Mergers, Acquisitions & Corporate Restructuring Flashcards

An earnout provision in an M&A purchase agreement is primarily used to:

Answer: Bridge valuation disagreements by tying a portion of the purchase price to the target's post-closing performance

An earnout defers a portion of the purchase price contingent on the target meeting agreed future milestones, aligning incentives when buyers and sellers disagree on the target's forward-looking value.

How does a corporate carve-out primarily differ from a spin-off?

Answer: A carve-out is a public IPO of a minority stake in a subsidiary while the parent retains control; a spin-off distributes all subsidiary shares to existing parent shareholders

In a carve-out the parent sells a minority interest in the subsidiary through an IPO and retains a controlling stake, whereas a spin-off distributes 100% of subsidiary shares directly to the parent's existing shareholders.

An acquisition is described as 'accretive' to the acquirer's earnings per share (EPS) when:

Answer: The combined entity's pro forma EPS exceeds the acquirer's standalone EPS

An accretive deal increases the acquirer's EPS on a pro forma combined basis, meaning shareholders earn more per share with the target than without it.

A reverse merger is most commonly executed to achieve which primary objective?

Answer: Allow a private company to gain a public listing by acquiring a publicly traded shell company

In a reverse merger, a private operating company merges with a dormant public shell, allowing the private company to become publicly listed more quickly and cheaply than through a traditional IPO.

Horizontal integration in M&A is best characterized as:

Answer: Merging with or acquiring a direct competitor operating at the same stage of the industry value chain

Horizontal integration combines two competitors at the same stage of production or service delivery, aiming to gain market share, eliminate competition, and achieve economies of scale.

In a bankruptcy sale process, a 'stalking horse' bidder's primary role is to:

Answer: Establish a minimum acceptable bid floor, ensuring the bankruptcy estate receives at least that value

The stalking horse bidder submits the initial credit-bid or cash offer that sets a price floor, protecting the estate from a low-ball outcome while inviting overbids from competing buyers.

Under ASC 805 (Business Combinations), purchase price allocation (PPA) requires the acquirer to:

Answer: Assign the acquisition cost to all identifiable acquired assets and liabilities at fair value, recording any residual as goodwill

PPA is an accounting process under ASC 805 that requires the acquirer to measure each identifiable asset and liability at fair value on the acquisition date, with any excess of the total consideration over net fair value recorded as goodwill.