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essentials corporate finance
Mergers Acquisitions And Other Restructuring Activities 5th Edition Donald DePamphilis - Solutions
2. The purchase price paid for YouTube represented more than 1 percent of Google’s then market value. If you were a Google shareholder at that time, how might you have evaluated the wisdom of the acquisition?
3. To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might the use of “overvalued”shares impact future appreciation of the stock?
4. What is the appropriate cost of equity for discounting future cash flows? Should it be Google’s or YouTube’s? Explain your answer.
5. What are the critical valuation assumptions implicit in the valuation method discussed in this case study? Be specific.
1. Merrill owns less than half of the combined firms, although it contributed more than one half of the combined firms’ assets and net income. Discuss how you might use DCF and relative valuation methods to determine Merrill’s proportionate ownership in the combined firms.
2. Why do you believe Merrill was willing to limit its influence in the combined firms?
3. What method of accounting would Merrill use to show its investment in BlackRock?
9–1. Why are financial modeling techniques used in analyzing M&As?
9–2. Give examples of the limitations of financial data used in the valuation process.
9–3. Why is it important to analyze historical data on the target company as part of the valuation process?
9–5. What are common-size financial statements, and how are they used to analyze a target firm?
9–7. Define the minimum and maximum purchase price range for a target company.
9–9. Can the offer price ever exceed the maximum purchase price? If yes, why? If no, why not?
9–10. Why is it important to clearly state assumptions underlying a valuation?
9–11. Assume two firms have little geographic overlap in terms of sales and facilities.If they were to merge, how might this affect the potential for synergy?
9–13. Dow Chemical’s acquisition of Rhom and Haas included a 74 percent premium over the firm’s preannouncement share price. What is the probable process Dow employed in determining the stunning magnitude of this premium?
9–15. How does the presence of management options and convertible securities affect the calculation of the offer price for the target firm?
9–16. Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. Acquiring Company does not expect any change in its P/E multiple after the merger.Using the information
9–17. Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm that develops products licensed to the major pharmaceutical firms. Development costs are expected to generate negative cash flows during the first two years of the forecast period of $(10)
9–18. Using the Excel-Based Offer Price Simulation Model (Table 9–7) found on the CD-ROM accompanying this book, what would the initial offer price be if the amount of synergy shared with the target firm’s shareholders was 50 percent?What is the offer price and what would the ownership
1. Purchase price premiums contain a synergy premium and a control premium. The control premium represents the amount an acquirer is willing to pay for the right to direct the operations of the target firm. Assume that Cliffs would not have been justified in paying a control premium for acquiring
2. Based on the information in Table 9–9 and the initial offer price of $10 billion, did this transaction implicitly include a control premium? How much? In what way could the implied control premium have simply reflected Cliffs potentially overpaying for the business? Explain your answer.
3. The difference in postacquisition EPS between an offer price in which Cliffs shared 100 percent of synergy and one in which it would share only 10 percent of synergy is about 22 percent (i.e., $3.72/$3.04 in 2008). To what do you attribute this substantial difference?
1. Using the M&A model financial statements for the two firms in Tables 9–10 through 9–14, determine the differences between the market value and stand-alone value of StarTrak and Alanco. How would you explain these differences?Table 9–10 Step 1. Acquiring Company—Alanco Forecast
2. Alanco shareholders ceded only 40 percent of the synergy to StarTrak shareholders, yet StarTrak shareholders received 77 percent ownership of the combined firms.Why?
3. Alanco shareholders owned less than one fourth of the new firm. Was this a good deal for them? Explain your answer.
10–1. Why is it more difficult to value privately held companies than publicly traded firms?
10–2. What factors should be considered in adjusting target company data?
10–3. What is the capitalization rate, and how does it relate to the discount rate?
10–4. What are the common ways of estimating the capitalization rate?
10–5. What is the liquidity discount, and what are common ways of estimating this discount?
10–6. Give examples of private company costs that might be understated, and explain why.
10–7. How can an analyst determine if the target firm’s costs and revenues are understated or overstated?
10–8. What is the difference between the concepts of fair market value and fair value?
10–9. What is the importance of IRS Revenue Ruling 59–60?
10–10. Why might shell corporations have value?
10–11. Why might succession planning be more challenging for a family firm?
10–12. How are governance issues between public and private firms the same and how are they different?
10–13. What are some of the reasons a family-owned or privately owned business may want to go public? What are some of the reasons that discourage such firms from going public?
10–14. Why are family-owned firms often attractive to private equity investors?
10–16. It is usually appropriate to adjust the financials received from the target firm to reflect any changes that you, as the new owner, would make to create an adjusted EBITDA. Using the Excel-Based Spreadsheet on How to Adjust Target Firm’s Financial Statements on the CD-ROM accompanying
10–17. Based on its growth prospects, a private investor values a local bakery at$750,000. While wanting to own the operation, she intends to keep the current owner to manage the business. To do so, she wishes to purchase 50.1 percent ownership, with the current owner retaining the remaining
10–18. You have been asked by an investor to value a local restaurant. In the most recent year, the restaurant earned pretax operating income of $300,000.Income has grown an average of 4 percent annually during the last five years, and it is expected to continue growing at that rate into the
1. Who were Panda Ethanol, Grove Street Investors, Grove Panda, and Cirracor?What were their roles in the case study? Be specific.
2. Discuss the pros and cons of a reverse merger versus an initial public offering for taking a company public. Be specific.
3. Why did Panda Ethanol undertake a private equity placement totaling $90 million shortly before implementing the reverse merger?
4. Why did Panda not directly approach Cirracor with an offer? How were the Panda Grove investment holdings used to influence the outcome of the proposed merger?
