MAA Assignments

7/23/2019 MAA Assignments

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Merger Acquisition



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Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM: BFIASEMESTER-VI

Subject Name: MERGER & ACQUISITIONStudy COUNTRY: SOMALIARoll Number (Reg. No.): BFIA01512010-2013019Student Name: MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS

a) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKSAssignment A Five Subjective Questions 10Assignment B Three Subjective Questions + Case Study 10Assignment C Objective or one line Questions 10

b) Total weight-age given to these assignments is 30%. OR 30Marksc) All assignments are to be completed as typed in word/pdf.d) All questions are required to be attempted.e)

All the three assignments are to be completed by due datesand need to be submitted for evaluation by Amity University.f)

The students have to attach a scanned signature in the form.

Signature : _________________________

Date: 01 April, 2013

( √ ) Tick mark in front of the assignments submitted

Assignment A’ Assignment ‘B’ Assignment ‘C’



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MERGER & ACQUISITION

ASSIGNMENT- A

Attempt these five analytical questions

Q: 1). Mention the Difference between - Leverage Buy out, Venturecapital & growth fund?

Answer:

A leveraged buy-out (LBO) is a transaction in which capital borrowed from acommercial lender is used to fund a large portion of the purchase. Generally,the loans are arranged with the expectation that the earnings of the businesswill easily repay the principal and interest. The LBO potentially has greatrewards for the buyers who, although they frequently make little or noinvestment, own the target company free and clear after the acquisition loansare repaid by the earnings of the business. LBOs are often arranged to enablethe managers of subsidiaries or divisions of large corporations to purchase asubsidiary or division which the corporation wants to divest, known as an‘‘MBO’’ or management buy-out.

The term ‘‘venture capital’’ has been defined in many ways, but refersgenerally to relatively high-risk, early-stage financing of young, emerging growthcompanies. The professional venture capitalist is usually a highly trainedfinance professional who manages a pool of venture funds for investment ingrowing companies on behalf of a group of passive investors.

The differences between venture capital investing and LBO investing areobvious to those in the business, but many outside the business are unclearabout the distinctions. Here are eight differences:

1) Sources of Funds — When LBO firms bring money to the closing, ittypically comes from at least two sources. First, the equity is provided by theLBO firm’s investors. In addition, senior debt is provided, most likely from abank or commercial finance company. In many cases, there is a mezzaninelayer of subordinated debt in addition to the senior debt and equity. Venturecapital investments almost always have just one source of funds: the investorsin the venture capital fund. Although such funds are often invested asconvertible subordinated debentures, in reality this money has equity risk and

demands equity returns. (Sometimes the portfolio company is able to use thatequity cushion to raise some senior debt, but in most cases at best they aregoing to raise an asset based loan (based on accounts receivable and perhapsinventory) and perhaps lease some equipment.)2) Uses of Funds — Venture capital is invested into the company. VCs go togreat length to make certain that shareholders are not being cashed out. All oralmost all of the funds in a buyout are distributed to shareholders.



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3) Maturity of Business — LBO firms almost always acquire maturebusiness with excess cash flow. Venture capitalists invest in business that aremuch earlier in their life cycle; many VCs, for example, invest in start-ups.4) Technology Focus — although many venture capitalists are willing toconsider investing in non-technology businesses, the fact is that almost allventure capital investments are in high technology companies. In order to

generate the high returns VCs require, a potential company must offer thepossibility of very high growth and a high exit multiple. Few non-technologybusinesses offer such potential. LBO firms, on the other hand, rarely invest inhigh technology companies, due to their high business risk. Combining highbusiness risk with high financial risk (i.e., a leveraged balance sheet) is veryrisky. LBO firms acquire no-technology and low-technology companies. Some,like Kensington, will acquire medium-technology companies.5) Profitability — LBO firms usually acquire companies with excess cashflow that need little or no capital for expansion. Venture capitalists almostalways invest in companies with negative cash flow and which need capital forexpansion (even if such companies are reporting accounting profits); otherwise,why would the company be raising venture capital?6)

Participating With Other Firms — Venture capitalists typically investonly in deals where other VC firms have also agreed to invest. A typical proposalto an entrepreneur is: “You need $4 million to start. I’ll give you $1.5 million,and you have to raise the other $2.5 million from at least two other venturecapital firms.” The VCs want other VC firms to invest in order to obtain asecond opinion on the desirability of the investment, and to share risk. Buyoutfirms rarely share deals with other buyout firms.7) Emphasis on Management — VC and buyout firms are extremelyconcerned about the quality of the management team, but VCs are even morefocused on this than buyout firms are. For a VC, an idea is just an idea; whatreally matters is who is going to execute. For a VC, the management team is

usually the most important factor in whether to invest. General Doriot (whofounded American Research & Development) said: “I much prefer Grade A menwith grade B ideas than vice versa.” Buyout firms also care about management,but typically look first at the business. Many buyout firms are willing toconsider purchasing companies where the owner/manager will leave a yearafter closing, figuring they can find a replacement manager. Some buyout firms,such as Kensington, have several partners with substantial CEO experiencewho can run an acquired company for the first year.8) Control — VCs are less focused on control (defined as choosing theBoard of Directors) than buyout firms are. VCs figure if the management teamhas to be replaced, the investment is probably worthless. Buyout firms almostalways insist on control of the Board of Directors and the right to replace

management if things are not working out. VC typically has negative controlover majority decision through covenants that are included in the InvestmentAgreement. Buyout firms typically don’t have such covenants because theyknow they are going to control the Board of Directors anyway, so they don’t

need the contractual protection.

The Difference between Growth and Venture - The classic venture modelpresumes that one or two monster hits per fund will make up for mediocre



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returns or losses on the rest of the portfolio. Venture capital is best suited tonetwork effect businesses where there will typically be one or two winners in aparticular market segment. Such companies require rapid scaling becauseachieving scale is paramount. However, this “swing for the fences” approachcan frequently lead to overcapitalization and poor returns on capital forcompanies that don’t fit this particular investment model. Growth equity takes

a more disciplined, capital-efficient approach to supporting company growth.

The Difference between Growth and Buyout - Buyout, on the other hand,performs best when dealing with mature industries. Generally speaking, buyoutmanagers seek companies that are earning sub-par returns on capital. Thosecompanies are purchased using financial leverage, and changes areimplemented to increase the returns on capital. Because buyout funds mustuse financial leverage to magnify the returns generated by improving operatingefficiency, buyout funds generally take more financial risk than growth equityfunds.

