S79 - Progress Exam 2A
If a firm is performing a bankruptcy analysis for a client, which of the following actions is of LEAST significance? A. Reviewing the disclosure statement that is filed by the debtor B. Inspecting the stock certificates C. Reviewing the debtor's disclosure statement D. Analyzing the intercreditor agreements
A debtor that files under the Bankruptcy code is petitioning the court and announcing its bankruptcy filing. The filing has important information regarding creditors, debtors, meetings, and deadlines. The disclosure statement addresses the debtor's current financial condition and enables creditors to make an informed decision about the viability of the plan. Intercreditor agreements enable lenders to address the priority of their loans and security in relation to another lender to the same borrower. In some cases, both lenders may simply want an acknowledgement that they are each entitled to a specific priority over specific assets of the borrower, to the exclusion of the other lender. In other cases, additional restrictions on the rights of one of the lenders may be required. Of least significance is inspecting the stock certificates. The inspection will neither provide any assistance in determining whether a business can emerge from bankruptcy, nor help the investment banker analyze future prospects of the business or the claims against it.
An investment banker representing the target company in an acquisition is MOST concerned with: A. The effect of the earnings per share and the combined enterprise value B. The combined synergies of the two companies C. The acquirer's ability to pay for the transaction D. The percentage of the board of directors who will be considered independent
Answer C: The investment banking team that represents the target company wants to be confident that the buyer has financial resources or access to financing in order to consummate the deal. If the acquirer is offering its stock as part of the deal, there is also the risk of the additional dilutive effect of the buyer's stock, which may cause the deal to collapse. The acquirer (not the sell side) is concerned with potential accretion/dilution of earnings and whether synergies can be attained.
Napa Industries has received an unsolicited tender offer from the JoJo Corporation. The management of Napa Industries is permitted to make all of the following comments to shareholders, EXCEPT: A. Shareholders should purchase additional shares of the company B. Shareholders should reject the offer C. Management remains neutral on the offer D. Management is unable to take a position on the offer
Answer: A A company that is subject to a tender offer is required to notify shareholders of such an offer no later than 10 business days from the date the tender offer is made. Along with a notice of the tender offer, the subject company must also either (1) recommend that shareholders accept or decline the tender offer, (2) express that it has no opinion and remains neutral, or (3) state that it is unable to take a position on the tender offer. If any material change occurs in these disclosures, the subject company is required to publish promptly or give notice to shareholders. Management would not be permitted to advise shareholders to purchase additional shares of the company.
A company would like to raise capital through a private placement in order to expand its operations and make acquisitions. As an investment banking representative working on the deal, you would be LEAST likely to target which of the following investors when offering these securities? A. Employees of the company who currently do not own shares B. Institutional investors located outside the U.S. C. Accredited investors who currently do not own shares of the company D. Private equity funds that currently own shares of the company
Answer: A A private placement would least likely appeal to the employees of the company. Under Regulation D, a private placement may be offered to an unlimited number of accredited investors but only 35 nonaccredited investors. Institutional investors, accredited investors, and private equity investors, whether they own shares or not, are more likely to purchase private placements. Private placements offered by investment banking firms are usually not offered to existing employees, but to outside investors.
In an M&A transaction, the data room is controlled by which of the following? A. The target B. The acquirer C. The law firm that was hired by the target D. Both the target and the acquirer
Answer: A For potential bidders to view detailed materials that relate to the business of the target (seller), a data room is set up. As an alternative to a physical location, many firms now use a virtual data room that is established by private data management companies. A data room is usually an online, secure, and confidential location where all participating dealmakers (investment bankers, lawyers, and accountants) review information. The target's (seller's) bankers usually control the data room and provide potential bidders with access to certain information. Technically, the target will provide guidance to the bankers as to what information may be viewed and by whom. The banker acts as a gatekeeper by requesting certain information from the seller and then providing this information to potential buyers.
