Course Introduction
Financial Strategy Review
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Financial Strategy explores the principles and frameworks essential for effective financial decision-making within organizations. The course covers topics such as capital structure, funding sources, risk management, valuation, dividend policy, and financial planning aligned with corporate objectives. Students learn how to apply strategic thinking to financial issues, analyze market environments, and evaluate investment opportunities to support organizational growth and long-term value creation. Through real-world case studies and quantitative tools, the course equips students with the skills necessary to develop, implement, and assess comprehensive financial strategies in dynamic business environments.
Recommended Textbook Mergers Acquisitions and Other Restructuring Activities 7th Edition by Donald DePamphilis
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2
Chapter 1: Introduction to Mergers, acquisitions, and Other
Restructuring
Activities
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Q1) A joint venture rarely takes the legal form of a corporation.
A)True
B)False
Answer: False
Q2) How are Xerox and ACS similar and how are they different? In what way will their similarities and differences help or hurt the long-term success of the merger?
Answer: Xerox is a product company and ACS is a services firm.Product firms are more familiar with the manufacturing,sale,and servicing of tangible products.The way in which products are sold and serviced is different from how services are provided.In contrast,services are delivered in a distinctly different manner,require a distinctly different skill set,and often require substantially different branding.Moreover,there is little customer overlap and Xerox customer base is more geographically diverse.Differences between the two firms could enable greater geographic expansion of ACS services.The different skill sets could also encourage technology transfer and learning between the two firms.However,it is likely that Xerox will incur significant expenses in rebranding itself.
Q3) Is this deal a merger or a consolidation from a legal standpoint? Explain your answer.
Answer: The deal is a merger in which P&G will be the surviving firm.
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Chapter 2: The Regulatory Environment
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Q1) The primary shortcoming of industry concentration ratios is the frequent inability of antitrust regulators to define accurately what constitutes an industry,the failure to reflect ease of entry or exit,foreign competition,and the distribution of firm size.
A)True
B)False
Answer: True
Q2) Federal antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for any significant competitor reaction.
A)True
B)False
Answer: True
Q3) The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive.
A)True
B)False Answer: False
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Chapter 3: The Corporate Takeover Market: Common
Takeover Tactics, anti-Takeover Defenses, and Corporate Governance
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Q1) What anti-takeover defenses were in place at AMP prior to AlliedSignal's offer?
Answer: The AMP Rights Agreement,a poison pill,was its primary defense in place before the bid.
Q2) All of the following are true of poison pills except for
A) They are a new class of security
B) Generally prevent takeover attempts from being successful
C) Enable target shareholders to buy additional shares in the new company if an unwanted shareholder's ownership exceeds a specific percentage of the target's stock
D) Delays the completion of a takeover attempt
E) May be removed by the target's board if an attractive bid is received from a so-called "white knight."
Answer: B
Q3) Describe the various takeover tactics Alcoa employed in its successful takeover of Reynolds.Why were these tactics employed?
Answer: Alcoa employed a bear hug letter and threatened to implement simultaneously a proxy contest and tender offer.These tactics were employed to increase pressure on Reynolds' board to accept the offer.
Page 5
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Chapter 4: Planning,developing Business,and Acquisition
Plans: Phases 1 and 2 of the Acquisition Process
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Q1) In a conducting a self-assessment,a firm should consider all of the following except for
A) The degree on government regulation in its targeted markets
B) The effectiveness of its R&D activities
C) Product quality
D) Responsiveness to changing customer needs
E) Brand name recognition
Q2) What are some of the key assumptions implicit in eBay's decision to make this acquisition?
Q3) A business plan articulates a mission or vision for the firm and a strategy for realizing that mission.
A)True
B)False
Q4) Acquisition plan objectives should be directly linked to key business plan objectives. A)True
B)False
Q5) A collection of markets is said to comprise an industry.
A)True
B)False
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Chapter 5: Implementation: Search Through Closing:
Phases 3 to 10 of the
Acquisition Process
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Q1) Confidentiality agreements are usually signed before any information is exchanged to protect the buyer and the seller from loss of competitive information.
A)True
B)False
Q2) Earnouts are generally very poor ways to create trust and often represent major impediments to the integration process.
A)True
B)False
Q3) An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely limit the number of potential candidates.
A)True
B)False
Q4) How might the internet affect the toy industry? What potential conflicts with customers might be created?
Q5) Despite being aware of extensive problems,Mattel proceeded to acquire The Learning Company.Why? What could Mattel to better protect its interests? Be specific.
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Chapter 6: Postclosing Integration: Mergers, acquisitions, and Business Alliances
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Q1) The integration process if done effectively can help to mitigate the potential loss of employees.
A)True
B)False
Q2) Benchmarking important functions such as the acquirer's and the target's manufacturing and information technology operations and processes is a useful starting point for determining how to integrate these activities.
A)True
B)False
Q3) Plant consolidation rarely requires the adoption of a common set of systems and standards for all manufacturing activities.