While growth equity managers share some skills sets with managers at VC andLBO funds, growth equity managers take less technology and adoption riskthan VCs and less financial and execution risk than buyout investors. Growthequity provides capital to invest in product development, asset deployment,sales and marketing and acquisitions for companies as they build market sharethroughout the growth cycle. These companies have typically developeddefensible market positions so the capital invested is not open to technology orcustomer adoption risk. Growth equity investors strike a balance betweencapital discipline and revenue growth.

To investors, growth equity is a distinctly different discipline than venturecapital and buyouts, but brings the benefits of both.

Q: 2). What do you mean by corporate control? Explain the howshares buy back work out?

Answer:

The term "corporate control" refers to the authority to make the decisions of acorporation regarding operations and strategic planning, including capitalallocations, acquisitions and divestments, top personnel decisions, and majormarketing, production, and financial decisions. This concept is frequentlyapplied to publicly traded companies, which may be susceptible to changes incorporate control when large investors or other companies seek to wrest control

from managers or other shareholders.

The notion of corporate control is similar to that of corporate governance;however, it is usually used in a narrower sense. Corporate control is concernedwith who has — and, moreover, who exercises — the ultimate authority oversignificant corporate practices. Governance, by contrast, involves the broaderinterworking of the day-to-day management, the board of directors, the



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shareholders at large, and other interested parties to formulate and implementcorporate strategy.

How shares buy back work out?

The board of directors for a company will announce that they have decided tobuy back their own shares from the current outstanding shares and thenretiring those shares. A Company may do this for several reasons but the mainreason is to increase the value of the stock price for the shareholders.If a company has 10 million outstanding shares and a current stock price of$5/share (keep in mind the market cap would be $50 million). The companyannounces that the board has authorized the repurchase of 5 million shares. Then the company will typically buy those shares back throughout the year (orwhatever time frame) reducing the outstanding shares to 5 million from theinitial 10 million. Let's say that miraculously the company was able to purchaseall 5 million shares at $5/share. So they spend $50 million buying back thestock. If I was wealthy shareholder and own 1 million shares of the company

then before the buyback I owned 10 %( my shares / total outstandingshares....1 million/10million) of the company, After the buyback there are now5 million shares so I own 20% (1 million / 5 million) of the company. If thestock remains at $10/share after the buyback then the market cap is now 25million, but if shareholders thought the value of company was worth 50 millionbefore the only thing that has changed after the buyback is the number ofoutstanding shares. So that means the price should increase to make themarket cap go back up. So the idea is when a company buys back stock theyincrease the value of each share to the shareholder by increasing theirownership in the company. In our case the price of the stock should now be$10/share making the market cap 50 million again ($10/share x 5 millionshares = $50 million). So buybacks are an alternative to dividends as a method

for a company to return value to the shareholders.

Q: 3). Write notes on the following:-

a) Split off.b) Amalgamation.c) Hostile Takeover Bid.

Answer:

a) Split ups are type of demerger which involves the division of parentcompany into two or more separate companies where parent company

ceases to exist after the demerger. This involves breaking up of the entirefirm into a series of spin off (by creating separate legal entities). Theparent firm no longer legally exists and only the newly created entitiessurvive. For instance a corporate firm has 4 divisions namely A, B, C, D.All these 4 division shall be split-up to create 4 new corporate firms withfull autonomy and legal status. The original corporate firm is to bewound up. Since de-merged units are relatively smaller in size, they arelogistically more convenient and manageable. Therefore, it is understood



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that spin-off and split-up are likely to enhance shareholders value andbring efficiency and effectiveness.

b) Amalgamation

Amalgamation is an arrangement or reconstruction. It is a legal process bywhich two or more companies are to be absorbed or blended with another. As aresult, the amalgamating company loses its existence and its shareholdersbecome shareholders of new company or the amalgamated company. In case ofamalgamation a new company may came into existence or an old company maysurvive while amalgamating company may lose its existence.

According to Halsbury’ s law of England amalgamation is the blending of two ormore existing companies into one undertaking, the shareholder of eachblending companies becoming substantially the shareholders of company whichwill carry on blended undertaking. There may be amalgamation by transfer ofone or more undertaking to a new company or transfer of one or moreundertaking to an existing company.

Amalgamation signifies the transfers of all are some part of assets and liabilitiesof one or more than one existing company or two or more companies to a newcompany.

The Accounting Standard, AS-14, issued by the Institute of CharteredAccountants of India has defined the term amalgamation by classifying (i)Amalgamation in the nature of merger, and (ii) Amalgamation in the nature ofpurchase.

1. Amalgamation in the nature of merger: As per AS-14, an amalgamation iscalled in the nature of merger if it satisfies all the following condition:

All the assets and liabilities of the transferor company should become, afteramalgamation; the assets and liabilities of the other company.

Shareholders holding not less than 90% of the face value of the equity shares ofthe transferor company (other than the equity shares already held therein,immediately before the amalgamation, by the transferee company or itssubsidiaries or their nominees) become equity shareholders of the transfereecompany by virtue of the amalgamation.

The consideration for the amalgamation receivable by those equity shareholdersof the transferor company who agree to become equity shareholders of thetransferee company is discharged by the transferee company wholly by theissue of equity share in the transferee company, except that cash may be paidin respect of any fractional shares.

The business of the transferor company is intended to be carried on, after theamalgamation, by the transferee company.



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No adjustment is intended to be made in the book values of the assets andliabilities of the transferor company when they are incorporated in the financialstatements of the transferee company except to ensure uniformity of accountingpolicies.

Amalgamation in the nature of merger is an organic unification of two or moreentities or undertaking or fusion of one with another. It is defined as anamalgamation which satisfies the above conditions.

2. Amalgamation in the nature of purchase: Amalgamation in the nature ofpurchase is where one company‘s assets and liabilities are taken over byanother and lump sum is paid by the latter to the former. It is defined as theone which does not satisfy any one or more of the conditions satisfied above.

As per Income Tax Act 1961, merger is defined as amalgamation under sec.2(1B) with the following three conditions to be satisfied.

1)

All the properties of amalgamating company(s) should vest with theamalgamated company after amalgamation.2) All the liabilities of the amalgamating company(s) should vest with the

amalgamated company after amalgamation.3) Shareholders holding not less than 75% in value or voting power in

amalgamating company(s) should become shareholders of amalgamatedcompanies after amalgamation

Amalgamation does not mean acquisition of a company by purchasing itsproperty and resulting in its winding up. According to Income tax Act, exchangeof shares with 90%of shareholders of amalgamating company is required.

c)

Hostile Takeover Bid

Hostile Takeover Bid: The acquiring firm, without the knowledge and consentof the management of the target firm, may unilaterally pursue the efforts to gaina controlling interest in the target firm, by purchasing shares of the later firm atthe stock exchanges. Such case of merger/acquisition is popularity known as“raid”. The caparo group of the U.K. made a hostile takeover bid to takeoverDCM Ltd. and Escorts Ltd. Similarly, some other NRI‘s have also made hostilebid to takeover some other Indian companies. The new takeover code, asannounced by SEBI deals with the hostile bids.

