Chapter 12 Practice Question Answers
1. Answer: D. The lawsuit discovered through due diligence is most likely to result in the buy side lowering its offer. The other options are either positives, or their impact is not clear from the information provided.
If the seller is considering giving its consent to a Section 338(h)(10) election, this is generally good for the buyer. A Section 338(h)(10) election allows a stock sale to be treated as an asset sale for tax purposes, resulting in a stepped-up basis for the buyer.
A target with stable cash flow might be considered a good LBO target, even with slow growth. This is because, in an LBO, most of the buyer’s profit does not come from the target’s growth, but from reselling the target.
While it’s not great that a vocal minority on the board wants to treat the acquisition as a hostile takeover, treating a transaction as a hostile takeover requires a majority of the board. Whether this is a serious obstacle or not depends on how small a minority it is, how many shareholders listen to them, and the nature of the target’s anti-takeover defenses. Additionally, without more information it is not clear that this opposition would lead to a reduction of the offer even if it were a serious obstacle.
2. Answer: C. Answer choices A and B describe tasks that a buy-side adviser would typically perform for her client; these tasks may also be performed by the sell-side adviser on behalf of the target. However, the sell-side adviser is responsible for designing and finalizing the bidding process. The buy-side adviser usually helps prepare and finalize a preliminary indication of interest (IOI) in response to a solicitation for bids.
3. Answer: C. Both the sell-side adviser and the buy-side adviser typically perform due diligence on the seller and coordinate site visits, so answer choices A and D are incorrect. The buy-side adviser typically evaluates the target’s leadership, so choice B is incorrect. Th