the role of the first round bid?
A
- first-round bid is a non-binding bid, subject to significant additional due diligence
- indicates a potential purchase price and form of consideration (cash, stock, etc.)
- bankers begin executing acc/(dil) analysis as soon as first-round bids are received
19
Q
During what round do management presentations occur?
A
SECOND ROUND
20
Q
In an all-cash deal, what is the sell-side adviser’s primary concern?
A
- their primary concern is the acquirer’s ability to pay
- they are less concerned about the strength of the buyer’s management team or the composition of the acquirer’s board
21
Q
As part of buy side diligence, buy side advisers often…
A
-conduct interviews with the target’s suppliers and customers to learn more, but they do not interview large shareholders of the target
22
Q
If an investment banker uncovers insider information about a third party during the course of due diligence, it would be prudent to…
A
notify compliance so compliance can put the third party on the broker-dealer’s restricted list and no employees of the firm can trade in the stock
23
Q
An M&A sell side adviser will eliminate bids that contain an exclusivity agreement if..
A
the client wants to pursue additional offers
24
Q
What is indemnification?
A
- in an M&A deal, a seller may indemnify a buyer for specific losses or expense arising after a deal
- i.e., a seller may indemnify a buyer for unknown future product liabilities or for environmental expenses within 2 years after closing
25
What does a fairness opinion do?
- it confirms that the price being paid for the target company is reasonable
- it does NOT recommend that the board accept or reject the deal
- it is prepared for the target board, so the acquirer and buy-side adviser do not get to review or preview the fairness opinion
26
What are the four main fairness opinion disclosures?
(1) Whether its compensation for preparing the opinion is contingent on the successful completion of the transaction (permissible, just requires disclosure)
(2) any material relationships between the preparing firm and other deal participants in the past 2 years
(3) whether the data provided to prepare the opinion was verified by an independent third party
(4) whether a fairness committee was used and whether insider compensation fairness was commented on
27
When do participants in an M&A transaction typically announce a deal?
-announce the signed definitive agreement with a press release and disclose this on an 8-K BEFORE filing a prospectus or proxy statement relating to the transaction
28
Reg M-A Disclosures
-provides the disclosure requirements in an S-4 for mergers and acquisitions, as well as for tender offers, going-private transactions, and other corporate transactions
29
What is bring-down due diligence?
- parties are brought up to speed on any recent changes to the transaction
- final confirmation that everything is accurate
- the final due diligence session where parties confirm to corporate actions the results of their original due diligence and receive assurance that no material events or changes have affected the company, or its business, since initial due diligence investigation
30
What are the general circumstances for voting on a deal?
- generally only target company shareholders vote on whether to accept or reject a deal, not acquirer company shareholders
- acquirer company shareholders vote on a stock deal only if the number of new shares issued by the acquirer will increase the number of outstanding shares by at least 20%
31
What is a working capital peg for a purchase price adjustment?
- an M&A transaction price may include a "working capital peg" provision that will adjust the final purchase based on the historic, average, working capital figure (the peg) versus the actual working capital at closing
- if actual working capital is higher than the peg, the purchase price will be adjusted upwards
- adjustment prevents either party from being adversely impacted by timing, seasonality, or irregular activity by the seller
32
If an executive is tendering shares and receiving future employment contracts with the new company...
the employment contracts must be approved by the acquirer's compensation committee
33
What is a golden parachute?
-contractual provision promising an employee a large payout or bonus if employment is terminated, including due to a change of control after a merger
34
During the period between signing the DA and closing deal, communications are considered _______ and must be filed with the SEC no later than the _______.
considered prospectuses; no later than the date of first use
35
What are the basics to a tender offer?
- in a tender offer, a purchaser (acquirer or third party) offers to buy all or a percentage of a company at a specific price
- any tender offer made to shareholders in the US must be registered with the SEC by filing a schedule TO and disclosed to all security holders
36
A tender offer must remain outstanding to shareholders for at least __________.
TWENTY BUSINESS DAYS
37
If tender terms are changed...