An attempt to take over a company without the approval of the company'sboard of directors When vying for control of a publicly-traded firm, the acquirerattempting the hostile takeover may proceed to bypass board approval in one oftwo ways typically.

First, the acquirer may attempt to buy enough shares of the company in orderto acquire a controlling interest in the firm. Second, the acquirer may insteadtry to persuade existing shareholders to vote in a new board which will acceptthe takeover offer.



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Q: 4). Explain the Net Asset Value method of valuation of firm?

Answer:

Valuation means the intrinsic worth of the company. There are various methodsthrough which one can measure the intrinsic worth of a company, such as NetAsset Value (NAV)

NAV or Book value is one of the most commonly used methods of valuation. Asthe name suggests, it is the net value of all the assets of the company. If youdivide it by the number of outstanding shares, you get the NAV per share.

NAV is the sum total of value of asserts (fixed assets, current assets, investmenton the date of Balance sheet less all debts, borrowing and liabilities includingboth current and likely contingent liability and preference share capital).Deductions will have to be made for arrears of preference dividend, arrears ofdepreciation etc. However, there may be same modifications in this method and

fixed assets may be taken at current realizable value (especially investments,real estate etc.) replacement cost (plant and machinery) or scrap value (obsoletemachinery). The NAV, so arrived at, is divided by fully diluted equity (afterconsidering equity increases on account of warrant conversion etc.) to get NAVper share.

The three steps necessary for valuing share are:

1) Valuation of assets2) Ascertainment of liabilities3) Fixation of the value of different types of equity shares.

One way to calculate NAV is to divide the net worth of the company by the totalnumber of outstanding shares. Say, a company’s share capital is Rs. 100 crores(10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs.100 crores. Net worth of the company would be Rs. 200 crores (equity andreserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10crores outstanding shares).

NAV can also be calculated by adding all the assets and subtracting all theoutside liabilities from them. This will again boil down to net worth only. Onecan use any of the two methods to find out NAV.

Q: 5). Mention the types of merge & acquisition?

Answer:

There are four types of merger are as follows:



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1) Horizontal merger:

It is a merger of two or more companies that compete in the same industry. It isa merger with a direct competitor and hence expands as the firm‘s operations inthe same industry. Horizontal mergers are designed to produce substantialeconomies of scale and result in decrease in the number of competitors in theindustry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was ahorizontal merger.

In case of horizontal merger, the top management of the company being metedis generally, replaced, by the management of the transferee company. Onepotential repercussion of the horizontal merger is that it may result inmonopolies and restrict the trade.

2) Vertical merger:

It is a merger which takes place upon the combination of two companies which

are operating in the same industry but at different stages of production ordistribution system. If a company takes over its supplier/producers of rawmaterial, then it may result in backward integration of its activities. On theother hand, Forward integration may result if a company decides to take overthe retailer or Customer Company.

Vertical merger may result in many operating and financial economies. Thetransferee firm will get a stronger position in the market as itsproduction/distribution chain will be more integrated than that of thecompetitors. Vertical merger provides a way for total integration to those firmswhich are striving for owning of all phases of the production schedule togetherwith the marketing network (i.e., from the acquisition of raw material to the

relating of final products).

“A takeover of merger is vertical where one of two companies is an actual orpotential supplier of goods or services to the other, so that the two companiesare both engaged in the manufacture or provision of the same goods or servicesbut at the different stages in the supply route (for example where a motor carmanufacturer takes over a manufacturer of sheet metal or a car distributingfirm). Here the object is usually to ensure a source of supply or an outlet forproducts or services, but the effect of the merger may be to improve efficiencythrough improving the flow of production and Reducing stock holding andhandling costs, where, however there is a degree of concentration in themarkets of either of the companies, anti-monopoly problems may arise”.

3) Congeneric Merger:

In these, mergers the acquirer and target companies are related through basic technologies, production processes or markets. The acquired companyrepresents an extension of product line, market participants or technologies ofthe acquiring companies. These mergers represent an outward movement bythe acquiring company from its current set of business to adjoining business.



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The acquiring company derives benefits by exploitation of strategic resourcesand from entry into a related market having higher return than it enjoyedearlier. The potential benefit from these mergers is high because thesetransactions offer opportunities to diversify around a common case of strategicresources.

Western and Mansinghka classified congeneric mergers into product extensionand market extension types. When a new product line allied to orcomplimentary to an existing product line is added to existing product linethrough merger, it defined as product extension merger, Similarly marketextension merger help to add a new market either through same line ofbusiness or adding an allied field . Both these types bear some commonelements of horizontal, vertical and conglomerate merger. For example, mergerbetween Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a Product extension merger and merger between GMM Company Ltd. and XproLtd. contains elements of both product extension and market extension merger.

4)

Conglomerate merger:

These mergers involve firms engaged in unrelated type of business activities i.e.the business of two companies are not related to each other horizontally ( in thesense of producing the same or competing products), nor vertically (in the senseof standing towards each other on the relationship of buyer and supplier orpotential buyer and supplier). In a pure conglomerate, there are no importantcommon factors between the companies in production, marketing, research anddevelopment and technology. In practice, however, there is some degree ofoverlap in one or more of this common factors.

Conglomerate mergers are unification of different kinds of businesses under one

flagship company. The purpose of merger remains utilization of financialresources, enlarged debt capacity and also synergy of managerial functions.However these transactions are not explicitly aimed at sharing these resources,technologies, synergies or product market strategies. Rather, the focus of suchconglomerate mergers is on how the acquiring firm can improve its overallstability and use resources in a better way to generate additional revenue. Itdoes not have direct impact on acquisition of monopoly power and is thusfavored throughout the world as a means of diversification.

Q: 6). What are the advantage of disinvestment in the Public SectorUnits?

Answer:

Disinvestment refers to sale of Government equity, either wholly or partially toprivate sector.. Disinvestment is the process in which certain percentage ofshares of public sector units is disinvested to private sector. It is also known asprivatization. Through disinvestment government can withdraw its resourcesinvested in public sector undertaking (PSUs) and can use such resources for



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development of the economy. When a PSU is disinvested government usuallykeeps strategic control in to strategic and nonstrategic areas.

