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Section One [50 marks]

Answer ALL questions. Questions 1 to 5 below DO NOT refer to the case study specified in Section Two.

Question 1. [10 marks]

Is it necessarily bad news that in the last several months the special purpose acquisition vehicles (SPACs) have been performing worse compared to one and two years ago, and also worse than other security classes? Why or why not?

Question 2. [10 marks]

The BCQ company has been going through challenging times lately. Due to a combination of unfavourable market conditions, investments in the wrong projects and more negligent management, BCQ will soon experience a deterioration of its business. So far, this is insider information and for the time being, BCQs share price does not reflect the expected drop in BCQs value. Yet the market will catch up soon.

BCQ is desperate to avoid a large decrease in its share price as it is worried that news of mismanagement may attract the attention of corporate acquirers. BCQs managers will likely lose their jobs then and this is something they want to avoid.

BCQ believes that an attack will be the best defence and is seriously considering adopting some aggressive anti-takeover measures. The suggestion that has gathered most support is to take over another company. The key idea behind such an acquisition is not entering new markets, benefiting from economies of scale, scope, or diversification, but increasing BCQs size so that it would become bigger and hence tougher for others to acquire.

BCQ does not want to waste time searching for the perfect target because time is of the essence and the paramount criterion is the targets size. Hence, BCQ is ready to acquire a large company that is being sold through an auction in the very near future. To expedite the acquisition process further, BCQ is trying to convince the seller to sell before the auction by offering a price the seller cannot refuse. This all will certainly make it impossible for BCQ to conduct due diligence of the target. The due diligence would be very restricted anyway, offering little new information, as it would be organised by the targets investments bank. What matters is that BCQ would get much bigger and protect itself well against external predatory interest.

Briefly but carefully discuss whether or not you agree with this approach and why.

Question 3. [10 marks]

Either you or your colleague Sam will be at the negotiations table in a week with representatives of your prospective target. Currently, you and Sam are ironing out the strategy and tactics to use. You would like to settle a couple of issues ahead of the negotiations. Actually, you would strongly prefer to tell the target straight away that your employer is willing to retain all target employees.

Your employer does want to retain them because this will make for a cheaper and smoother integration of this specific target. Sam disagrees though about the usefulness of telling the target now that this aspect is a done deal.

Sam believes it will be better for the acquirers position to keep quiet about this decision to retain all target employees. The decision can be announced as a possibility rather than a done deal at some convenient moment with the idea of influencing the target to make concessions regarding some other aspect. In Sams opinion, nothing will be lost if such an opportunity does not present itself during the negotiations as Sam is confident that this can also be discussed later.

Do you agree with Sam? Why or why not?

Question 4. [10 marks]

You are the head of Sales and Business Development at Sylar, a moderately large UK publisher. You have just had a talk with the Chief Editor, Robbie. Last week, Robbie was approached by the owner of a small privately held UK printing house, specialising in photographs and art reproductions that is looking for a buyer. Robbie immediately liked the idea. Such a printing house would finally allow Sylar to expand into the publishing of art and photography books without having to depend on outsiders for the specialised printing.

Robbie has no financial or managerial background and no experience in takeovers. Yet, right away Robbie discussed the idea with Sylars general director and was given the green light to start the preliminary work. Out of excitement and to show initiative, Robbie composed and sent a simplified first-round bid letter to the seller, specifying there that Sylar would like to conduct due diligence of the printing house as soon as possible before narrowing down the bid to a single number.

The seller has not replied yet. Robbie is surprised the seller is not more forthcoming with facilitating the process. You are about to explain that the first-round bid letter is not sufficient as no seller would allow Sylar to conduct due diligence without Sylar signing a non-disclosure agreement first. Robbie, however, asks you not to interrupt as there is more to the story and Robbie is in a hurry.

Robbies enthusiasm of acquiring this target has visibly grown rather than decreased. Robbie is now thinking of other ways of finding a valuation for the seller. Robbie has heard that comparables valuation can be used especially if the target seems not to be willing to allow the acquirer to conduct due diligence. Robbie has found valuation information on other printing houses. The list includes some more general printing companies, some specialising in art reproductions and photography like the seller, of different sizes and located in different geographical regions. Robbie is sure it will be straightforward to select a couple that most resemble the seller and use an average of their Enterprise Value to EBITDA multiple to come up with a value for Sylars current target.

This, in Robbies opinion, will also solve the problem of having to pay some intermediary to do the due diligence of the seller and will also save Sylar the hassle of doing it themselves. Robbie has also heard that for extra protection, Sylar must insist that the seller make the required representations and warranties and that will be sufficient. These, Robbie continues, will allow Sylar to claim damages if Sylar later discovers problems at the seller. Robbie now wants your support for this approach.

Having in mind how busy Robbie is, briefly but carefully explain whether you support the idea of using a combination of comparables valuation and representations and warranties from the seller instead of pushing for the seller to allow Sylar to conduct due diligence. Why or why not.

Please align your thinking toward EITHER these Merger & Acquisition topics: M&A Context and Implications, Due Diligence, SPACs, Synergies, Contingent Value Rights, Comparable, Negotiations.