A)True
B)False
Q4) How did Allianz attempt to retain key employees? In the short run? In the long run?
Q5) Decentralized management control usually facilitates the integration of a newly acquired business.
A)True
B)False
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Chapter 7: Merger and Acquisition Cash Flow Valuation
Basics
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Q1) What are the limitations of the valuation methodology employed in this case?
Q2) For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e.,the rate of return that can be earned at the end of the investor's holding period).
A)True
B)False
Q3) When the firm increases its debt in direct proportion to the market value of its equity,the level of the debt is perfectly correlated with the firm's market value.Consequently,the risk associated with the tax shield (resulting from interest paid on outstanding debt)is the same as that associated with the firm.
A)True
B)False
Q4) The cost of equity is the minimum financial return required by investors to invest in stocks of comparable risk.
A)True
B)False
Q5) What other assumptions might you consider?
Q6) Did @Home overpay for Excite?
Page 9
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Chapter 8: Relative,asset-Oriented,and Real Option
Valuation Basics
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Q1) Why do you believe that the percentage difference between the maximum and minimum valuation estimates varies so much from one valuation method to another? See Table 8-7.
Q2) Limitations in applying the comparable companies' method of valuation include which of the following?
A) Finding truly comparable companies is difficult
B) The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets
C) Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows.
D) A, B, & C
E) A & B only
Q3) The purchase price paid for YouTube represented more than one percent of Google's then market value.If you were a Google shareholder,how might you have evaluated the wisdom of the acquisition?
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Chapter 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions
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Q1) Discrepancies between the way a firm records its financial statements and GAAP accounting standards are common and should be ignored.
A)True
B)False
Q2) What is the purpose of the common-size financial statements developed for Volvo (see Table 8-8 in the textbook)? What insights does this table provide about the historical trend in Volvo's historical performance? Based on past performance,how realistic do you think the projections are for 2000-2004?
Q3) Non-compliance with environmental laws,product liabilities,pending lawsuits,poor product quality, patents,poorly written or missing customer contracts,and high employee turnover are all considered destroyers of value.
A)True
B)False
Q4) It is rarely useful to review more than one or two years of historical data for the acquiring or target firms.
A)True
B)False
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Chapter 10: Analysis and Valuation of Privately Held Companies
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Q1) The discount rate may be estimated using all but the one of the following:
A) The capital asset pricing model
B) The share exchange ratio
C) The cost of capital
D) Return on total assets
E) Price-to-earnings ratio
Q2) If the buyer believes that the seller has overstated revenue in a specific accounting period,the buyer can reconstruct revenue by examining usage levels,in the same accounting period,of the key inputs required to produce the product or service.
A)True
B)False
Q3) Shell corporations may be attractive for investors interested in capitalizing on the intangible value associated with the existing corporate shell.This could include name recognition; licenses,patents,and other forms of intellectual properties; and underutilized assets such as warehouse space and fully depreciated equipment with some economic life remaining.
A)True
B)False
Q4) What were the primary reasons Cantel wants to acquire Crosstex? Be specific.
Page 12
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Chapter 11: Structuring the Deal: Payment and Legal
Considerations
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Q1) What is the form of payment? Why was it used?
Q2) Balance sheet adjustments most often are used in purchases of stock when the elapsed time between the agreement on price and the actual closing date is short.
A)True
B)False
Q3) If the acquirer is interested in integrating the target business immediately following closing,the holding structure may be most desirable.
A)True
B)False
Q4) Stock purchases involve the exchange of the target's stock for cash,debt,stock of the acquiring company,or some combination.
A)True
B)False
Q5) The assumption of seller liabilities by the buyer in a merger may induce the seller to demand a higher selling price.
A)True
B)False
Q6) Did the AirTouch board make the right decision? Why or why not?
Page 13
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Chapter 12: Structuring the Deal: Tax and Accounting
Considerations
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Q1) Which one of the following statements is true?
A) Target firm shareholders may accept cash or acquirer stock in exchange for their shares for the transaction to be considered tax free
B) To be tax free, the target firm shareholders must receive acquirer firm shares for all of the target firm's shares outstanding
C) At least one-half of the assets of the target firm are recorded on the balance sheet of the acquirer at their book rather than market value in a tax free transaction
D) If the assets of a firm are written up to fair market value as part of the transaction, the increase in value is considered a taxable gain
E) Target firm shareholders are required by law to pay taxes on any writeup of the firm's assets to fair market value
Q2) What was the form of acquisition? How does this form of acquisition protect the acquiring company's rights to HiTech's proprietary technology?
Q3) How would the use of purchase accounting affect the balance sheets of the combined companies?
Q4) How valid are the reasons for the proposed merger?