Some of the advantages of disinvestment in Public Sector Units are:

1. Releasing large amount of public resources: the primary objective ofdisinvestment is to release public resources for deployment in areas that aremuch higher on the social priority, such as, basic health, family welfare,primary education and social and essential infrastructure.

2. Get rid off bureaucratic set up: Management of public sector does not havethe independence to take decision. Most of decision of PSE is taken by theministers. Their decisions are politically motivated and are delayed. As a result,production capacity is not fully utilized and there is fall in productivity.

3. Get rid off uneconomic price policy: price of public utility services likeelectricity, irrigation, transport, water, etc. are determined on the basis of

political, social, and other non-economic consideration rather than on the basiscommercial principles. In some cases, prices are deliberately kept less than thecost of production. Privatization is advocated to avoid such losses.

4. Reduce burden on the government: at least 53 public sector units arerunning at loss. This creates unnecessary economic burden on the government. The management and any other person are indifferent to profit earned or lossesincurred. So government has promoted privatization for reducing its economicburden.

5. Avail benefit of capitalism: capitalism is very successful countries like Japan, USA, Hong Kong, Singapore, Korea etc. considering the benefits of

capitalism like increase in competition, increase in technology advancement,increase deficiency the government has decided to adopt privatization.

6. To Solve financial crisis of government: Government is falling shorts offunds to develop infrastructure. This finance crisis could be solved by sellingpart of government equity at remunerative prices and thereby getting fundsfrom their sale.

7. For Promoting Industrial Growth: Government thought that public sectorwill not be able to bear the burden of developing basic and heavy industriesalone, because of shortage of funds. So privatization was promoted to increaseindustrial growth

8. For promoting Globalization: Globalization can only be promoted throughprivatization, because foreign entrepreneurs prefer to join hands with privatesector. By globalization benefits of foreign investment and foreign technologycan be availed.



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Assignment B

Q: 1). Explain the Discounted Cash Flow method in details, with thehelp of suitable example?

Answer:

Discounted cash flow (DCF) is the most commonly used valuation method fordetermining the price of a company. In a DCF valuation, projections of thetarget company’s future free cash flow are discounted to the present andsummed to determine the current value. The implication of a DCF valuation isthat when ownership of the target company changes hands, the buyer will ownthe cash flows created by continued operations of the target. Key elements of the DCF model are financial projections, the concepts of free cash flow, and thecost of capital used to calculate an appropriate discount rate.

The first step in a DCF valuation is developing projections of the target

company’s financial statements. Intimate knowledge of the target company’soperations, historical financial results, and numerous assumptions as to theimplied future growth rate of the company and its industry are key elements ofgrounded financial projections. In addition, it is necessary to determine areasonable forecast horizon, which depending on industry and company stage,can range between five and ten years.

The next step in a DCF valuation is determining the target company’s futurefree cash flows. The most basic definition of free cash flows is cash that is leftover after all expenses (including cost of goods sold, operating and overheadexpenses, interest and tax expenses, and capital expenditures) have beenaccounted for; it is capital generated by the business that is not needed for

continued operations and accordingly, it is the capital available to return toshareholders without impairing the future performance of the business.Determining the free cash flows of a business is a function of understanding and utilizing the basic financial data provided in the target’s projected financial statements. That being said it is extremely important in determining acompany’s free cash flows to have both general knowledge of financialstatements and a thorough understanding of the target company’s accountingpractices as projections are often heavily influenced by historical financialstatement data.

After determining the free cash flows for the target over the designated forecastperiod (typically five years), a terminal value is assigned to all future cashflows (everything post five years), which should be consistent with both industrygrowth rates and inflation predications. (Note: During the Internet bubble,optimistic entrepreneurs often made the mistake of assuming their company’sgrowth rate would forever exceed that of the U.S. economy, yielding sizeable yetunrealistic valuations). Two primary methods are used for assigning a terminalvalue:



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1)

Perpetual growth, which assumes that the target’s free cash flowwill grow indefinitely at a given rate, and

2)

Exit multiples implied by comparable company or transactionmultiples described in previous sections.

Perhaps the most crucial concept of the discounted cash flow valuation methodis that of a discount rate. As future free cash flows occur in the future and thetarget business is being valued today, it is necessary to adjust future inflows ofcapital to today’s dollars.

This discount rate encapsulates the idea the money today is worth more thanmoney in future. If given the choice between $100 today and $100 two yearsfrom now, most people would choose the former as they would have theopportunity to invest that money and reasonably expect to receive more than$100 two years from now. This same concept, the time value of money, is usedto apply an appropriate discount rate to the future free cash flows and theterminal value of a target business.

Finally, after discounting all future cash flow to today’s dollar, the targetcompany’s cash flows can be summed to yield a final implied valuation.Unfortunately, like the other valuation methods described, the DCF valuationmethod has its flaws — the most prominent being that it is grounded inassumptions and financial projections that are prone to human error.

Discounted Cash Flow Example

Since the discounted cash flow is used primarily in real estate, let's use anexample of a hypothetical construction company. Let's say a constructioncompany is evaluating two projects. Below are the scenarios for each project.

Project A - small apartment complex

o 8 million in costso 10 million sales priceo 1 year to complete the project

Project B - retail office

o 12 million in costso 16 million sales price

o

3 years to complete project

In Project A the future cash flow is 2 million. This means that over the course ofthe year the return would be 2M/8M = 25%. We now have to discount thisvalue to reflect how the cash could have been used over the same period. Let'sassume the 10 million could have been invested in Treasury Notes at a perannum rate of 6%. This would represent $600,000 dollars’ worth of interestmade over the year. So in order to get the present value of the investment, we



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would take 10M - $600,000 for a total of $9,400,000. Then we subtract the$940,000,000 - $800,000,000 (initial investment) to get the true value of$1,400,000 for Project A. This represents a 17.5% return on the initialinvestment.

Project B is 4M which is double the money of Project A. The return on the

project is 4M/16M = 25%, which is the same rate of return for Project A. Nowlet's again assume that if the company did not have to take this project on, theycould invest $16M in Treasury Notes at 6% over three years. This wouldrepresent 3M dollars’ worth of interest over the 3 year period. So, in order to getthe present value of the investment, we would take 16M - 3M for a total of 13M.Once we subtract 13M - 12M (initial investment) the true value of the deal is1M. This represents a return on the initial investment of 1M/12M = 8.33%.

Project B returns 8.33%, but this return is over a 3 year period, which isroughly 2.77% return per year. So, while Project A is a smaller deal, it is abetter business deal because the return on the initial investment is far greateron a per year basis.

Q: 2). What do you mean by Leverage Buy out (LBO)? How LeverageBuy Out deals take place?

