Try 10 focused Series 79 questions on Mergers and Acquisitions, with explanations, then continue with the full Securities Prep practice test.
Series 79 Mergers and Acquisitions questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.
| Item | Detail |
|---|---|
| Exam | FINRA Series 79 |
| Official topic | Function 3 — Mergers and Acquisitions (M&As), Tender Offers and Financial Restructuring Transactions |
| Blueprint weighting | 24% |
| Questions on this page | 10 |
A public company has filed for Chapter 11 and your team is preparing a preliminary recovery analysis to brief the board and creditor groups. Assume administrative claims are paid separately and the estimated reorganized enterprise value available to prepetition stakeholders is $600 million.
Capital structure (prepetition):
Which statement about likely recoveries under a plan of reorganization is INCORRECT?
Best answer: C
Explanation: Preferred stock is junior to all debt, so it cannot recover ahead of unsecured creditors under the absolute priority waterfall.
In Chapter 11, value generally flows down the priority waterfall: secured claims, then unsecured claims, then equity. With $600 million of value against $650 million of debt, unsecured creditors are impaired and equity (including preferred) is typically wiped out unless senior classes are paid in full or agree otherwise. Therefore, the statement placing preferred ahead of unsecured debt is incorrect.
The key concept is the Chapter 11 priority-of-claims waterfall (absolute priority). Here, reorganized value of $600 million first supports the $400 million secured term loan, leaving $200 million for the $250 million unsecured notes, implying unsecured creditors are not paid in full. Because a senior creditor class is impaired, junior securities (preferred and common) generally receive no recovery and are canceled unless senior classes are paid in full or voluntarily allocate value to juniors as part of a negotiated plan. A liquidation preference does not make preferred stock senior to debt; it only ranks within the equity layer (ahead of common but behind creditors).
In a sell-side M&A process, what is the primary purpose of a standstill provision typically included in a bidder’s NDA?
Best answer: A
Explanation: A standstill limits hostile or uninvited actions (e.g., buying stock, launching a bid, soliciting proxies) while the bidder has access to confidential information.
A standstill is a confidentiality-related control designed to prevent a recipient of sensitive deal information from using it to pursue an unsolicited transaction. In a sell-side process, it commonly restricts share accumulations, tender offers, proxy contests, or other approaches to control without the seller’s invitation, typically for a specified time period.
In a sell-side M&A process, bidders often receive highly sensitive nonpublic information through management presentations, a Q&A process, and a virtual data room. A standstill provision in the NDA is used to manage that risk by limiting what the bidder can do outside the agreed process while it has (or has had) access to that information. Typical standstill restrictions include prohibitions on accumulating the target’s securities, launching a tender offer, making a public or hostile proposal, running a proxy contest, or otherwise seeking control without authorization, usually for a defined period. This helps keep bidders participating on a level playing field and reduces the chance of process disruption. Confidentiality, exclusivity, and break-up fees are separate concepts.
BuyerCo is considering an unsolicited tender offer for TargetCo (a U.S. public company). TargetCo has 50.0 million shares outstanding. BuyerCo currently beneficially owns 7.0 million shares and plans to purchase an additional 5.0 million shares in the tender offer.
Selected TargetCo governance terms (from public filings):
Based on BuyerCo’s planned purchases, which item is the most likely legal/governance impediment to the transaction as structured?
Best answer: A
Explanation: BuyerCo would go to 24% ownership \( (7+5)/50 \), exceeding 20%, so the pill could be triggered without board action.
BuyerCo’s post-tender beneficial ownership would be 24% \( (12.0/50.0) \), which is above the 20% threshold in TargetCo’s shareholder rights plan. A poison pill can directly deter or prevent acquiring shares above the trigger unless the board redeems the rights. That makes the rights plan the most immediate governance impediment to feasibility as structured.
The key feasibility check is whether the buyer’s planned ownership crosses a pill trigger, because a rights plan can make acquiring additional shares prohibitively expensive (e.g., flip-in) unless the board redeems the rights. Here, BuyerCo would increase beneficial ownership from 7.0 million to 12.0 million shares out of 50.0 million outstanding:
\[ \begin{aligned} \text{Post-tender ownership} &= \frac{7.0 + 5.0}{50.0} \\ &= \frac{12.0}{50.0} = 24\% \end{aligned} \]Because 24% exceeds the 20% trigger, the shareholder rights plan is the most direct governance impediment to executing the tender offer for that amount without board cooperation; a staggered board is more about delaying a change of board control via proxy contests.
A FINRA member investment bank pitched a confidential sell-side M&A process to a public company’s CEO. The CEO gives verbal approval and asks the bank to send teasers to potential buyers next week. No board action has been taken and no engagement letter has been executed. Company counsel asks the bank to outline the process and proposed terms of retention.
