Questions and Answers
1. Why might a company decide to engage in corporate restructuring?
Companies restructure to create shareholder value by addressing deteriorating financial
fundamentals, poor earnings performance, excessive debt, or declining competitiveness.
Restructuring can optimize operations, improve cash flow, and realign strategy when organic
growth is insufficient citeturn0search0.
2. How does a merger or acquisition impact earnings and market value?
Mergers can be accretive, increasing the acquirer’s earnings per share (EPS) if its P/E ratio
exceeds the target’s, or dilutive, temporarily reducing EPS despite long‑term synergies.
Post‑deal stock prices typically rise above pre‑takeover levels if the market anticipates value
creation citeturn0search1turn0search2.
3. What merger benefits accrue to acquiring‐company and selling‐company shareholders?
Acquiring‐company shareholders gain from cost and revenue synergies, EPS accretion, and
enhanced market power, while selling‐company shareholders receive a control
premium—typically cash or stock above market price—for their shares
citeturn0news93turn0search12.
4. How do you analyze a proposed merger as a capital‐budgeting problem?
Evaluate M&A like any major investment by projecting combined free cash flows, estimating
integration costs, and discounting to present value to determine net present value (NPV). Only
deals with positive NPV—where synergies exceed the premium paid—should be pursued
citeturn0search3.
5. What are the main steps in the merger process?
1. Assessment & Preliminary Review of strategic fit
2. Negotiation & Letter of Intent to outline deal terms
3. Due Diligence on legal, financial, and operational aspects
4. Negotiations & Closing including regulatory approval
5. Post‑Closure Integration to realize synergies citeturn0search4.
6. What are common defenses against hostile takeovers?
Poison Pill: Allows existing shareholders to buy discounted shares, diluting the acquirer’s stake.
White Knight: A friendly investor offers a superior bid.
Staggered Board & Greenmail: Delay board replacement or repurchase shares at a premium.
citeturn0news94.
7. How have strategic alliances and outsourcing contributed to the formation of virtual
corporations?
Firms form strategic alliances and outsource non‑core activities to specialized partners, creating
agile “virtual corporations” that combine capabilities without full ownership, reducing capital
needs and accelerating innovation citeturn0search6.
8. What is a divestiture and how may it be accomplished?
A divestiture is the disposal of assets or business units via sale, spin‑off, equity carve‑out, or
closure. It refocuses management on core operations, raises capital, and can improve overall
profitability citeturn0search7.
9. What does “going private” mean, and why might management choose this route?
“Going private” converts a public company into private ownership through management or
private‑equity buyouts, tender offers, or recapitalizations. Motivations include reducing
regulatory burdens, enabling long‑term strategic changes, and avoiding short‑term market
pressures citeturn0search8turn0search18.
10. What is a leveraged buyout (LBO) and what risks does it entail?
An LBO acquires a company primarily with debt, using the target’s assets as collateral. While
high leverage can amplify returns and offer tax shields, it also raises default risk if cash flows
cannot service debt repayments citeturn0search9turn0search19.
