Spring 2022 Acquisition Data Final Exam Solutions – Yale University

The following are neat and accurate acquisition data exam questions and solutions for a final assessment done at Yale university in spring 2022. The solutions are professionally written by competent finance exam solvers online. You can also hire someone to help with your corporate finance exam online and score the best grades.

Exam question:

What Is the Significance of Acquisition Analysis?

Once a target company has been identified, the next step is the collection of information so that a more detailed financial analysis of the company may be carried out. This analysis forms the basis of the assessment of valuation and what price should be paid and whether it should be paid in cash or shares or some other more complex package. The effect on earnings per share and gearing are highly relevant to this decision.

A cynical acquiror will always assume that there is some good reason why a company is for sale. One objective of the analysis will be to identify any weakness which has led to a company becoming 'in play. A poor acquisition can have consequences that are not limited to the initial price paid. There is a strong tendency not to admit that an acquisition has been a mistake and instead of cutting losses to 'throw good money after bad' by trying to improve a hopeless situation. The health of the whole group may be affected, even companies with no direct relationship to the struggling acquisition. The best chance of avoiding a damaging acquisition is when the initial analysis is carried out. Minds are open and there is no vested interest in the decision.

Exam question:

Explain Publicly Available Information as A Source of Acquisition Data

Under the provisions of company law in most countries, a company is obliged to file certain information for public inspection. The information normally includes details of the authorized and issued share capital, the list of registered shareholders, and the current directors. Certain basic financial information may also be provided.

Information held on file for public inspection tends to be updated annually. A fairly generous time limit is allowed for the provision of the required information. It frequently happens that the latest publicly available information is considerably out of date, especially as authorities do not always have the time to chase up a prompt filing by the very large number of companies that have been established.

Some comment and analysis may be obtained from press cuttings if the company is one which has attracted public attention. Credit analysis companies and similar organizations are other potential sources. In addition to searching publicly available information, such organizations may have carried out interviews with selected suppliers, customers, and creditors of the group. Trade and marketing associations may be able to supply literature on products and other commercial aspects of the company.

Companies that have a public listing must produce annual accounts and publish results periodically, usually twice a year and sometimes quarterly. Supplementary information may also be required. They may provide additional information to stockbrokers as the basis of reports which are circulated semi-privately. If the company has been engaged in any major transactions such as raising capital in the public markets or taking over another company, other relevant documents will have been issued containing more details than appears in the accounts.

In many jurisdictions, transactions involving land are taxed and must be registered in such a way that the details are made public. Similarly, a public register of charged assets may be kept to enable creditors to assess the financial risk they run in dealing with the company. From these two registers, key information on the fixed assets of the company and the extent to which they have been charged to support borrowings may be obtained.

Exam question:

What Is the Purpose of Using Public Information to Obtain Data?

The acquiror may be relying on public sources because he does not wish to alert the target to his intentions. Drawing on the various sources described above does carry some risk of a leak occurring. Although public sources can be consulted anonymously, an alert observer may notice that a particular file is frequently out for use. A company whose management is nervous about a threat may quickly realize that questions are being asked in trade associations. The acquiror may be able to shield his own identity by having his inquiries carried out by a third party. However, the more extensive the inquiries become, the more difficult it will be to prevent rumors from starting that someone is 'sniffing around'.

Exam question:

Explain How an Acquiror Obtains Acquisition Data by Interviewing?

Except in the case of a bid that is expected to be opposed, after an acquiror has done what homework he can be based on public sources, the next step would be to approach the target company to open negotiations. If the initial approach meets with some response, it will be followed by a request for information.

The moment at which many negotiations founder is when a company that may be attracted by a proposal first realizes the extent to which it will have to bare its soul. It is therefore important that the request be handled tactfully and restricted to relevant information which can reasonably be made available. This also helps prevent an acquiror from being overwhelmed by a mass of information. The danger of not seeing 'the wood for the trees' is a real one when substantial analysis has to be carried out from scratch, often under time pressure.

The key characteristics of a business can often be identified beforehand. The information requested should be designed to highlight these characteristics. An acquiror should ask the question 'what am I buying?' and tailor the information requested to allow him to answer that question. Sometimes the really significant points in a particular transaction may be quite limited. When an important aspect has been isolated, questions must be phrased in a careful way. Intensive questions on a specific point may tip a negotiating hand, emphasizing to the other side points the acquiror considers of significant value. Questions on major assets or profit trends will come as no surprise, but if the acquiror is interested in something more unusual, a battery of questions is bound to alert even an unwary target company to a factor they may have overlooked.

Some requests may cover areas such as the directors' own personal dealings or highly sensitive commercial aspects. In these cases, checks may only be needed of a negative kind, to establish that nothing untoward has happened. If this information proves hard to obtain, it may be possible to 'skin the cat' in other ways, for example by including warranties on the relevant points in the sale and purchase contract.

A list of the items which might be included in a request for information is shown below. It should be borne in mind that not all items will be essential in every case. In specialized cases, a different emphasis may be needed. The acquiror should ask himself if I knew this piece of information, would it make any difference to my decision?'

Exam question:

Write a Sample Questionnaire Used to Obtain Acquisition Data

Statutory/Legal

Memorandum and articles of association.
Authorized and issued share capital, including details of voting and dividend rights.
Details of capital convertible into shares and of any warrants or options outstanding.
Terms of any trust deeds or major loan agreements.
Details of any litigation or material claims.
Minutes of recent board meetings.

Financial

Latest audited accounts for the company, group, individual subsidiaries, and, where appropriate, associates for as many past years as is useful.
Copy of the consolidation schedule used in drawing up the consolidated accounts.
Profit and cash flow budgets or forecasts for the current and, if available, subsequent years and projected balance sheet.
Statement of borrowings and cash position and capital commitments, guarantees, leases, and other financial commitments. Details of any significant foreign exchange exposure.
Monthly management accounts for the current year.
List of properties and other major fixed assets with current valuations, and, if relevant, a schedule of tenancies and insurance coverage.
Details of any tax losses and of assets with book value higher than their tax was written down value.
Details of any intangible assets such as trademarks or patents.
Details of pension or provident fund scheme. Is it fully funded? Is it overfunded?

Market statistics (if listed)

Summary of monthly or weekly share price movements, price-earnings ratio, dividend yield, and net asset backing over say the past 12 months.
Analysis of the level of turnover in shares and buying cost to major shareholders.
Details of major shareholders and spread of shareholdings.

Directors, management, and employees

Names of directors, their business background, their involvement in the group, and their shareholdings.
Details of contracts of service.
Organisation chart.
Numbers of employees, where located, typical training or qualifications, and union involvement, if any.

Commercial

Description of business and products and services.
Sales/marketing organization and procedures, trade or conference member-ships, import or export quotas, licenses, and distribution agreements or agencies.
Geographical spread of production and sales.
Level of research and development expenditure, new products, competitive position, payment reputation.
Details of any organization, affiliated or not, on which the company's business critically depends. Top ten customers and the percentage of sales they account for.

It should be emphasized that slapping down a standardized list of questions is one of the surest ways to kill an acquisition proposal. A selective approach will elicit a more positive response from the vendor and start the acquirer's analysis off on the right track.