What is the best next step?
Best answer: C
Explanation: A sell-side process should not be launched until conflicts are cleared and the company has formally retained the bank under an executed engagement letter (typically with board authorization).
Before any market outreach, the bank should clear conflicts and document the engagement. An executed engagement letter (often approved by the board or special committee) sets scope, fees, confidentiality, and key protections, and it provides the control point that authorizes the bank to proceed with diligence and the sale process design.
In a sell-side engagement setup, the control-point sequence is to confirm the bank can act and is properly retained before contacting buyers. Practically, that means running the firm’s conflicts process, disclosing any relevant relationships, and negotiating and executing the engagement letter that defines the mandate (scope, fee/expenses, term/termination, confidentiality, indemnification, and required approvals). Once retained, the bank can finalize process design (timeline, buyer universe, outreach strategy), build the diligence plan and materials (teaser/CIM), and then begin NDA-controlled buyer contact.
The key takeaway is that buyer outreach and management presentations are premature without cleared conflicts and a signed engagement letter.
A public company is running a sell-side process and has received two bids for 100% of the equity. Management expects the following at closing (USD): cash $30 million, debt $110 million, and closing net working capital (NWC) $45 million.
Bid 1: $600 million enterprise value on a cash-free/debt-free basis with an NWC peg of $50 million and a dollar-for-dollar purchase price true-up to the peg.
Bid 2: $535 million equity purchase price paid to the sellers at closing, with no NWC adjustment.
Ignoring fees and taxes, which bid is expected to deliver higher cash proceeds to the equityholders at closing?
Best answer: A
Explanation: Bid 2 is already an equity check with no NWC true-up, while Bid 1 must be reduced for net debt and the $5 million NWC shortfall.
Bid 1 is quoted as enterprise value on a cash-free/debt-free basis, so the equityholders’ proceeds must be adjusted for net debt and then true-upped for the working-capital peg. With net debt of $80 million and an NWC shortfall of $5 million, Bid 1’s estimated proceeds are $515 million. Bid 2 is a stated equity purchase price with no NWC adjustment, so it yields $535 million.
To compare bids, convert both to the same basis: cash paid to equityholders at closing. A cash-free/debt-free enterprise value quote excludes cash and debt, so you back into equity proceeds by subtracting net debt and then applying any working-capital true-up versus the peg.
The key differentiator is that Bid 2 is already an equity check amount, while Bid 1 is an EV headline number that must be “bridged” to equity value and adjusted for working capital.
You are advising AcquirerCo on its all-cash tender offer for TargetCo.
Exhibit: Offer timeline (public communications and filings)
Based on the exhibit and baseline tender-offer practice, which period is generally subject to restrictions on AcquirerCo (and its affiliates and dealer manager) purchasing TargetCo shares outside the tender offer (e.g., open-market or privately negotiated purchases)?
Best answer: B
Explanation: The restricted period generally runs from the first public announcement of the tender offer until the offer expires.
Tender offer rules generally restrict the bidder (and certain related parties such as affiliates and the dealer manager) from purchasing the target’s securities outside the tender offer during the offer’s restricted period. That period typically begins with the first public announcement of the tender offer and ends when the offer expires. Here, that maps to March 25, 2026 through May 1, 2026.
Under Rule 14e-5, once a tender offer is publicly announced, the bidder and certain covered persons (including the bidder’s affiliates and the dealer manager and its affiliates) are generally restricted from buying the target’s securities outside the tender offer (whether in the open market or in private transactions) until the offer expires. The key interpretation is that the restriction is tied to the first public announcement, not merely the formal commencement/filing date, and it typically ends at expiration rather than the later payment/settlement mechanics.
Applied to the exhibit, the first public announcement is the March 25 press release and the expiration is May 1 at 11:59 p.m. ET. Payment expected on May 6 does not extend the outside-purchase restricted period in the typical framing tested at this level.
In a sell-side fairness opinion, management’s base-case projections assume a 14% revenue CAGR and EBITDA margin expansion from 8% to 18% over five years for a mature U.S. industrial company, while its last five-year revenue CAGR was 3% and industry forecasts are 2%–4%. Which review step best matches the banker’s task of evaluating the reasonableness of these key inputs?
Best answer: D
Explanation: Reasonableness testing focuses on whether projected growth and margins are supportable versus historical performance, industry conditions, and the operational/capex needed to achieve them.
When inputs to a DCF come from management projections, the banker should “sanity check” whether the implied growth and margin expansion are achievable. That typically means benchmarking to the company’s historical results and external reference points (peers/industry), and validating that the operational plan and reinvestment assumptions are consistent with the forecast.
