Exam 20: External Growth Through Mergers

The desire to expand management and marketing capabilities is a direct financial motive for an acquisition.

The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King Solomon Mining can use over the next two years ($200,000 per year). If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

Which of the following is NOT a motive for selling by the stockholders of the acquired company?

The typical merger premium is _______.

The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ______________ for the carryforward alone.

Synergy is said to take place when the whole is less than the sum of the parts.

Which of the following terms is not specifically related to an unfriendly buyout?

Which of the following is NOT a potential challenge or downside to a merger?

One potential advantage of a merger to the acquiring firm is the "portfolio effect," which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

"Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider.

In a merger, two or more companies are combined to form an entirely new entity.

Too much diversification has led many companies to sell off companies previously acquired during the merger boom.

Which of the following is NOT a financial motive, but rather an operating motive, for merger and consolidation?

In regard to two-step buyouts,

In planning mergers, there is a tendency to _____ synergistic benefits.

Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 1,500,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28 per share. The second step would be to exchange each remaining share of Garfunkel common stock for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $31.00 per share. Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock. a) What is the total cost of the two-step buyout? b) What is the total cost of the single-step proposal? c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Synergy is

While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company.