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Page 14
Chapter 13: Financing the Deal: Private Equity, hedge Funds, and
Other
Sources of Funds
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Q1) According to fraudulent conveyance laws,if a new company is found by the court to have been inadequately capitalized to remain viable,the lender could be stripped of its secured position in the assets of the company or its claims on the assets could be made subordinate to those of the general creditors.
A)True
B)False
Q2) A single asset is often used to collateralize loans from different lenders in LBO transactions.
A)True
B)False
Q3) LBO investors must be very careful not to overpay for a target firm because
A) Major competitors tend to become more aggressive when a firm takes on large amounts of debt
B) High leverage increases the break-even point of the firm
C) Projected cash flows are often subject to significant error limiting the ability of the firm to repay its debt
D) A and B only
E) A, B, and C
Q4) What are the risks to this deal's eventual success? Be specific.
Page 15
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Chapter 14: Highly Leveraged Transactions: Lbo Valuation and Modeling Basics
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Q1) The extremely high leverage associated with leveraged buyouts significantly increases the riskiness of the cash flows available to equity investors as a result of the increase in fixed interest and principal repayments that must be made to lenders.Consequently,the cost of equity should be adjusted for the increased leverage of the firm.
A)True B)False
Q2) Is this transaction taxable or non-taxable to Tribune's public shareholders? To its post-transaction shareholders? Explain your answer.
Q3) What do you believe were the major factors persuading the MGM board to accept the Revised Sony bid? In your judgment,do these factors make sense? Explain your answer.
Q4) Having pledged not to engage in aggressive cost cutting,how do you think HCA and its financial sponsor group planned on paying off the loans?
Q5) As the LBO's extremely high debt level is reduced,the cost of equity needs to be adjusted to reflect the decline in risk,as measured by the firm's unlevered beta. A)True B)False
Page 16
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Chapter 15: Business Alliances: Joint Ventures, partnerships,
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Q1) Business alliances often receive favorable antitrust regulatory treatment.
A)True
B)False
Q2) The major disadvantages of a sub-chapter S corporation are that the number of shareholders is limited,corporate shareholders are excluded,it must distribute all of its earnings,the liability of shareholders is limited,and it can issue only one class of stock.
A)True
B)False
Q3) Under a C corporate structure,ownership can be easily transferred,which facilitates raising money.
A)True
B)False
Q4) How could Verizon Communications have protected itself from the leverage Vodafone's put option provides? Explain your answer.
Q5) The formation of a successful alliance requires that a series of issues be resolved before signing an alliance agreement.
A)True
B)False
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Chapter 16: Alternative Exit and Restructuring Strategies:
Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs
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Q1) Restructuring actions may provide tax benefits that cannot be realized without undertaking a restructuring of the business.
A)True
B)False
Q2) Discuss the conditions under which this spin-off would constitute a tax-free transaction.
Q3) The timing of a divestiture is important.If the business to be sold is highly cyclical,the sale should be timed to coincide with the firm's peak year earnings.
A)True
B)False
Q4) Speculate as to why the 2005 restructure program appears to have been unsuccessful in achieving a sustained increase in Sara Lee's earnings per share and in turn creating value for the Sara Lee shareholders?
Q5) In your judgment,did the breakup of USX into Marathon Oil and United States Steel Corporation make sense? Why or why not?
Q6) Describe the motivation for UPS to undertake this type of transaction.
Q7) Speculate as to why a firm may choose to spin-off rather than divest a business?
Page 18
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Chapter 17: Alternative Exit and Restructuring Strategies: Bankruptcy
Reorganization and Liquidation
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Q1) U.S.bankruptcy laws and practices focus on maintaining shareholder value during the bankruptcy process.
A)True
B)False
Q2) Companies may not seek the protection of bankruptcy court to avoid liquidation.True of False
A)True
B)False
Q3) Economic distress arises when a firm's growth and investment prospects deteriorate,causing a reduction in the value of the business due to the deteriorating outlook for the firm's cash flow.
A)True
B)False
Q4) What alternative restructuring strategies do you believe may have been considered for GM? Of these,do you believe that the 363 sale in bankruptcy represented the best course of action? Explain your answers.
Q5) Identify what you believe to be the real benefits and costs of the bailout of General Motors? Be specific.
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Chapter 18: Cross-Border Mergers and Acquisitions: Analysis
and Valuation
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Q1) As in the U.S.,any representations and warranties in an acquisition agreement are intended to cause the seller to disclose significant information.However,because of local custom,they are often more extensive in foreign countries than in the U.S.
A)True
B)False
Q2) M&As represent by far the most profitable means of entering foreign markets. A)True
B)False
Q3) Why would the annual cost savings not be realized until the end of the third year?
Q4) In globally integrated markets,it makes little difference whether the ß is calculated by regressing the target firm's (or a similar firm's)historical returns against the returns for a broadly defined global index,U.S.equity market index,or a broadly defined equity index in the target's country.
A)True
B)False
Q5) Why do you believe that Dofasco's share price rose above ThyssenKrupp's offer price per share immediately following the announcement of the bid?
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