-new terms must be made available for at least TEN BUSINESS DAYS
38
Tender Response (14D-9):
target company board of directors has TEN BUSINESS DAYS to respond with a non-binding recommendation to shareholders on Schedule 14D-9
39
A tender response must include one of three things:
(1) recommend acceptance or rejection of the tender
(2) express no opinion and remain neutral toward the tender offer
(3) state that the company is unable to take a position with respect to the tender offer
* *THESE ARE THE ONLY THREE PERMITTED RESPONSES**
40
An investor can sell into a tender only to the extent that...
- he is net long the stock
- if shareholders tender more shares than the acquirer wants to buy, shares are accepted on a pro rata basis from shareholders who tendered their shares
41
What is the typical post-tender market response?
-a tender offer by an issuer will typically cause the stock price to rise
42
In a Dutch auction tender offer, all accepted shares receive the...
-clearing price
43
What are two ways that an issuer can repurchase its shares?
(1) through a tender offer
(2) through open market purchases
- when purchasing its own shares through open market transactions, an issuer may face heightened scrutiny over whether it is engaging in market manipulation
44
In a share buyback, the issuer must buy all shares from _____ per day during NORMAL market hours.
one market maker per day
45
In a share buyback, the issuer cannot purchase more than _____% of the stock's average daily volume per day.
25%
46
In a share buyback, the issuer can bid on its own securities only at the greater of the _____________ or at the last______.
highest independent bid or at the last sales price
47
In a share buyback, the issuer cannot repurchase shares at the _____ of the day or within the last ____minutes of trading
first trade of the day or within the last 30 minutes of trading
48
With regard to block trading during share buybacks, an issuer can do ______ block trade per week, purchasing as many shares as it wants, provided it ________.
one; provided it does no other buybacks on that particular day
49
How long must an issuer wait after its IPO to conduct a share buyback within 10b-18's safe harbor?
4 weeks
50
What is "automatic stay"?
upon filing for bankruptcy protection, the debtor (bankrupt company) benefits from an immediate automatic stay on claims, which requires all creditors to cease all collections efforts outside of the bankruptcy court (i.e., stop lawsuits, foreclosures, garnishments, etc.)
51
Under Chapter 7 bankruptcy, what is proof of claim and is it required?
proof of claim is required and is a written statement that describes the reason the debtor owes the creditor money
52
Under Chapter 7 bankruptcy, what happens to the firm?
- a trustee will be appointed to liquidate all assets and distribute funds to creditors
- no company remains
53
Under Chapter 11 bankruptcy, what happens to the firm?
- either a liquidation of assets OR a reorganization of the debtor
- a creditor need not file a proof of claim if it agrees with the amounts listed on the debtor's bankruptcy petition (though if he disagrees, he must file a proof of claim in a timely fashion)
54
When existing board and management continue to manage the business and prepare a reorganization plan, it is referred to as the :
debtor in possession (DIP)
55
What is the UCC (Unsecured Creditor's Committee)?
- consists of the seven largest unsecured creditors and is appointed by the US trustee to represent the interests of unsecured creditors in a bankruptcy proceeding
- UCC can review motions filed with court and participate in creating a debtor's reorganization plan
56
363 Sales: asset sales in bankruptcy
- allows a debtor to sell its assets during a bankruptcy case
- allows assets to be transferred or sold to a purchaser "free and clear" of any liens
- NOT USED TO ARRANGE DIP FINANCING
57
What is the timing with regard to 363 sales?
-a debtor can pursue a Section 363 sale immediately after being appointed a DIP (debtor in possession)
58
What is a "stalking horse bidder"?
-initial bidder that enters into a 363 asset purchase agreement (APA) to purchase these debtor's assets, settling a floor or minimum bid
59
How can I debtor entice a stalking horse?
-reimburses the stalking horse's professional fees (i.e., lawyers and bankers) as well as offers a break-up fee if stalking horse does not win the auction
60
Does a 363 Sale require bankruptcy court approval?
