Wall St. Prep - M&A
Study online at https://quizlet.com/_cz3u1c
1. Potential reasons to acquire another company: * Value Creation from Revenue
and Cost Synergies Ownership of Technology Assets (IP, Patents, Proprietary Tech-
nology)
* Talent Acquisitions (New Skilled Employees)
* Expansion in Geographic Reach or into New Product/Service Markets
* Diversification in Revenue Sources (Less Risk, Lower Cost of Capital)
* Reduce Time to Market with New Product Launches
* Increased Number of Channels to Sell Products/Services
* Market Leadership and Decreased Competition (if Horizontal Integration)
* Achieve Supply Chain Efficiencies (if Vertical Integration)
* Tax Benefits (if Target has NOLs)
2. Broad auction: In a broad auction, the sell-side bank will reach out to as many
prospective buyers as possible to maximize the number of interested buyers. Since
competition directly correlates with the valuation, the goal is to cast a wide net
to intensify an auction's competitiveness and increase the likelihood of finding the
highest possible offer (i.e., removing the risk of "leaving money on the table")
3. Targeted auction: In a targeted auction, the sell-side bank (usually under the
client's direction) will have a shortlist of buyers contacted. These contacted buyers
may already have a strong strategic fit with the client or a pre-existing relationship
with the seller.
4. Negotiated sale: A negotiated sale involves only a handful of potential buyers and
is most appropriate when there's a specific buyer the seller has in mind. A potential
reason for this type of sale approach could be the seller intends to stay on and
strongly values the partnership and growth opportunities.
Under this approach, the speed of close and confidentiality are two distinct benefits.
These deals are negotiated "behind-closed-doors" and generally on friendlier terms
based on the best interests of the client.
5. Common reasons why M&A deals fail to create value: 1. Overpaying/overes-
timating synergies
2. Inadequate due diligence
3. Lack of a strategic plan
4. Poor execution/integration
6. Examples of material adverse changes (MACs): 1. Significant changes in
economic conditions, financial/credit/capital markets
2. Changes in regulation, GAAP, or transaction litigation (ex: anti-trust)
3. Natural disasters, geopolitical change
4. Missing financial performance targets
7. Asset sale: In an asset sale, the seller will sell the assets to the buyer with each
asset contractually sold. Once the buyer holds all the assets, it controls the business
1/8
, Wall St. Prep - M&A
Study online at https://quizlet.com/_cz3u1c
by having everything that made the seller's
equity worth something.
In the asset sale, the buyer gets the incremental D&A tax benefits - meaning, the
tax basis of assets is stepped up, which creates tax-deductible D&A and future cash
tax savings.
But the seller potentially faces double taxation - first on the corporate level and then
on the shareholder level
8. Stock sale: In a stock sale, the seller gives the buyer shares. Once the buyer
holds all the target shares, it controls the business from being its new owner.
In a stock sale, the buyer doesn't get a stepped-up basis in the seller's assets, which
means the
buyer cannot benefit from lower future taxes due to incremental deal-related D&A.
The seller is taxed only at the shareholder level (as opposed to the corporate level).
9. 338(h)(10) election: A 338(h)(10) is something both buyer and seller can jointly
elect to do, which gives you the tax treatment of an asset sale without the hassle
of actually exchanging individual assets. This applies to acquisitions of corporate
subsidiaries or S-corps, and most applicable when the target has a high amount of
NOLs.
A 338(h)(10) offers the benefits of stock sales along with the tax savings of an asset
sale. Legally, a 338(h)(10) is considered a stock sale but treated as an asset sale
for tax purposes.
The seller is still subject to double-taxation, but the buyer can benefit from the tax
advantages of the step-up of assets and the NOLs - leading to a higher purchase
price.
10. Methods of hostile takeovers: Tender offer
Proxy fight
11. Tender offer: In a tender offer, the acquirer will publicly announce an offer to
purchase shares from existing shareholders for a premium. The intent is to acquire
enough voting shares to have a controlling stake in the target's equity that enables
them to push the deal through
12. Proxy fight: Alternatively, a proxy fight involves a hostile acquirer attempting
to persuade existing shareholders to vote out the existing management team to
take over the company. Convincing existing shareholders to turn against the existing
management team and board of directors to initiate a proxy fight is the hostile
acquirer's objective, as the acquirer needs these shareholders' votes, which it does
by trying to convince the company is being mismanaged.