1. What were the primary reasons Cantel wanted to buy Crosstex? Be specific.
2. What do you believe could have been the primary factors causing Crosstex to accept Cantel’s offer? Be specific.
3. What factors might cause Crosstex’s net asset value (i.e., the difference between acquired assets and liabilities) to change between signing and closing the agreement of purchase and sale?
4. Speculate why Cantel may have chosen to operate Crosstex as a wholly owned subsidiary following closing. Be specific
5. The purchase price consisted of cash, stock, and an earn-out. What are some factors that might have determined the purchase price from the seller’s perspective? From the buyer’s perspective? Be specific.
11–1. Describe the deal-structuring process. Be specific.
11–2. Provide two examples of how decisions made in one area of the deal-structuring process are likely to affect other areas.
11–3. For what reasons may acquirers choose a particular form of acquisition vehicle?
11–4. Describe techniques used to “close the gap” when buyers and sellers cannot agree on price.
11–5. Why do bidders sometimes offer target firm shareholders multiple payments options (e.g., cash and stock)?
11–6. What are the advantages and disadvantages of a purchase of assets from the perspective of the buyer and seller?
11–7. What are the advantages and disadvantages of a purchase of stock from the perspective of the buyer and seller?
11–8. What are the advantages and disadvantages of a statutory merger?
11–9. What are the reasons some acquirers choose to undertake a staged or multistep takeover?
11–10. What forms of acquisition represent common alternatives to a merger? Under what circumstances might these alternative structures be employed?
11–11. Comment of the following statement. A premium offered by a bidder over a target’s share price is not necessarily a fair price; a fair price is not necessarily an adequate price.
11–12. In early 2008, a year marked by turmoil in the global credit markets, Mars Corporation was able to negotiate a reverse breakup fee structure in its acquisition of Wrigley Corporation. This structure allowed Mars to walk away from the transaction at any time by paying a $1 billion fee to
11–14. Describe the conditions under which an earn-out may be most appropriate.
1. From a legal standpoint, identify the acquirer and the target firms.
2. What is the form of acquisition? Why might this form have been agreed to by the parties involved in the transaction?
3. What is the form of acquisition vehicle and the postclosing organization? Why do you think the legal entities you have identified were selected?
4. What is the form of payment or total consideration? Why do you believe the parties to this transaction agreed to this form of payment?
5. Based on a total valuation of $42 billion, Vivendi’s assets contributed one third and GE’s two thirds of the total value of NBC Universal. However, after the closing, Vivendi would own only a 20 percent equity position in the combined business.Why?
1. What was the form of payment employed by both bidders for Unocal? In your judgment, why were they different? Be specific.
2. How did Chevron use the form of payment as a potential takeover strategy?
3. Is the “proration clause” found in most merger agreements in which target shareholders are given several ways in which they can choose to be paid for their shares in the best interests of the target shareholders? In the best interests of the acquirer? Explain your answer.
12–2. What are the advantages and disadvantages of a tax-free transaction for the buyer? Be specific.
12–3. Under what circumstances can the assets of the acquired firm be increased to fair market value when the transaction is deemed a taxable purchase of stock?
12–4. When does it make sense for a buyer to use a Type A tax-free reorganization?
12–5. When does it make sense for a buyer to use a Type B tax-free reorganization?
12–6. What are net operating loss carryforwards and carrybacks? Why might they add value to an acquisition?
12–7. Explain how tax considerations affect the deal structuring process.
12–8. How does the purchase method of accounting affect the income statement, balance sheet, and cash-flow statements of the combined companies?
12–9. What is goodwill and how is it created?
12–10. Under what circumstances might an asset become impaired? How might this event affect the way in which acquirers bid for target firms?
12–13. Tangible assets are often increased to fair market value following a transaction and depreciated faster than their economic lives. What is the potential impact on posttransaction EPS, cash flow, and balance sheet?
12–14. Discuss how the form of acquisition (i.e., asset purchase or stock deal) could affect the net present value or internal rate of return of the deal calculated postclosing.
12–16. Target Company has incurred $5 million in losses during the past three years.Acquiring Company anticipates pretax earnings of $3 million in each of the next three years. What is the difference between the taxes that Acquiring Company would have paid before the merger as compared to actual
12–17. Acquiring Company buys Target Company for $5 million in cash. As an analyst, you are given the premerger balance sheets for the two companies(Table 12–6). Assuming plant and equipment are revalued upward by Table 12–6 Premerger Balance Sheets for Companies in Problem 12–17 (in
1. What might J&J have done differently to avoid igniting a bidding war?
2. What evidence is given that J&J may not have taken Boston Scientific as a serious bidder?
3. Explain how differing assumptions about market growth, potential synergies, and the size of the potential liability related to product recalls affected the bidding?
1. What is the acquisition vehicle, postclosing organization, form of payment, form of acquisition, and tax strategy described in this case study?
2. Describe the firm’s strategy to finance the transaction.
3. Is this transaction best characterized as a merger, acquisition, leveraged buyout, or spin-off? Explain your answer.
4. Is this transaction taxable or nontaxable to Tribune’s public shareholders? To its posttransaction shareholders? Explain your answer.
5. Comment on the fairness of this transaction to the various stakeholders involved.How would you apportion the responsibility for the eventual bankruptcy of Tribune among Sam Zell and his advisors, the Tribune board, and the largely unforeseen collapse of the credit markets in late 2008? Be
13–1. What potential conflicts arise between management and shareholders in an MBO? How can these conflicts be minimized?
13–2. In what ways have private equity and hedge funds exhibited increasing similarities in recent years?
13–3. What are the primary ways in which an LBO is financed?
13–5. What are the primary factors that explain the magnitude of the premium paid to pre-LBO shareholders?
13–6. What are the primary uses of junk bond financing?
13–8. Describe some of the legal problems that can arise from an improperly structured LBO.
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