A fairness opinion relies heavily on management projections, so the banker’s job is to assess whether the forecast is credible—not to simply accept it. If projections imply a step-change in growth or profitability versus the company’s history and industry outlook, the banker should challenge what would need to be true operationally.
Common high-level checks include:
Discount rate selection and exchange ratio work are valuation mechanics, but they do not address whether management’s operating assumptions are reasonable in the first place.
A public bidder has commenced an all-cash tender offer for TargetCo and filed a Schedule TO. TargetCo’s board will not receive its banker’s fairness opinion for another week, but shareholders are already asking whether to tender and the offer is scheduled to expire in 20 business days. TargetCo’s CEO wants to call a few large holders to say “don’t tender yet,” and management also expects to roll over equity in the deal. As TargetCo’s investment banker, what is the single best recommendation to coordinate the target’s recommendation/solicitation disclosures while these constraints exist?
Best answer: B
Explanation: A timely Schedule 14D-9 can disclose the board’s current position (including no position), conflicts/arrangements, and be amended when the fairness opinion and recommendation are finalized.
When a bidder commences a tender offer, the target’s response must be coordinated through the target’s tender-offer response filing and related public communications. If the board cannot yet make a recommendation, it can take no position but still must provide required disclosures, including conflicts like management rollover expectations and banker relationships, and later amend when the recommendation is made.
The core disclosure-control point for a target company in a third-party tender offer is the Schedule 14D-9 (the target’s recommendation/solicitation statement). If the board has not yet reached a recommendation (for example, because a fairness opinion is still in process), the target can state that it is unable to take a position, but it still needs to provide the required disclosure framework and direct shareholders appropriately. That disclosure typically includes the board’s current position, the material factors being considered, background of the offer/process, and material conflicts and arrangements (such as management rollover expectations and the banker’s fees and potential conflicts). As facts develop (fairness opinion delivered, board recommendation made), the target updates the market through amendments so shareholders receive complete, broadly disseminated information rather than selective outreach.
Which statement is most accurate regarding preparing sell-side marketing materials (teaser and confidential information memorandum (CIM)) for an M&A process?
Best answer: B
Explanation: Sell-side materials should avoid unnecessary identification in the teaser and keep the CIM consistent with diligence while managing updates and version control.
On a sell-side process, the teaser is generally an anonymous, high-level document used to screen interest, while the CIM contains detailed information provided under NDA. The CIM should be consistent with diligence findings and the data room, and the banker should manage updates so bidders are not relying on conflicting versions.
The core goal of a teaser and CIM is to market the business without creating disclosure issues or credibility gaps versus diligence. The teaser is usually short, anonymized, and high level so it can be shared more broadly without revealing sensitive identifiers. The CIM is distributed to qualified parties (typically after an NDA) and should be grounded in supportable diligence, with numbers, narrative, and assumptions reconciling to the data room and management explanations. If diligence uncovers a material inconsistency, the sell-side team should address it (e.g., revise the CIM, issue a Q&A clarification, or update the data room) and maintain version control so all bidders have consistent information. The key takeaway is consistency: marketing claims should be supportable and kept in sync with diligence and controlled disclosures.
A sponsor-backed buyer is bidding in a banker-run auction to acquire a U.S. public target. The seller’s board prioritizes closing certainty and has stated it prefers: (i) no financing condition, (ii) confirmatory diligence only (VDR + management meetings), and (iii) signing within three weeks. The buyer expects an HSR filing and will use third-party debt plus sponsor equity.
Which action by the buyer best aligns with durable investment-banking standards to maximize closing certainty while balancing price, structure, timing, and diligence?
Best answer: D
Explanation: Providing an executable agreement package with debt and equity commitments, a clear timeline, and only customary/regulatory conditions best signals certainty of close while preserving confidentiality and process integrity.
In a competitive process, the most credible way to improve closing certainty is to reduce execution risk: deliver a near-final agreement, show funds certainty (debt commitment letters plus sponsor equity commitment), and limit conditions to customary items like regulatory approval. This approach also supports confidentiality controls and a clean, well-documented process with a realistic signing-to-closing timeline.
A buyer’s bid strategy should translate “certainty” into objective proof and fewer ways the deal can fail. In practice, that means pairing price with an executable structure and disciplined process: committed financing (or clearly identified sources), limited and defined closing conditions, and a realistic timetable for diligence, documentation, and required approvals (such as HSR).
A strong buyer submission in this fact pattern typically includes:
The key takeaway is that sellers discount “highest price” if it comes with financing, diligence, or confidentiality risks that reduce the probability of closing on time.
Use the Series 79 Practice Test page for the full Securities Prep route, mixed-topic practice, timed mock exams, explanations, and web/mobile app access.
Use the Series 79 Cheat Sheet on SecuritiesMastery.com when you want a compact review before returning to the FINRA Series 79 Practice Test page.