You are an investment banking representative working in the energy sector of the mergers and acquisitions department. A managing director has asked you to review and analyze trends concerning recent mergers in your sector. Which of the following choices would be the BEST source to review? A. Recent S-4 filings B. Recent S-3 filings C. Recent 13D filings D. Recent 10-K filings
Answer: A If securities are to be issued in connection with a merger, an S-4 must be filed by the acquiring company with the SEC. Since shareholders will need to vote on the proposed merger, a proxy statement is required to be issued. Issuers are permitted to incorporate most of the important details of the merger in the S-4 filings. The acquiring company, not the target company, would issue the S-4. This is an important source of information, detailing the cash and/or stock the shareholders of the target company will receive from the acquirer. Other information included is the purpose of the merger, the tax implications of the transaction, the conditions for the completion of the merger, termination fees (if applicable), whether or not the target is permitted to solicit other offers, historical financial information, risk factors of the merger, overall business risk of the industry, recommendations of the target company's board of directors, the fairness opinion rendered by the target's financial adviser, the merger agreement, and historical price ranges for the common stock of both companies.
An owner of a company would like to realize liquidity by selling the majority of the business but would like to retain a minority equity interest and continue in the management of the company. As her investment banking representative, you would recommend that she explore which of the following options? A. A private equity recapitalization B. A dividend recapitalization C. A minority recapitalization D. A sale to a strategic buyer
Answer: A In a private equity (PE) recapitalization, the PE firm generally buys most, but not all, of the owner's interest in the company. The owner has liquidity, but still can participate in the equity upside when the business is sold the next time. The PE firm generally wants at least 51% of the company. A PE firm will usually buy a business through a leveraged buyout (LBO), using some equity and financing the rest with bank debt. The PE firm will look to increase the business by increasing revenue, reducing expenses, and possibly by making other acquisitions. As the firm increases cash flow, it pays down debt to increase equity. The objective is to increase the value of the business so it can be sold to another entity or exit through an IPO. In a dividend recapitalization, a PE firm that has already purchased a company takes on additional debt to pay itself, and possibly management, a cash dividend. There is the risk that the market will not like this since it increases the debt and, therefore, the risk that the company will not have sufficient cash flow to pay the debt. PE firms like this since it is a source of liquidity. The hope is that after initially buying the company, its equity has risen and the buyer can tap into this excess by borrowing funds to pay the dividend. In a minority recapitalization, a company reorganizes its debt and equity mixture with a PE investor owning less than 50% of the company. This generally provides liquidity to specific shareholders while preserving capital structure flexibility to facilitate future growth. A strategic buyer would be more likely to buy the entire business and take control of management.
A shareholder rights plan is a: A. Defensive tactic used by target companies to prevent a hostile takeover B. Mechanism that allows shareholders to vote directly on a merger in lieu of indirect voting by the board of directors C. Voting mechanism used by acquiring companies for speedy merger approval D. Corporate bylaw that requires shareholders to be made aware of any merger discussions on a timely basis
Answer: A In a shareholder rights plan, (also called a Poison Pill) the target company issues rights to existing shareholders to acquire a large number of new securities, usually in the form of common or preferred shares. This tactic dilutes the percentage of the target owned by a hostile bidder, and makes it more expensive to acquire control of the target company.
A customer has securities that were received as part of a merger. The customer discloses that the securities are subject to SEC Rule 145. Which of the following statements is TRUE? A. In order to sell the securities immediately, several conditions of Rule 144 may need to be satisfied B. The securities must be registered with the SEC before they can be sold C. The resale of the security is not subject to any conditions, provided the amount sold is 5,000 or fewer shares, worth $50,000 or less D. The securities are subject to a minimum 6-month holding period
Answer: A Securities that are subject to Rule 145 may not always be resold freely. If the shares that were held prior to the business combination were restricted, then the shares received as a result of the business combination would be restricted and subject to resale under Rule 144. These securities are usually received by affiliates of one of the companies involved in a merger, reclassification, consolidation, or transfer of assets. The securities can be resold according to any one of the following three conditions: 1. The person sells the securities in accordance with the conditions prescribed in Rule 144 for public information, limitations on the amount sold, and the manner of sale (through a broker's transaction, or directly with a market maker). 2. The person is not an affiliate of the issuer, has held the securities for at least six months, and the public information condition is met. 3. The person has not been an affiliate of the issuer for at least three months and has held the securities for at least one year.
Which of the following customers is permitted to purchase securities under Regulation S? A. A British investor who is located in Canada B. A British investor who is located in the U.S. C. A U.S. investor who is located in Great Britain D. A Canadian investor who is located in the U.S.
