CFM Mergers, Acquisitions & Corporate Restructuring 3

Question 1

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

Accepted Answer

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

Answer

Guarantee minimum post-closing revenue targets that the acquirer must achieve

Answer

Grant the target's shareholders continued voting rights in the combined entity

Answer

Limit the acquirer's indemnification exposure for the target's pre-closing liabilities

Question 2

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

Accepted 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

Answer

A carve-out involves selling a majority stake to private investors; a spin-off is a public IPO of a minority stake

Answer

A carve-out requires a full asset sale; a spin-off retains the subsidiary within the parent's consolidated group

Answer

A carve-out requires a shareholder vote; a spin-off can be executed by board resolution alone

Question 3

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

Accepted Answer

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

Answer

The acquisition reduces the acquirer's total revenue during the first full year post-close

Answer

The deal is expected to reduce shareholder value in the near term but create value long-term

Answer

The target company has a higher absolute earnings level than the acquirer

Question 4

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

Accepted Answer

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

Answer

Enable a target company to assume control of its acquirer post-transaction

Answer

Spin off a division of a public company into a newly formed private entity

Answer

Convert a public company's outstanding equity into long-term debt instruments

Question 5

Horizontal integration in M&A is best characterized as:

Accepted Answer

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

Answer

Acquiring a company that supplies raw materials or distributes the acquirer's finished products

Answer

Expanding into entirely unrelated industries to diversify revenue streams

Answer

Acquiring a firm that serves a different geographic or demographic market segment

Question 6

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

Accepted Answer

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

Answer

Prevent competing buyers from submitting bids above a set ceiling price

Answer

Provide debtor-in-possession (DIP) financing to keep the bankrupt company operating during the sale

Answer

Represent the unsecured creditors' committee in negotiations with potential buyers

Question 7

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

Accepted Answer

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

Answer

Distribute the total consideration paid among the target's common and preferred shareholders on a pro rata basis

Answer

Allocate transaction advisory fees equally between the buyer and the seller at closing

Answer

Determine the tax depreciation basis of acquired tangible assets using the target's historical book values