Mergers and Acquisitions Questions and Answers

Answer: A

Correct answer: No shareholder meeting to vote is necessary

Buying shares directly from shareholders bypasses the target’s board and needs no vote, which is what makes it the route for a hostile bid. The other options are its disadvantages: minority shareholders who refuse to tender remain and prevent complete absorption, and a public tender offer alerts other potential bidders and invites a contest.

Answer: B

Correct answer: $29 million

Under purchase accounting the acquirer’s own assets stay at book value; only the target’s are restated. So the total is PEN’s $20 million at book, plus CNC’s $8 million at fair value, plus $1 million of goodwill, giving $29 million. The $26 million option is what pooling would have given, adding the two book values, and the difference between the two figures is the whole of the accounting argument.

Answer: C

Correct answer: $8

Cash payment leaves A with its original 100 shares, and the merged firm earns 600 + 200 = $800, so earnings per share are $8 - up from $6 before. The rise is arithmetic rather than economic: A has acquired earnings more cheaply than its own were valued, and the price-earnings ratio falls to compensate.

Answer: A

Correct answer: Proxy fight

A proxy fight is a contest for votes rather than for shares: the dissidents solicit shareholders’ proxies in order to elect their own directors and so change the management without buying the company. It is far cheaper than a tender offer and correspondingly harder to win, since it requires persuading a majority of shareholders rather than paying them.

Answer: D

Correct answer: I, II, and III only

Diversification is dubious because shareholders can do it themselves more cheaply. Increasing earnings per share by the bootstrap effect creates no value and the market discounts it. Lower financing costs are largely an illusion - the combined firm borrows more cheaply chiefly because each set of bondholders now has a claim on both firms’ assets, which transfers value from shareholders to bondholders rather than creating it. Industry consolidation is a sound motive.

Answer: D

Correct answer: $10 million

The cost is the premium over B’s standalone value: 130 - 120 = $10 million. That is what B’s shareholders take out of the gain, and it is the figure the negotiation is really about.

Answer: A

Correct answer: $30 million

The gain is the synergy, the present value of the cost savings the merger makes possible - $30 million. As before it is independent of the price paid, which affects only how the $30 million is shared between the two sets of shareholders.

Answer: C

Correct answer: Yes goodwill; 1

Goodwill is the excess of the price over the fair value of the assets acquired: 9 - 8 = $1 million. It represents what was paid for things the balance sheet does not carry - brand, customer relationships, assembled workforce - and it appears as an asset which must thereafter be tested for impairment rather than amortised.

Answer: D

Correct answer: A poison put

A poison put gives bondholders the right to demand redemption at par on a change of control. Because the bonds were issued at a deep discount, redemption at par means an immediate and substantial cash demand precisely when the acquirer is least able to meet it. The defence works by making the target expensive to buy rather than by preventing the purchase.

Answer: D

Correct answer: I, II,III, and IV

The market for corporate control covers every mechanism by which control over corporate assets changes hands. That includes mergers and acquisitions, the reverse transactions of spin-offs and divestitures, leveraged buyouts taking a company private, and privatisations transferring assets from state to private ownership. The unifying idea is the transfer of control, whichever direction it runs in.