Answer: A To qualify for a Regulation S exemption, the transaction must be executed offshore (overseas) and not be offered to any person who is a resident of the U.S. (a U.S. citizen). Choice (a) satisfies both of those criteria since 1) the customer is not a U.S. resident and 2) she resides outside of the U.S.
Which of the following transactions would NOT require approval by the board of directors of the target company? A. An offer to purchase a company where shareholders will receive stock of the acquiring company B. A cash tender offer by a third party to purchase the shares of a company C. An offer to purchase a company with a combination of cash and stock of the acquiring company D. A private equity firm making an offer to a company to purchase its stock for cash
Answer: B A tender offer by a third party to purchase shares of the company for cash can be made directly to shareholders and would not require approval by the board of directors. The board of directors must approve the other M&A transactions, whether the target company shareholders would receive cash or stocks, or a combination of the two. Although the offer by the third party bidder will not be subject to approval by the board, the bidder is still required to file a Schedule TO with the SEC and provide information to shareholders.
A public company has decided to put itself up for sale. Your investment bank has been hired to assist one of the potential purchasers that is also a public company. Since there are a large number of bidders involved in the auction, your client has asked for the best method to distinguish your offer from the others without increasing the offer price. Which of the following strategies would be the BEST method to accomplish this goal? A. Offer stock options and bonuses to the company's senior management B. Offer to complete the merger using more cash C. Offer to complete the merger using more securities D. Offer to raise your bid using additional borrowed funds
Answer: B Offering more cash (not additional securities) would be a good strategy since that would provide the seller a comfort level on how it will be paid. It may also allow for a quicker completion of the transaction. If borrowed funds are used, the seller may become concerned if rates rise or conditions change in the credit markets. Offering additional compensation to the target's senior management may jeopardize the deal since the seller is a public company and regulatory requirements provide that shareholder interest must come first. Various industry regulators may be the ones deciding how quickly the transaction will be completed. Raising your bid with the use of borrowed funds may affect the financial aspects of the deal, as well as require additional costs to your client.
A large media company is offering to exchange $600,000,000 of 6.90% senior notes for securities originally sold under Rule 144A. The exchanged notes will not be restricted securities. The company is not raising additional capital. The company: A. Must file Form 144 with the SEC B. Must file a Form S-4 with the SEC C. Must file a Form S-1 with the SEC D. Is not required to file any form with the SEC
Answer: B SEC Rule 145 of the 1933 Act applies to situations where securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. Securities issued under this rule may be registered using Form S-4. Form S-1 is used when a company files for an IPO, or is not permitted to use any other type of registration form. Form 144 is used when a person sells restricted or control stock.
All of the following activities are part of the preparation process when rendering a fairness opinion, EXCEPT a review of: A. The current and historical market prices and trading activity for both companies' common stock B. Similar previous transactions and a recommendation to shareholders C. The financial terms, to the extent that information is publicly available, of comparable acquisition transactions D. The pro forma impact of the merger on the acquiring company's earnings per share
Answer: B The fairness opinion is rendered by the financial adviser to determine whether the proposed transaction price is fair (within a reasonable range of prices) in a merger. In preparing this document, the investment bank that is hired will: - Review certain publicly available financial statements and other business and financial information of companies - Review certain internal financial statements and other financial and operating data concerning the companies, prepared by the managements - Review certain financial projections of the companies prepared by their managements - Discuss with senior executives the past and current operations and financial condition and the prospects of the companies, including information relating to strategic, financial, and operational benefits anticipated to be derived from the merger - Review the pro forma impact of the merger on the acquiring company's earnings per share - Review the current and historical market prices and trading activity for both companies' common stock - Compare the financial performance of both companies and the prices and trading activity of the shares against other publicly traded companies - Review the financial terms, to the extent that information is publicly available, of comparable acquisition transactions - Review a draft of the merger agreement and related documents Although the investment banking firm would review previous transactions, it would not make a recommendation to shareholders. The companies' boards of directors, however, may recommend that shareholders accept the merger.