Yes
61
What document does the winning bidder in a 363 sale sign which details the terms of purchase?
an APA (Asset Purchase Agreement)
62
In order for a plan of reorganization to be confirmed/approved by the court, it must provide for the repayment of:
(1) Administrative Claims
| (2) Wages in cash on plan's effective date
63
In a chapter 11 bankruptcy, a plan of reorganization must be approved by creditor vote which requires:
(1) two-thirds of the dollar amount claims
| (2) one half the number of claims
64
What is a cramdown?
- if a reorganization plan does not receive required votes, it can still be approved by a cramdown
- plan can be approved if one impaired creditor class votes to accept it
* *this impaired creditor class vote excludes votes of any company insiders in that class**
65
What is a white-knight?
-a buyer who acquires a distressed company BEFORE they declare bankruptcy
66
What type of buyers can use stapled financing?
Financial Sponsors
67
What is stapled financing?
a loan package offered by the sell side advisor
68
Where should one look in order to see fees paid in an M&A transaction?
look at engagement letter
69
Does the buyer or target perform valuations?
BOTH
70
Buy side advisory wants to earn fees in two ways:
(1) underwriter
| (2) advisory
71
What does it mean that the target board of directors has a fiduciary responsibility to shareholders?
- they must ensure that the firm is sold at a reasonable price
- to satisfy this obligation, they can have a "go-shop" provision
72
The IRC 338(h)(10) election refers to when..
- a purchase are written up as an equity sale for GAAP but as an asset sale for tax implications
- buyer benefits from a stepped up basis (additional tax shield from more depreciation)
73
What are the three main ways to exit an LBO?
(1) Sell the company (to a strategic buyer or financial sponsor)
(2) IPO
(3) Dividend Recapitalization
74
What is a dividend recap?
- company issues debt to pay dividend to equity investors
| - offers liquidity (in the form of cash) but WITHOUT DILUTION (because no new shares are issued)
75
Broad Auction vs Target/One-on-One Auction
- Broad Auction: maximizes price; not that concerned with confidentiality; more likely to have confidence that paying fair price
- Targeted Auction: maintains confidentiality; risk is someone might be willing to pay more
* *as action gets more targeted, more likely to have go-shop provision and fairness opinion
76
What does a confidentiality NOT prohibit discussion of?
RESEARCH ANALYST PROJECTIONS (already in public domain)
77
How do you calculate pro forma net income for the acc/(dil) analysis?
Acquirer Net Income + Target After Tax EBIT + After Tax Synergies + Interest Expense (Tax Effected)
78
WHAT NUMBER DO YOU THINK OF WITH COMPARING EPS
1.15
79
What is the sell-side adviser's main concern during due diligence investigations?
- buyer's ability to pay
| - second thing would be retention of management/employees
80
If during due diligence as a sell-side adviser, a banking rep discovers non public information about a potential merger involving a different company, what should they do?
-tell compliance so that the company's stock is placed on the firm's restricted list
81
What is a fairness opinion?
- valuation analysis to confirm financial fairness of transaction
- does NOT advise on if a deal should be accepted; just says if price is fair
82
What are the four required disclosures for a fairness opinion?
(1) if the firm writing the opinion will receive any compensation contingent on the successful closing of the deal (don't need to disclose the amount of success or contingent fee, just if there is one)
(2) Material relationships with any of the other parties to the transaction in the last 2 years
(3) if the data provided to prepare the opinion was verified by an independent third party
(4) if the opinion considers the fairness of the compensation to board members vs compensation to all other shareholders
83
What is a MAC (Material Adverse Clause)? Who wants a higher MAC and who wants a lower MAC?
- allows on of the parties to kill the deal for a breach of reps and warranties
- seller wants deal to be as binding as possible so it benefits from a tighter MAC
- buyer wants looser MAC so they can back out more easily
84
HSR Antitrust Improvements Act
62.3 MILLION
85
One-Step Merger
- target shareholders will vote
- issuer files proxy statements (merger proxies: 14A) - filed JOINTLY by buyer and seller: joint proxy filing
- target shareholders vote on the transaction; not joint proxy filing if one company is private
- file S-4 registration - contents governed by Regulation M-A
86
Two Step Merger (Tender Offer)
-NO VOTE; acquirer offers to purchase stock directly from target's shareholders
87
Steps to a Tender Offer
(1) Tender offer to company shareholders
| (2) "Squeeze-Out" once acquirer has 90% control
88
Tender offer and proxies are...