Answer:

A leveraged buy-out (LBO) is an acquisition of a public or private company inwhich the takeover is financed predominantly by debt with minimum equityinvestment. The debt is typically structured to include a combination of bankloans, loans from other financial institutions and bonds with below investment-grade credit ratings, referred to as high-yield bonds. Assets of the acquired

company act as collateral for the debt and interest and principal obligations aremet through cash flows of the refinanced company.

Basically a leveraged buyout transaction is funded through a mix of equity anddebt, but usually debt will make up the larger part. Debt can be in the form oftraditional bank financing, bond offerings, seller financing and loans fromspecialized funds. During the LBO boom of 1980's, the debt portion wasnormally as low as 10%. But nowadays, it has increased to up to 40% of thetotal value of the transaction.

Takeover of a company or controlling interest in a company, using a significantamount of borrowed money. Often the target company's assets serve as

collateral for the borrowed money.

Leveraged buyout is a tactic through which control of a corporation is acquiredby buying up a majority of their stock using borrowed money. A leveragedbuyout may also be referred to as a hostile takeover, a highly-leveragedtransaction, or a bootstrap transaction.



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A leveraged buyout (LBO) occurs when a financial sponsor acquires acontrolling interest in a company's equity and where a significant percentage ofthe purchase price is financed through leverage (borrowing). The assets of theacquired company are used as collateral for the borrowed capital, sometimeswith assets of the acquiring company. The bonds or other paper issued forleveraged buyouts are commonly considered not to be investment grade

because of the significant risks involved.

Companies of all sizes and industries have been the target of leveraged buyouttransactions, although because of the importance of debt and the ability of theacquired firm to make regular loan payments after the completion of a leveragedbuyout, some features of potential target firms make for more attractiveleverage buyout candidates, including:

o Low existing debt loads;o A multi-year history of stable and recurring cash flows;o Hard assets (property, plant and equipment, inventory, receivables) that

may be used as collateral for lower cost secured debt;o The potential for new management to make operational or other

improvements to the firm to boost cash flows;o Market conditions and perceptions that depress the valuation or stock

price.

The LBO transaction will generally take one of two basic forms: the sale ofassets or the cash merger. Under the cash merger format, the acquiredcompany disappears upon merger into the acquiring company and itsshareholders receive cash for their shares.

Under the sale of assets format, on the other hand, the operating assets become

part of the buying company but the selling company will generally be given theoption of either receiving cash or continuing to hold their shares in the sellingcompany.

Typically, leveraged buyout uses a combination of various debt instrumentsfrom bank and debt capital markets.

And the assets of the acquired company are used as collateral for the borrowedcapital.

Q: 3). What are the reason of Merger & Acquisition?

Answer:

There are several reasons for merger and acquisition that include:

1) Economies of large scale business: One of the most important reasonsfor M&A is that a large-scale business organization enjoys both internal andexternal economies which generally lead to reduction in cost and increase inprofits. Motives for Mergers & acquisitions.



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2) Elimination of competition: This is also one of the motivating factorsfor M&A because it eliminates severe, intense and wasteful expenditure bydifferent competing organizations.3) Adoption of modern technology: The adoption of modern scientifictechnology by a corporate organization requires large resources which maybe out of reach of an individual firm. This may induce M&A of different

firms.4) Lack of technical and managerial talent: In the developing countries atthe earlier stages of industrialization, scarcity of entrepreneurial, managerialand technical talent is also one of the important factors that leads to M&A.5) Effect of Trade Cycles: Trade cycles are the periods of ups and downsin an economy. Ups are the periods of boom when production is on largescale, profits are more, employment is maximum and new firms crop upindiscriminately in all directions. This situations creates unhealthycompetition and acts as a motivating factors for M&A. on the other hand,downs are the period of depression when economic activity reaches to itslowest point. During depression, only efficient and large firms manage tosurvive and inefficient firms, to reduce the risk of failures, preferred to bemerged or acquired by strong firms.6) Desire to enjoy monopoly power: M&A leads to monopolistic control inthe market. In the situation of monopoly, a firm can easily make adjustmentin the supply and price of products and can also increase the profit of thefirm.7) Patent rights: The exclusive right to use the invention of any newmachines, method or idea is one of the reasons favoring M&A. Patents havegiven monopoly position to many firms in the market at national andinternational levels.8) Desire to unified control and self-sufficiency: Firms which depends onother units for their raw material requirements or which are engaged in

different process of product for ensuring uninterrupted supply of rawmaterials are encouraged and benefited by M&A. By bringing such firmsunder unified control, their dependence on other firms can be avoided.9) Personal Ambition- One of the factors favoring M&A is personalambition of becoming the chief of a personal empire. The desire of a personto increase profits and enlarge his own industrial empire is the factor at theback of many M&A.10) Government Pressure: Whenever the government of a countryfeels that the competition among firms is providing harmful to the countryor it want to improve overall efficiency of industrial undertakings, it canpressurize for M&A through legislation. 11) Strategic benefits: A company may go into acquisition or merger

in order to change strategic direction or expand in a particular industry. Indoing so, it is prudent to acquire a company already engaged in thatindustry, rather than dependence on internal expansion. This may offerseveral strategic advantages such as a pre-emptive move it can prevent acompetitor from establishing a similar position in that industry.12) Complementary resources: Two firms may also merge in order tohave complementary resources. For example, a small firm with an innovativeproduct may need the engineering capability and marketing reach of a bigfirm. With the merger of the two firms, they will better able to manufacture



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and market the innovative product to the maximum point due to the firmscomplementing each other from the resources they both have. Hence, thetwo firms will be able to conduct business more efficiently and effectivelythan if they were to stay separately from each other. 13) Tax shield: When a firm with accumulated losses and/orunabsorbed depreciation merges with a profit making firm, tax shields are

utilized better.14) Utilization of surplus funds: In a matured industry, you havefirms that generate a lot of cash but unable to make profitable investmentdecisions. In such as case the firm ought to distribute generous dividendsand even buy back its shares, to the same is possible. But mostmanagement has a tendency to make further investments, even though theymay not be profitable. In this case the investment decision should be amerger with another firm involving cash compensation which oftenrepresents a more efficient utilization of surplus funds. 15) Managerial effectiveness: One of the potential gains of merger isan increase in managerial effectiveness. This may occur if the existingmanagement team, which is performing poorly, is replaced by a moreeffective management team. Most often than not, a firm may be sufferingfrom managerial inadequacies and inefficiencies, can gain immensely fromthe superior management that is likely to emerge as a result of the merger. 16) Diversification: A commonly stated motive for mergers is toachieve risk reduction through diversification.

