Deck 23: Mergers, Acquisitions, and Corporate Control

Question 1

Agency cost occurs when managers or directors take actions adverse to shareholders' interest.

Answer 1

True

Question 2

In a merger the acquiring firm buys only the assets of the target firm.

Answer 2

False

Question 3

In mergers financed by cash,the merger cost is not affected by the size of the merger gain.

Answer 3

False

Question 4

Tender offers generally require the approval of the target firm's management.

Question 5

Companies spin off the business by selling part of the assets to another company.

Question 6

An economic gain is derived from mergers when two firms are worth more combined than separate.

Question 7

A tender offer is an attempt by outsiders to buy the stock of the target firm's shareholders with the help of target firm's managers.

Question 8

In certain circumstances,the competition tribunal will allow a merger that substantially lessens competition.

Question 9

On average,shareholders in target firms earn higher returns from mergers than shareholders from acquiring firms.

Question 10

In general,shareholders of the target firm benefit from takeovers.

Question 11

A tender offer is an agreement between the management and shareholders of a firm to buy back its own shares.

Question 12

A key criterion used by the competition tribunal is whether a merger substantially lessens competition.

Question 13

Economies of vertical integration are one possible source of synergy in mergers.

Question 14

A merger between two firms in a similar industry is an example of vertical merger.

Question 15

Contrary to logic,firms that enjoy complementary resources in the production process are rarely good candidates for merger.

Question 16

Generally,a shareholder in the firm that is being acquired gains the most from a corporate merger.

Question 17

It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine their operations.

Question 18

When analyzing a potential merger's cash flows,the most appropriate discount rate is the acquiring firms cost of capital.

Question 19

A proxy is a method by which a shareholder can allow another shareholder to vote his/her shares.

Question 20

In vertical mergers,the goal is to benefit from the economies of scale.

Question 21

The value of the target firm's bonds goes down when a leveraged buyout is announced.

Question 22

The shares of an acquired firm typically trade for a higher value on the open market after an LBO.

Question 23

The proliferation of junk bonds in the 1980s greatly increased the feasibility of LBOs.

Question 24

CBA Corp.is worth $15 million as a stand-alone firm.ABC Corp.has offered 350,000 shares valued at $50 each to merge with CBA.After the merger,however,ABC's shares are worth only $45 per share.What was the cost of the merger?

A) ($1.75 million)
B) $0.75 million
C) $1.75 million
D) $3.25 million

Question 25

The urge to merge frequently is prompted by more regulation.

Question 26

Firms A and B are each worth $50 million,but generate a $20 million gain when merged.If the cost of the merger was $5 million,how much did Firm A pay for Firm B?

A) $50 million
B) $55 million
C) $60 million
D) $65 million

Question 27

"Junk bonds" are not very desirable because of the low yields these securities provide.

Question 28

An acquiring company is considering a takeover of a target company.The acquiring company has 10 million shares outstanding with $40 per share.The target company has 5 million shares outstanding which sell for $20 per share.If the acquiring company estimates that merger gains will be $20 million,determine what the highest price will be paid per share for the target.

A) $24
B) $26
C) $28
D) $30

Question 29

Firm B's one million shares of stock currently sell for $20 each.Firm A estimates the economic gain from the merger to be $10 million and is prepared to offer $22 cash for each share of B) What percentage of the merger gain will be captured by firm B's shareholders?

A) 20.00%
B) 33.33%
C) 50.00%
D) 60.00%

Question 30

Leveraged buyouts are acquisitions where a large fraction of the purchase price is financed with debt.

Question 31

In merger terminology,a white knight is:

A) any suitor willing to bid more than the current share price for a firm.
B) the successful bidder in a merger process.
C) a suitor who acquires with cash rather than with stock.
D) a friendly acquirer that will out-bid a hostile acquirer.

Question 32

Which of the following might you recommend to a firm with excessive free cash flow?

A) Acquire a firm to diversify
B) Acquire a firm to bootstrap earnings
C) A leveraged buyout
D) A repurchase of shares

Question 33

If an automobile manufacturer were to acquire one of the firms listed in the answer options,which acquisition would be called a horizontal merger?

A) A steel mill
B) A rival manufacturer
C) A tire producer
D) A bank

Question 34

Which of the following is correct concerning a spin-off?

A) A division of a firm is reconstituted as a new firm
B) An unprofitable division is divested
C) A division of a firm is bought by its managers
D) The spin-off generates no free cash flow

Question 35

Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.

Question 36

Firm B's one million shares of stock currently sell for $12 each,but Firm A is preparing an $18 per share tender offer.Firm A estimates the gain of the merger to be $6 million.What percentage of the merger gains will be captured by B's stockholders?

A) 33.33%
B) 50.00%
C) 66.67%
D) 75.00%

Question 37

The most likely interpretation of headlines that read,"ABC Corp.adopts shark repellent" is that:

A) ABC wants to increase the difficulty of a takeover.
B) ABC has made a tender offer for the shares of another firm.
C) ABC will only merge with small-sized partners.
D) ABC Corp. desires to reduce the costs of being acquired.

Question 38

An acquiring company is considering a takeover of a target company.The acquiring company has 15 million shares outstanding with $30 per share.The target company has 8 million shares outstanding which sell for $24 per share.If the acquiring company estimates that merger gains will be $16 million,determine what the highest price will be paid per share for the target.

A) $24
B) $26
C) $28
D) $30

Question 39

A "poison pill" is a generous retirement package for current management,implemented after a hostile takeover.

Question 40

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

A) $20 million.
B) $30 million.
C) $50 million.
D) $130 million.

Question 41

Which of the following is not a category of mergers?

A) Horizontal
B) Vertical
C) Conglomerate
D) Diagonal

Question 42

Diversification is often a poor motive for mergers because:

A) vertical integration is rarely successful.
B) investors can diversify on their own account.
C) it does not produce economies of scale.
D) the increase in taxes overcomes gains in earnings.

Question 43

Mergers may provide reductions in average production cost as a result of:

A) increased market share.
B) a more efficient management.
C) economies of scale.
D) diversification.

Question 44

Which of the following is least likely to provide a motivation for vertical integration?

A) A continuous source of raw materials
B) A desire to spread fixed costs across more output
C) Access to an efficient distribution channel
D) Acquisition of an established customer base

Question 45

Empirical studies show that the operating efficiency of firms having undergone a leverage buyout,______ over the following 3 years.

A) Increases
B) Decreases
C) Does not change
D) Shows no clear trend

Question 46

The merger between Chase Manhattan and Chemical bank is an example of:

A) Vertical merger.
B) Horizontal merger.
C) Conglomerate merger.
D) Direct merger.

Question 47

A merger adds value by creating synergies.Which of the following is not a possible source of synergy?

A) