Deck 7: Merger and Acquisition Strategies

Question 1

A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.

Answer 1

True

Question 2

The example in the chapter Opening Case of fuel refiner Valero's purchase of ethanol producer VeraSun is an example of a sector in which M&A opportunities exist.

Answer 2

True

Question 3

Research evidence suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels.

Answer 3

False

Question 4

An acquisition of a firm in a highly related industry is referred to as a horizontal acquisition.

Question 5

A related acquisition involves two firms in the same industry.

Question 6

Evidence suggests that returns to shareholders of acquired firms are greater than those for acquiring firms.

Question 7

Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm.

Question 8

A horizontal acquisition involves two firms in the same industry.

Question 9

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry.

Question 10

According to the chapter Opening Case, despite the global financial crisis, worldwide M&A activity grew in 2008 and 2009 primarily due to opportunities in the health acre and energy sectors.

Question 11

An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review.

Question 12

Typical returns on acquisitions for acquiring firms are close to zero.

Question 13

Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.

Question 14

An acquisition occurs when one firm buys a controlling or 100% interest in another firm and the acquired firm becomes a subsidiary business.

Question 15

The acquisition of Caremark Rx, Inc., (a pharmacy benefits manager) by CVS Corporation (a retail pharmacy) is an example of a horizontal acquisition.

Question 16

A merger is defined as a transaction in which one firm purchases controlling interest in another firm.

Question 17

Takeovers are unfriendly acquisitions where the target firm does not solicit the acquiring firm's bid.

Question 18

According to the chapter Opening Case, despite recent declines both globally and domestically, M&A opportunities seem strong in sectors such as energy and health care.

Question 19

Research evidence suggests that horizontal acquisitions result in higher performance when the firms have similar strategies, assets, and capabilities.

Question 20

The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies.

Question 21

Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions.

Question 22

Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers.

Question 23

Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy.

Question 24

United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy.

Question 25

The chapter Strategic Focus illustrates the use of cross-border acquisitions by Chinese companies in the oil industry for the purpose of gaining market power.

Question 26

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

Question 27

P&G's acquisition of Gillette reshaped its competitive scope by giving P&G a stronger presence in some products for whom men are the target market.

Question 28

Large or extraordinary debt is defined as overpaying for an acquired firm.

Question 29

Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.

Question 30

Pfizer's acquisition of Wyeth, discussed in the chapter Strategic Focus, should be driven by defensive reasons (e.g., to gain sales revenue) rather than strategic reasons (e.g., cost and revenue synergy).

Question 31

A goal of Pfizer's proposed acquisition of Wyeth, discussed in the chapter Strategic Focus, was that Wyeth could contribute to Pfizer's revenue which was expected to decline when Lipitor came off patent.

Question 32

Due diligence is performed by investment banking firms because of laws protecting shareholders during acquisitions.

Question 33

As noted in the Strategic Focus, Chinese energy companies took advantage of the global financial crisis which resulted in depressed prices for oil and gas assets which they could then acquire at low prices.

Question 34

The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.

Question 35

It is relatively common for a firm to develop new products internally to diversify its product lines.

Question 36

In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations.

Question 37

Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful.

Question 38

A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate.

Question 39

The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself.

Question 40

The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.

Question 41

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the merged firm.

Question 42

Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms.

Question 43

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

Question 44

Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies.

Question 45

Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using an related diversification strategy.

Question 46

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Since both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Question 47

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm.

Question 48

One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power.

Question 49

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls.

Question 50

With an interest of refocusing on technologies that can grow its businesses, Motorola is divesting assets that are not related to its core businesses. This is an example of a downscoping strategy.

Question 51

Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.

Question 52

Private synergies exist between a potential acquisition target and all firms seeking to acquire it.

Question 53

Because high debt increases the likelihood of bankruptcy, it can lead to a downgrade in the firm's credit rating by agencies such as Moody's and Standard & Poor's.

Question 54

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

Question 55

Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company.

Question 56

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

Question 57

When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies.

Question 58

Top manager participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success.

Question 59

Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders.

Question 60

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself.

Question 61

According to the chapter Opening Case, cross-border M&A activity ______ in the 1990s and ___________ in 2008 and 2009.

A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Question 62

All of the following statements are correct EXCEPT

A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines.
B) shareholders of acquired firms often earn above-average returns from an acquisition.
C) the majority of acquisitions increase long-term value for the acquiring firm.
D) shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

Question 63

In a merger

A) one firm buys controlling interest in another firm.
B) two firms agree to integrate their operations on a relatively coequal basis.
C) two firms combine to create a third separate entity.
D) one firm breaks into two firms.

Question 64

There are few true mergers because

A) few firms have complementary resources.
B) integration problems are more severe than in outright acquisitions.
C) one firm usually dominates in terms of market share, size, or value of assets.
D) of managerial resistance. True mergers result in significant managerial-level layoffs.

Question 65

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

Question 66

The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.

Question 67

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners

A) resisted selling at any price.
B) sold the company to the larger brewer.
C) designed a poison pill to discourage a takeover.
D) looked for smaller brewers to acquire instead of selling to the larger brewer.

Question 68

When a firm acquires its supplier, it is engaging in a(an)

A) merger.
B) unrelated acquisition.
C) hostile takeover.
D) vertical acquisition.

Question 69

Market power is derived primarily from the

A) core competencies of the firm.
B) size of a firm and its resources and capabilities.
C) quality of a firm's top management team.
D) depth of a firm's strategy.

Question 70

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in five to eight years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose.

Question 71

A primary reason for a firm to pursue an acquisition is to

A) avoid increased government regulation.
B) achieve greater market power.
C) exit a hyper-competitive market.
D) achieve greater financial returns in the short run.

Question 72

A(an) ____ occurs when one firm buys a controlling, or 100% interest, in another firm.

A) merger
B) acquisition
C) spin-off
D) restructuring

Question 73

Researchers have found that shareholders of acquired firms often

A) earn above-average returns.
B) earn below-average returns.
C) earn close to zero as a result of the acquisition.
D) are not affected by the acquisition.

Question 74

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(an)

A) stealth raid.
B) adversarial acquisition.
C) hostile takeover.
D) leveraged buyout.

Question 75

Currently, the rationale for making an acquisition includes each of the following EXCEPT

A) To increase market power.
B) To decrease taxes paid by shareholders.
C) To overcome entry barriers.
D) To increase diversification.

Question 76

Toys "R" Us Inc. recently acquired specialty toy retailer FAO Schwarz. This is a _________ acquisition and is most likely intended to _________ .

A) vertical; increase diversification
B) horizontal; increase market power
C) vertical; overcome entry barriers
D) related; increase speed to market

Question 77

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.

Question 78

According to the chapter Opening Case, despite recent declines both globally and domestically, M&A opportunities seem strong in sectors such as ________and ________.

A) automobiles; hotels
B) health care; software
C) energy; health care
D) energy; biotechnology

Question 79

A leveraged buyout by a third party is often the result of managerial mistakes or management that has operated in its own self-interest rather than the firm's interest.

Question 80

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.

A) result in above-average returns
B) provide approximately average returns
C) result in returns near zero
D) take some time to achieve private synergy, but eventually result in above-average returns