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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

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?
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
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
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
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
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
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
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,
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.
13–9. Is it possible for an LBO to make sense to equity investors but not to other investors in the deal? If so, why? If not, why not?
13–10. How does the risk of an LBO change over time? How can the impact of changing risk be incorporated into the valuation of the LBO?
13–11. In an effort to take the firm private, Cox Enterprises announced on August 3, 2004, a proposal to buy the remaining 38 percent of Cox Communications’s shares that it did not already own.
13–12. Following Cox Enterprises’ announcement on August 3, 2004, of its intent to buy the remaining 38 percent of Cox Communications’s shares that it did not already own, the Cox
13–15. Sony’s long-term vision has been to create synergy between its consumer electronics products business and its music, movies, and games. On September 14, 2004, a consortium, consisting of
13–16. Assume that, based on similar transactions, an analyst believes that a buyout firm will be able to borrow about 5.5 times first year EBITDA of $200 million(i.e., about $1.1 billion) and that
13–17. By some estimates, as many as one fourth of the LBOs between 1987 and 1990(the first mega LBO boom) went bankrupt. The data in Table 13–12 illustrate the extent of the leverage associated
1. What were the motivations for this deal from Cerberus’s perspective? From Daimler’s perspective?
2. What are the risks to this deal’s eventual success? Be specific.
3. Cite examples of potential economies of scale and scope.
4. Cerberus and Daimler would own 80.1 percent and 19.9 percent of Chrysler Holdings LLC, respectively. Why do you think the two parties agreed to this distribution of ownership?
5. Which of the leading explanations of why deals often fail to meet expectations(i.e., tendency to overpay, slow integration, and bad business plan) best explains why the combination of Daimler and
6. The new company, Chrysler Holdings, is a limited liability company. Why do you think Cerberus chose this legal structure over a more conventional corporate structure?
1. What criteria did Pacific Investors (PI) use to select California Kool (CK) as target for an LBO? Why were these criteria employed?
2. Describe how PI financed the purchase price. Speculate as why each source of financing was selected. How did CK pay for fees incurred in closing the transaction?
3. What are the advantages and disadvantages of using enterprise cash flow in valuing CK? In what way might EBITDA have been a superior (inferior) measure of cash flow for valuing CK?
4. Compare and contrast the cost of capital method and the adjusted present value method of valuation.
14–1. Under what circumstances does a business alliance represent an attractive alternative to a merger or acquisition?
14–2. Compare and contrast a corporate and partnership legal structure.
14–3. What are the primary motives for creating a business alliance? How do they differ from the motives for a merger or acquisition?
14–4. What factors are critical to the success of a business alliance?
14–5. Why is a handshake agreement a potentially dangerous form of business alliance? Are there any circumstances under which such an agreement may be appropriate?
14–6. What is a limited liability company? What are its advantages and disadvantages?
14–7. Why is defining the scope of a business alliance important?
14–8. Discuss ways of valuing tangible and intangible contributions to a JV.
14–10. What are the common reasons for the termination of a business alliance?
14–11. In 2005, Google invested $1 billion for a 5 percent stake in Time Warner’s America Online unit as part of a partnership that expands the firm’s existing search engine deal to include
14–12. In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil’s (a largely government-owned Russian oil and gas company) stock for $2.36 billion during a
14–14. In late 1999, General Motors (GM), the world’s largest auto manufacturer, agreed to purchase 20 percent of Japan’s Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for
14–15. Through its alliance with Best Buy, Microsoft is selling its products—including Microsoft Network (MSN) Internet access services and hand-held devices such as digital telephones, hand-held
1. What tactics do you think Anheuser-Busch might employ to exploit the predicted confusion during the integration of the SABMiller and Coors operations?
2. How did the combination of the U.S. operations of SABMiller and MolsonCoors meet the needs of the two parties? Why was a JV viewed as preferable to a merger of the two firm’s global operations?
3. How do you believe the ownership distribution for MillersCoors was determined?
4. Why do you believe that SAB and Coors agreed to equal board representation and voting rights in the new JV? What types of governance issues might arise in view of the governance structure of
1. In your opinion, what were the motivating factors for the Coke and P&G business alliance?
2. Why do you think the parents selected a limited liability corporate structure for the new company? What are the advantages and disadvantages of this structure over alternative legal structures?
3. The parents estimated that the new company would add at least $1.5–2.0 billion to their market values. How do you think this estimated incremental value was determined?
4. Why do you think the parents opted to form a 50–50 distribution of ownership?What are some possible challenges of operating the new company with this type of an ownership arrangement? What can
5. Do you think it is likely that the new company would be highly entrepreneurial and innovative? Why or why not? What could the parents do to stimulate the development of this type of an environment
6. What factors may have contributed to the decision to discontinue efforts to implement the joint venture? Consider control, scope, financial, and resource contribution issues.
15–1. How do tax and regulatory considerations influence the decision to exit a business?
15–2. How would you decide when to sell a business?
15–3. What are the major differences between a spin-off and an equity carve-out?
15–4. Under what conditions is a spin-off tax free to shareholders?
15–5. Why would a firm decide to voluntarily split up?
15–6. What are the advantages and disadvantages of tracking stocks to investors and the firm?

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