Your buy-side role in mergers and acquisitions (M&A) is to help a buyer choose an affordable acquisition that advances its strategy. Begin with the rationale for the acquisition: entering a market, obtaining capabilities, or lowering costs. Compare purchasing the target with building internally or continuing independently.
Assess the buyer's resources and financial capacity before discussing price. Review available cash after operating needs, borrowing capacity, management attention, and integration capabilities. Estimate the value of the buyer's business independently. When the buyer pays with its own shares, undervaluing those shares can cause it to surrender excessive ownership.
Before receiving sensitive information, review the seller's confidentiality agreement, which restricts disclosure and use of information. With legal advisors, check permitted recipients, financing-source access, contact restrictions, and return or destruction requirements. A standstill may also restrict share purchases or unsolicited approaches. Obtain any needed permission before taking restricted action.
The seller's confidential offering memorandum presents the business, historical results, forecasts, and investment case to prospective buyers. Review its assumptions and omissions with the buyer.
Common mistakes
- Giving the triggering bidder flip-in rights. Shareholder rights plans exclude that bidder from the discount; buying 20% does not confer protection from dilution.
- Treating 100% stock consideration as proof of tax-free treatment. Tax advisors must establish qualification under the applicable reorganization rules.
- Calling the $160 million enterprise value in Example 1 the shareholder payment. The comparable equity amount is $140 million after debt and excess cash.
Bottom line
- Buyer strategy, resources, financial capacity, and independent value inform the bid.
- Control-share statutes affect voting; flip-ins threaten dilution; classified boards delay board replacement.
- Stock consideration alone does not establish a tax-free reorganization.
- Section 338(h)(10) requires eligible parties, a qualifying stock purchase, and joint election.
Exam shortcut
Identify the obstacle first: loss of voting rights points to a control-share statute; discounted purchases excluding the bidder point to a flip-in. For valuation, label every amount enterprise or equity before adding synergies or subtracting debt. Compare the bid with the matching value. For EPS, calculate new shares separately, tax-effect incremental synergies and interest, then divide combined earnings by combined shares.
The full lesson (about 3,732 words, 25 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C22
Browse all free Series 79 lessons or jump into free Series 79 practice questions.