But all what we are discussed may be contained in this three majorreasons of merger and acquisition:

o Synergy: 2+2=5, total value of firms after M&A is greater than theirsimple arithmetic sum

o

Strategic fit: To improve the position in the market To fill the large gapof planned and achieved growth going abroado Basic Business Reason: More feasible than internal investment

Diversification.



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CASE STUDY

Tata Motors: Acquisition of Jaguar & Land Rover

Ford Motors Company

Location: Dearborn, Michigan; Founded: 1903 by Henry Ford; Competitors:General Motors, Toyota;

Brand names: Lincoln, Mercury, Volvo, Mazda, Jaguar and Land Rover, CEO:Alan Mulally.

1913 - Assembly Line: “low priced, mass-produced automobile with standardinterchangeable parts.” Hiring of African Americans, Virtual manufacturing,focus on safety, Advantage through fuel efficiency.

Jaguar: The ups and downs:

1922 - Founded in Blackpool as Swallow Sidecar Company1960 - Jaguar name first appeared in 19351975 - Nationalized in due to financial difficulties1984 - Floated off as a separate co in the stock market1990 - Taken over by Ford

A statement of ultra-luxury, Holds Royal warrants, Rarely advertised Ford ’ sformula one entry since 1990s.

1948: Land Rover is designed by the Rover Car co1976: One millionth Land Rover leaves the production line1994: Rover Group is taken over by BMW2000: Sold to Ford for £1.8 billion.

The case of Land Rover:

Known for superior off-road performance, Used by military for projects andexpeditions, Safe but less reliable, Makeover in recent times

Key issues:

• Ford acquired Jaguar for $2.5 billion in 1989.

• Ford acquired Land Rover for $2.75 billion in 2000.• But the US auto major put the two marquees on the market in 2007 afterposting losses of $12.6 billion in 2006 - the heaviest in its 103-year history.

The Deal Process: - 12/06/2007- Announcement from Ford that it plans tosell Land Rover and Jaguar.

August 2007 - Major bidders are identified



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Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital,Apollo Management

• India’ s Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b)• 03/01/2008 – Ford announces Tatas as the preferred bidders• 26/03/2008 - Ford agreed to sell their Jaguar Land Rover operations to TataMotors.• 02/06/2008 – The acquisition is complete

TATA MOTORS – A SNAPSHOT

TATA GROUP is 150 year old, Previously Tata Engineering and LocomotiveCompany, Telco.

Tata Motors‟ s break-even point for capacity utilization is one of the best in theindustry worldwide

Listed on the New York Stock Exchange in 2004.

Making Waves Internationally

• NANO will mark the advent of India as a global centre for small-carproduction and represent a victory for those who advocate making cheap goodsfor potential customers at the 'bottom of the pyramid' in emerging markets.

• International praise came from Standard & Poor’s, which in December 2006expressed the view that the “policy to support its companies and the improvedfinancial profile of its entities also enhances the overall financial flexibility of Tata Motors.”

Why is Ford selling?

• Reports said losses at Jaguar stood at USD 715 million in 2006. Jaguar hasbeen a dog i.e. it has not been able to provide any profit for ford because of thehigh manufacturing costs provided in the United Kingdom.

• The strong boy Land Rover's profit, on the other hand, was driven by therecord sale of 2.26 lakh vehicles, an 18% YoY growth in 2007..

• Bringing down production costs and turning around the companysuccessfully will be the challenge,” analysts said. It’ s a test that Ford failed.

• Ford is combining both the brands since the products and manufacturing ofvehicles for Land Rover and Jaguar is so intertwined.

Ratan Tata says?

• We aim to support their growth, while holding true to our principle of allowingthe management and employees to bring their experience and expertise to bearon the growth of the business.„



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• 'We have enormous respect for the two brands and will endeavor to preserveand build on their

• Heritage and competitiveness, keeping their identities intact,' he said in astatement.

Advantages to acquire JLR?

• Long term strategic commitment to automotive sector.• Opportunity to participate in two fast growing auto segments.• Increased business diversity across markets and products.• Land rover provides a natural fit for TML ‟ s suv segment.• Jaguar offers a range of “performance/luxury” vehicles to broaden the brandportfolio.• Benefits from component sourcing, design services and low cost engineering

Tata and the dream

NEED FOR GROWTH

• In the past few years, the Tata group has led the growing appetite amongIndian companies to acquire businesses overseas in Europe, the United States,Australia and Africa - some even several times larger - in a bid to consolidateoperations and emerge as the new age multinationals.

• Tata Motors is India's largest automobile company, with revenues of $7.2billion in 2006-07. With over 4 million Tata vehicles plying in India, it is theleader in commercial vehicles and the second largest in passenger vehicles.

COMPETITIVE ADVANTAGE

• Tata Motors is vulnerable to greater competition at home. Foreign vehiclemakers including Daimler, Nissan Motor, Volvo and MAN AG have struck localalliances for a bigger presence.

• Tata Motors, which has a joint venture with Fiat for cars, engines andtransmissions in India, is also facing heat from top car maker Maruti SuzukiIndia Ltd, Hyundai Motor, Renault and Volkswagen.

Analysts pick

• Analysts indicate that Tata Motors can comfortably finance the acquisition of

Jaguar and Land Rover.

The Indian automaker is sitting on a cash pile of over Rs 6,000 crore andgenerated free cash of over Rs 1,000 crore during FY07. It can easily use thesereserves to raise more funds without endangering its finances. At the end of lastfinancial year, Tata Motors‟ debt-to-equity ratio was a low 0.56, giving it amplehead room to raise more funds.



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• Over the next 3-4 years, Tata Motors plans to invest Rs 12,000 crore in settingup new units for a small car, trucks and SUVs and also to expand the capacityof its existing units.

• Challenge for Tata Motors. These marquee brands have very high productioncosts and require phenomenally high engineering and research capabilities as

they compete with likes of BMW and Audi.

“Taking over the brand is easy, bringing down production costs and turningaround the company successfully, will be the challenge,” analysts said. It’ s atest that Ford failed.

WHAT IS TATA PAYING FOR????

FINANCING WAYS

• Low leverage of the auto biz provides funding flexibility• Currently financed the purchase through a $3bn, 15month bridge loan – It intends to refinance the loan through long-term funds• valuable stakes in group companies – owns $400m of Tata Steel at current prices – owns stake in Tata Sons (Tata Group‟ s holding company) worth at least$600m



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2. Tata Group has multiple levers

Tata Auto Comp (TACO) - TATA group has a a rich ecosystem of JVs withleading players in Auto ancillary space held through TACO.