2/8
Study online at https://quizlet.com/_cz3u1c
1. Potential reasons to acquire another company: * Value Creation from Revenue
and Cost Synergies Ownership of Technology Assets (IP, Patents, Proprietary Tech-
nology)
* Talent Acquisitions (New Skilled Employees)
* Expansion in Geographic Reach or into New Product/Service Markets
* Diversification in Revenue Sources (Less Risk, Lower Cost of Capital)
* Reduce Time to Market with New Product Launches
* Increased Number of Channels to Sell Products/Services
* Market Leadership and Decreased Competition (if Horizontal Integration)
* Achieve Supply Chain Efficiencies (if Vertical Integration)
* Tax Benefits (if Target has NOLs)
2. Broad auction: In a broad auction, the sell-side bank will reach out to as many
prospective buyers as possible to maximize the number of interested buyers. Since
competition directly correlates with the valuation, the goal is to cast a wide net
to intensify an auction's competitiveness and increase the likelihood of finding the
highest possible offer (i.e., removing the risk of "leaving money on the table")
3. Targeted auction: In a targeted auction, the sell-side bank (usually under the
client's direction) will have a shortlist of buyers contacted. These contacted buyers
may already have a strong strategic fit with the client or a pre-existing relationship
with the seller.
4. Negotiated sale: A negotiated sale involves only a handful of potential buyers and
is most appropriate when there's a specific buyer the seller has in mind. A potential
reason for this type of sale approach could be the seller intends to stay on and
strongly values the partnership and growth opportunities.
Under this approach, the speed of close and confidentiality are two distinct benefits.
These deals are negotiated "behind-closed-doors" and generally on friendlier terms
based on the best interests of the client.
5. Common reasons why M&A deals fail to create value: 1. Overpaying/overes-
timating synergies
2. Inadequate due diligence
3. Lack of a strategic plan
4. Poor execution/integration
6. Examples of material adverse changes (MACs): 1. Significant changes in
economic conditions, financial/credit/capital markets
2. Changes in regulation, GAAP, or transaction litigation (ex: anti-trust)
3. Natural disasters, geopolitical change
4. Missing financial performance targets
7. Asset sale: In an asset sale, the seller will sell the assets to the buyer with each
asset contractually sold. Once the buyer holds all the assets, it controls the business
1/8
, Wall St. Prep - M&A
Study online at https://quizlet.com/_cz3u1c
by having everything that made the seller's
equity worth something.
In the asset sale, the buyer gets the incremental D&A tax benefits - meaning, the
tax basis of assets is stepped up, which creates tax-deductible D&A and future cash
tax savings.
But the seller potentially faces double taxation - first on the corporate level and then
on the shareholder level
8. Stock sale: In a stock sale, the seller gives the buyer shares. Once the buyer
holds all the target shares, it controls the business from being its new owner.
In a stock sale, the buyer doesn't get a stepped-up basis in the seller's assets, which
means the
buyer cannot benefit from lower future taxes due to incremental deal-related D&A.
The seller is taxed only at the shareholder level (as opposed to the corporate level).
9. 338(h)(10) election: A 338(h)(10) is something both buyer and seller can jointly
elect to do, which gives you the tax treatment of an asset sale without the hassle
of actually exchanging individual assets. This applies to acquisitions of corporate
subsidiaries or S-corps, and most applicable when the target has a high amount of
NOLs.
A 338(h)(10) offers the benefits of stock sales along with the tax savings of an asset
sale. Legally, a 338(h)(10) is considered a stock sale but treated as an asset sale
for tax purposes.
The seller is still subject to double-taxation, but the buyer can benefit from the tax
advantages of the step-up of assets and the NOLs - leading to a higher purchase
price.
10. Methods of hostile takeovers: Tender offer
Proxy fight
11. Tender offer: In a tender offer, the acquirer will publicly announce an offer to
purchase shares from existing shareholders for a premium. The intent is to acquire
enough voting shares to have a controlling stake in the target's equity that enables
them to push the deal through
12. Proxy fight: Alternatively, a proxy fight involves a hostile acquirer attempting
to persuade existing shareholders to vote out the existing management team to
take over the company. Convincing existing shareholders to turn against the existing
management team and board of directors to initiate a proxy fight is the hostile
acquirer's objective, as the acquirer needs these shareholders' votes, which it does
by trying to convince the company is being mismanaged.
2/8