MUTUALLY EXCLUSIVE
89
What is a "squeeze out" and what is another name for it?
- also called "short form merger"
| - goal is to hit 90% because then squeeze out can occur where the remaining shareholders are forced to sell
90
Is acquirer shareholder approval needed for transactions?
- for cash transactions, acquiring company shareholders do not get to vote in cash transactions; can't vote on how it spends its money
- for stock transactions: acquiring company shareholders can vote if the number of shares being issued will increase outstanding share count by 20 of more
91
When must public communications between signing DA and before closing be filed with the SEC?
-no later than the date of first use
92
What does a schedule TO show?
- identity of purchaser
| - source of funds
93
How long does a tender offer remain open for?
20 BUSINESS DAYS
94
How long until a response from target company is required?
10 DAYS IN...HALF WAY THROUGH TENDER ON 14D-9
95
What is a Schedule 14D-9?
management's response to a tender; filed half way through the tender
96
What are the three permitted recommendations by the company on tender offers?
- recommend that they accept the tender
- recommend that they reject the tender
- remain neutral/unable to comment
* *CANNOT RECOMMEND THAT SHAREHOLDERS BUY MORE STOCK**
97
If there are changes to the terms in a tender offer...
updated terms must be available to shareholders for at least 10 days from date of change
98
What does it mean that "all holders best price"?
-any updated terms are retroactive to all shares - everybody gets the same perms in a tender
99
If a tender is well received and oversubscribed, shares are accepted...
pro rata, meaning they take the same percentage from everyone
**CAN ONLY TENDER SHARES YOU OWN NET LONG; CANNOT SHORT TENDER SHARES
100
Under Rule 10b-18 Safe Harbor, what are the volume limitations on trading shares?
-no more than 25% of daily trading volume
101
Under Rule 10b-18 Safe Harbor, what are the purchase price restrictions?
-no higher than the greater of the highest current bid OR the last transaction price
102
What is a proof of claim?
proof that you are actually owed money by a debtor
103
What is the role of the trustee in chapter 11 bankruptcy?
-administers bankruptcy; monitors operations of debtor; handles liquidation of assets; court filings
104
The trustee in a chapter 11 bankruptcy is one of two things:
(1) DIP: debtor in possession: company is its own DIP; firm remains in charge and continues to make operational decisions
(2) outside trustee appointed by department of justice
105
What is DIP Financing?
- company in bankruptcy can borrow money this way
| - debtor is required to service and pay interest on a DIP loan
106
What is the Unsecured Creditors Committee (UCC)?
- 7 largest unsecured creditors
- responsibilities include investigation of conduct, helps shape reorganization plan, negotiates with DIP lender (represents all unsecured lenders and negotiate on their behalf)
107
What does the UCC NOT DO:
-it does not secure a lien
108
Describe a Section 363 Asset Sale:
asset sale free and clear of any interests such that the purchaser does not become stuck in bankruptcy process: creditors can't come after buyer for more money
109
What is found in an Asset Purchase Agreement?
- reimbursement for due diligence, over-bid protection, break-up fee
- purchase price
- go shop provisions
- reps and warranties
110
What is NOT found in an APA?
-DEBT COVENANTS - APA has nothing to do with debt; all about the asset sale
111
Order of Distribution of Assets in the Case of a Bankruptcy:
(1) Secured Creditors
(2) Priority Claims (admin claims/expenses, recent employee wages, recent pension contributions, taxes)
(3) Unsecured Creditors (trade creditors, unsecured loans, debenture bonds, general creditors)
(4) Subordinated/Mezzanine Debt & Convertible Bonds
(5) Preferred Stockholders
(6) Common Stockholders and warrants