TCS, Corus and Tata Technologies have varied competencies in the Autospace

We believe an improvement of 50-70bps in EBITDA margin possible in JLRover the next 2 years (current EBITDA margin)

- We estimate CY2007 EBITDA margin of JLR at around 6.5% – This couldmake the acquisition

PAT accretive in CY2009/FY10E

TAMO + JLR: Leverage and Valuation ratios

Leverage increases but coverage ratios reasonable

• Headline Debt/Equity of TAMO would increase to 2.5x from 1x• Excluding the vehicle finance biz, leverage would go to 1.2x• EBITDA/Interest remains at 5.0

TAMO is trading inline/modest discount to global peers

• EV/Sales (1-yr forward) of 0.5x against 0.4x for global peers• P/E (1-yr forward) of 6.5x against 8.5x for global peers

Q: 1). a) Write your observation regarding the JLR deal? Mention itsadvantages & disadvantages of this deal?

Answer:

Although Tata Motors has proven excellence over the years through continuousstrong financial results market expansion, acquisition, joint ventures andimprovement and introduction of new products, it seems to have a promisingfuture. But it failed the expectation as the company was in trouble right afterthe acquisition of jaguar and land Rover (JLR) in June 2008, due to arrival ofglobal financial crisis.

And as the nature of any financial deal there is an advantage which is thedesirable of the deal and disadvantage which the deal may came up with, andthis is some of the advantage and disadvantage of Tata JLR deal:

Advantage

o Global image: Tata Motor’s decision to acquire JLR will facilitate to the

company to go global by acquiring famous international brand toincrease its global image.

o By acquiring JLR, Tata Motors able to obtain intellectual property rightsrelated to the technologies from JLR at the meantime improvecorporation’s image and increase its public reputation.



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o Increased business diversity across markets and productso Improved corporation’s image and increased its public reputationo Opportunity to participate in two fast growing auto segments to fulfill

part of Tata group’s ongoing strategy of internationalization.

Disadvantage of the JLR deal

o High cost Manufacturing: These two brands need high production andmanufacturing costs, analysts said. It’s a test that Ford failed

o FALL IN SHARE PRICE: Company’s share prices dropped in the marketafter JLR deal because of the investor perception that it was not the righttime to invest in JLR deal, when TATA had recently undergone hugecapital expenditure for other automobile industry projects like {TataNano}

o Facing a hard competition with big automobile brands in the globalmarket: after JLR acquisition TATA motors should go to compete withglobal automobile giants like Mercedes, BMW, Lexus and infinity.

b) Why Ford Sell out these two iconic brands? Mention the reasons?

Answer:

o These two iconic brands have very high production costs and requirehigh engineering and research capabilities to compete with the bigbrands in car industry and that is way ford need to sell these two highcost manufacturing brands to bring down its production costs.

o Also Jaguar was not performing well as it was unable to provide anyprofit for Ford due to high manufacturing costs in the United Kingdom,and in this context Jaguar Faced a losses which stood at USD 715million Due to 2006 report.

c) What are the consequences of this deal financing on TATA group andits market position?

Answer:

JLR TATA deal coincidentally met with a global financial crisis, due to this badsituation many questions arrived at the front, whether TATA Motors able torepay the bridge loan? Will it be able to build up investors’ confidence andincrease sales in the future? Could TATA Motors survive or going underbankruptcy. And because of that all the points below emerged as consequence

of financing this deal Lack of access to credit to repay the bridge loan of US$ 3 billion Share price dropped drastically and affect its global image. Tata motors may also face a greater risks due to this facts :

o Global financial crisis has severely impacted the global automobileindustry especially the luxury cars segment.o Increasing materials and fuel prices have slowed the demand ofvehicles.



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ASSIGNMENT – C

MULTIPLE CHOICE QUESTIONS

Q: 1). ________ is equal to the total market value of the firm'scommon stock divided by (the replacement cost of the firm's assetsless liabilities).

a) Book value per shareb) Liquidation value per sharec) Market value per shared) Tobin's Q ( )e) None of the above.

Q: 2). High P/E ratios tend to indicate that a company will _______,ceteris paribus.

a) grow quickly ( )

b)

grow at the same speed as the average companyc) grow slowlyd) not growe) none of the above

Q: 3). ________ are analysts who use information concerning currentand prospective profitability of a firms to assess the firm's fair marketvalue.

a) Credit analystsb) Fundamental analysts ( )c) Systems analystsd) Technical analystse)

Specialists

Q: 4). _______ is the amount of money per common share that couldbe realized by breaking up the firm, selling the assets, repaying thedebt, and distributing the remainder to shareholders.

a) Book value per shareb) Liquidation value per share ( )c) Market value per shared) Tobin's Qe) None of the above

Q: 5).

The ______ is a common term for the market consensus valueof the required return on a stock.

a) dividend payout ratiob) intrinsic valuec) market capitalization rate ( )d) plowback ratee) none of the above



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Q: 6). Net profit is equal to:

a) Sales less cost of sales and operating expensesb) Gross profit less operating expensesc) Sales less operating expensesd) Both (a) & (b) ( )

Q: 7). In the long run, a successful acquisition is one that:

a) Enables the acquirer to make an all-equity purchase, therebyavoiding additional financial leverage.

b) Enables the acquirer to diversify its asset base.c) Increases the market price of the acquirer's stock over what it

would have been without the acquisition ( ).d) Increases financial leverage.

Q: 8). A tender offer is

a) A goodwill gesture by a "white knight."b) A would-be acquirer's friendly takeover attempt.c) A would-be acquirer's offer to buy stock directly from

shareholders ( )d) Viewed as sexual harassment when it occurs in the workplace.

Q: 9). You are considering acquiring a common stock that you wouldlike to hold for one year. You expect to receive both $2.50 in dividendsand $28 from the sale of the stock at the end of the year. Themaximum price you would pay for the stock today is _____ if youwanted to earn a 15% return.

a) $23.91b) $24.11c) $26.52d) $27.50e) none of the above ( )

Q: 10). The public sale of common stock in a subsidiary in which theparent usually retains majority control is called

a) A pure play.b) A spin-off.

c)

A partial sell-off.d) An equity carve-out ( ).

Q: 11). One means for a company to "go private" is

a) Divestiture.b) The pure play.c) The leveraged buyout (LBO) ( ).d) The prepackaged reorganization.



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Q: 12). Hindrance for going in the international business is known as

a) Synergyb) Turn key pointc) Trade barrier ( )d) Minority interest

Q: 13). ___________________ is the combination of at least two firmsdoing similar businesses at the same market level.

a) Diversified activity Mergerb) Horizontal Merger ( )c) Joint Ventured) Vertical Merger.