Which of the following choices is NOT a role of the seller's investment bankers in a merger or acquisition? A. Identify and assess potential transaction structures such as stock sale versus an asset sale B. File the S-4 registration statement if securities are being issued for the transaction C. Coordinate with legal advisers in identifying antitrust and other regulatory issues D. Coordinate with tax advisers to identify potential tax issues and their financial implications
Answer: B The seller's investment bankers would not file an S-4 registration statement if securities are being issued for the transaction. The securities would be issued by the buying firm. The seller's bankers will identify and assess potential transaction structures such as a stock sale versus an asset sale, coordinate with legal advisers in identifying antitrust and other regulatory issues, and coordinate with tax advisers to identify potential tax issues and their financial implications.
In which of the following situations is a fairness opinion LEAST likely to be written? A. For an M&A transaction by the sell-side advisor in which the company being acquired is publicly traded and the offer is being make for cash B. For an M&A transaction by the buy-side advisor in which the company being acquired is publicly traded and the offer is being made for stock C. For an M&A transaction by the sell-side advisor in which the board of directors of the company being acquired has decided against the sale of the company D. For an M&A transaction by the sell-side advisor in which the company being acquired is publicly traded
Answer: C A fairness opinion is typically written after the terms of the definitive agreement have been negotiated. An opinion is generally not created if the board of directors had decided against the sale of the company. Both the seller (or target) and the buyer (or acquirer) may request a fairness opinion.
A company is making an all-cash offer for all the outstanding shares of stock of the Widget Corporation at a premium to the current market price. After the completion of the transaction, shareholders of the Widget Corporation would: A. Be entitled to shares of the company making the offer B. Be permitted to hold their shares for 6 months C. Have an immediate tax liability D. Have no tax liability
Answer: C If a company makes an all-cash offer, the shareholders of the target would have an immediate tax liability. For example, if a shareholder of the target purchased stock at $35/share and the cash offer was at $50/ share, the shareholder would have a $15/share capital gain.
The Reading Review Company filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code. The company plans to continue operating its business as a Debtor-in-Possession. Which of the following activities will NOT be performed by the Reading Review Company? A. Conducting Section 363 sales B. Obtaining financing to continue to operate the company C. Obtaining valuations for the assets of the company D. Filing motions with the bankruptcy court
Answer: C In a Chapter 11 bankruptcy, the firm is operated by existing management as a Debtor-in-Possession (DIP). It will arrange to obtain financing, which is called DIP financing, and will conduct Section 363 sales. The sale of assets outside the normal course of business can be accomplished through a Section 363 sale. The trustee, or debtor, must file a motion with the bankruptcy court seeking the court's approval. Opponents of the sale will have a given period to object to the proposed sale. If approved, the debtor or trustee can proceed with the sale. The DIP will also petition or file other motions with the court. The DIP would not obtain valuations for the assets of the company. This may be done by a firm hired by the Creditors' Committee in order to determine the quality of any liens placed against the assets. A lien is a legal right placed against the assets by a creditor until the debt has been paid off.
In a Rule 144A transaction, each of the following statements is TRUE, EXCEPT: A. The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) B. The buyer must be able to establish its credentials as a QIB, through relevant documentation C. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) D. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB
Answer: C The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and certification from the issuer are common methods of demonstrating that the purchaser is a QIB. Choice (c) is not true since its states that the only acceptable documentation is an audtied financial statement.
A firm has been hired as an M&A advisor to represent the seller. Which of the following is the LEAST important question that may be brought up by the buy-side advisor during the due diligence process? A. What are the major drivers of future growth which support your valuation? B. Why have the seller's profit margins been decreasing for the last few years? C. Why is the company earning such a small return on the cash on its balance sheet? D. Why does such a large percentage of the seller's revenue come from a relatively small percentage of its clients?
Answer: C The best method to answer this question is to use a process of elimination. When a sell-side advisor is hired, part of its responsibility is to provide assistance and anticipate the types of questions the buy-side will ask during the due diligence process. Choice (c) is the least important factor since the amount of interest being earned by the seller is not important as it relates to the value of the business. The buyer can quickly alter this amount by using its own cash management expertise. Major drivers of future growth that will help support the valuation, concern about profit margins, and where the company derives its revenue are all more important factors since they impact the business of the company. The seller's ultimate goal is to sell the business at the highest valuation, while the buyer will have questions and concerns about the value of the future business.