Q: 14). Which of the following is NOT recognized as a misconceptionabout entrepreneurship?

a) Entrepreneurship is found only is small businesses.

b)

Entrepreneurship is easy.c) Successful entrepreneurship needs only a great idea.d) Entrepreneurial ventures and small businesses are different ( )

Q: 15). An entrepreneur’s primary motivation for starting a businessis

a) To make moneyb) To be independent ( ).c) To be famousd) To be powerful

Q: 16).

Entrepreneurs typically forma) Service businessesb) Manufacturing companiesc) Constructive companiesd) A variety of ventures ( ).

Q: 17). Joint ventures have been used by entrepreneur:

a) When the entrepreneur wants to purchase local knowledgeb) When rapid entry in to the market is neededc) Both of the options given (

).d) None of the above

Q: 18). The _________ of a venture could be that the company hasexperience in related business.

a) Strength ( ).b) Weaknessc) Opportunityd) Threat



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Q: 19). Franchising is :-

a) Purchase all part of company.b) Allowing another party to use a product or services under the

owner’s name ( ).c) Joining two or more companies.d)

A company acquiring another company against its will.

Q: 20). Many mergers begin through a series of negotiations betweenthe two companies. If the two companies decide to seriouslyinvestigate the possibility of a merger, they will launch Phase II DueDiligence and execute a:

a) Post-Merger Contractb) Formal Joint Conferencec) Merger & Acquisition Agreementd) Letter of Intent ( ).

Q: 21). Either party in a merger and acquisition may be entitled toindemnification because of a significant misrepresentation.Indemnification is usually not due until a certain threshold has beenreached. This threshold amount is often called the:

a) Reciprocal Amountb) Basket Amountc) Striking Price ( ).d) Closing Rate

Q: 22). On March 3, 1998, Miser Steel made a tender offer to acquire

Reliance Steel. Miser's tender offer is set to expire on March 23, 1998.On March 21, 1998, another company called Ohio Steel made a tenderoffer to acquire Reliance Steel. Based on consideration of Ohio Steel'stender offer, the closing date for Miser Steel's tender offer is:

a) March 21, 1998b) March 23, 1998 ( ).c) March 25, 1998d) March 31, 1998

Q: 23). Due diligence requires the collection of a lot of information.

Which of the following information types would be least important fordue diligence to work properly?

a) Employment Records of Target Company ( ).b) Property Records of Competing Companiesc) Financial Records of Target Companyd) Property Records of Target Company



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Q: 24). Due diligence will attempt to restate financial statements inrelation to what will take place after the two companies merge. Onearea of particular concern as it relates to the Balance Sheet is:

a) Proper Valuation of Cashb) Par Value Assigned to Stockc)

Selection of Depreciation Methodsd) Possible Understatement of Liabilities ( ).

Q: 25). Due diligence is particularly important in the case of a reversemerger since it is necessary to "clean the Shell Company." Oneimportant aspect of cleaning the Shell Company is to:

a) Confirm ownership of the Shell Company ( ).b) Identify cultural and social issuesc) Plan for long-term integrationd) Evaluate human resource capital

Q: 26). The following are examples of changes in corporate controlexcept:

a) Merger & Acquisitionb) Leverage Buy Out (LBOs)

c) Proxy fights ( ) d) Spin-Off & carve-outs

Q: 27). Leveraged buyouts (LBOs) almost always involve:

a) AAA grade debt

b)

Issuance of new shares of stock to many investors.

c) Junk grade debt ( ) d) ……All of the above

Q: 28). Which of the following tactics completely eliminates thepossibility of a takeover via tender offer?

a) Leverage Buy Out (LBOs) ( ) b) Exclusionary sekf-tenderc) Targeted repurchased) Super majority amendment.

Q: 29). Big gainers from LBOs were:

a) Junk bond holderb) Raidersc) Selling stockholders ( ).d) Investment banking firm.



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Q: 30). Junk bonds are bonds with:

a) AAA or Aaa ratingsb) BBB or Baa ratingsc) BB or Ba ratings ( ).d) D rated bonds.

Q: 31). In case of carve-outs:

a) Shares of the new company are given to the shareholders of theparent company

b) Shares of the new company are sold in a public offering ( )c) Shares of the new company are bought by borrowing or issuing

junk bondsd) None of the above.

Q: 32). A privatization is a:

a) Sale of a government-owned company to private investor ( )b) Sale of private companies to the government.c) Sale of a publicly traded company to private investors.d) None of the above.

Q: 33). Which of the following statements regarding spin-offs andcarve-outs is not true?

a) Spin-offs are not taxed if the shareholders of the parentcompany are given a majority of shares in the new company( ).

b)

Spin-offs are not taxed if the shareholders of the parent companyare given at least 80% of the shares in the new company.

c) Gains or losses from carve-outs are taxed at the corporate taxrate.

d) None of the above.

Q: 34). The following are important motives for privatization except:-

a) Revenue for the government.b) Increased efficiency.c) Conglomerate merger ( ).

d)

Privatization.

Q: 35). "Effective" control of a firm requires approximately:

a) 100% ownership.b) 51% ownership.c) 50% ownership.d) 20% ownership ( ).



Q: 36). Suppose that the market price of Company X is $45 per shareand that of Company Y is $30. If X offers three-fourths a share ofcommon stock for each share of Y, the ratio of exchange of marketprices would be:

a) .667b)

1.0c) 1.125 ( )d) 1.5.

Q: 37). The restructuring of a corporation should be undertaken if

a) The restructuring can prevent an unwanted takeover.b) The restructuring is expected to create value for shareholders

( )c) The restructuring is expected to increase the firm's revenue.d) The interests of bondholders are not negatively affected.

Q: 38).

The "information effect" refers to the notion that

a) A corporation's actions may convey information about itsfuture prospects ( ).

b) Management is reluctant to provide financial information that isnot required by law.

c) Agents incur costs in trying to obtain information.d) The financial manager should attempt to manage sensitive

information about the firm.

Q: 39). In the long run, a successful acquisition is one that:

a)

Enables the acquirer to make an all-equity purchase, therebyavoiding additional financial leverage.

b) Enables the acquirer to diversify its asset base.c) Increases the market price of the acquirer's stock over what it

would have been without the acquisition ( ).d) Increases financial leverage.

Q: 40). Bidding companies often pay too much for the acquired firm.The hubris hypothesis explains this by suggesting that the bidders

a) Have too little information to make an optimal decision.

b)

Have big egos and this impedes rational decision-making (

).c)

Have difficulty in thinking strategically over the long-term.d)

Are overly influenced by the tax consequences of an acquisition.

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MAA Assignments