If an issuer defaults on one of its bond issues, which of the following would provide other creditors with the BEST type of protection? A. A sinking fund B. Call provisions C. A positive covenant D. A cross default clause
Answer: D A cross default clause in a bond indenture would provide protection to other creditors by triggering a default if any of the bonds issued by the same company defaulted. A sinking fund provision requires the issuer to make payments to a trustee in order to repurchase outstanding bonds. This is done so that, by the time the final maturity date arrives, the issuer has already paid off a certain percentage of the issue. A subordination clause would restrict the issuer's future borrowings by stating that all future lenders are subordinate to existing bondholders. Covenants are protective agreements that the borrower pledges for the protection of the lender. Covenants can be positive, which require certain actions on the part of the issuer, or negative, which limit certain actions. An example of a positive covenant is a situation where an issuer is required to maintain a minimum amount of working capital or debt coverage ratio, while a negative covenant would restrict an issuer from selling assets or issuing additional debt.
When a corporation goes bankrupt, which of the following would be the last to be paid? A. Secured investors B. Debenture holders C. Preferred stockholders D. Holders of warrants
Answer: D A holder of common stock is usually the last to be paid in a bankruptcy. A holder of a warrant has the right to purchase common stock and is paid after a holder of common stock. In practical terms, the a warrant is worthless if a corporation declares bankruptcy.
KleenKing Ltd. is an integrated manufacturer of kitchen cleaning supplies. It has currently targeted Sparkle Shine Products for purchase and has made a formal cash offer of $57.50 per share. KleenKing has requested that the board of directors and management of the target not entertain competing offers until the negotiations have concluded. The name for this contractual clause is a(n): A. Standstill agreement B. Exclusivity clause C. Good-faith provision D. No-shop provision
Answer: D Bidders are always wary of having their target snatched away by rival firms. When signing a no-shop agreement, the target firm agrees to work in good faith toward a closing. The company, its officers, and the board of directors agree that they will not, directly or indirectly, take any action to initiate, solicit, or assist in the submission of any proposal, negotiation, or offer from any third party. In practical terms, these agreements are difficult to enforce. A provision contained in a preliminary proposal that allows the target company to seek out other bidders is called a go-shop provision.
XAM Corporation is organized in Delaware, but the company's managers control and coordinate all of the corporate activities from North Carolina. Which of the following statements is TRUE regarding XAM's ability to be able to raise capital without registering its securities with the SEC? A. Its offers may be made to residents of any state, but sales may be made only to residents of Delaware B. Its offers and sales may be made only to residents of Delaware and North Carolina C. Its offers may be made to residents of any state, but the sales may be made only to residents of North Carolina and Delaware D. Its offers may be made to residents of any state, but sales may be made only to residents of North Carolina
Answer: D Companies that are selling new securities are typically required to register their securities with the SEC. However, under Rule 147 and Rule 147A, if a company is conducting an offering and selling its securities only to its state residents, the offering is exempt from registration. Rule 147A allows for multi-state offers (not sales), which means that issuers are permitted to use general solicitation and publicly available websites to locate potential in-state investors. Although offers are able to be made outside of the state, all sales must still be limited to in-state residents. This differs from Rule 147 which dictates that all offers and sales must be limited to residents of one state. In addition, companies are able to be incorporated or organized outside of the state in which they conduct the offering as long as they have their principal place of business in that state. Principal place of business is defined as the location from which the principal officers, managers, or partners primarily direct, control, and coordinate the activities of the issuer. Under Rule 147A, if XAM's sales occur only in North Carolina, the issuer is not required to register its securities with the SEC.
If a corporation is in liquidation, the holder of subordinated debt would be paid: A. After bank loans and before administrative expenses B. Before bank loans and after accounts payable C. After bank loans and before accounts payable D. Before preferred shareholders and after bank loans
Answer: D If a corporation defaults on its debt and declares bankruptcy, bondholders (creditors) have priority over shareholders. Secured debt holders as creditors have the first priority. However, the secured debt is only secured to the extent of the value of the asset that is pledged as collateral. Unsecured debt holders are paid next, followed by subordinated debenture holders.
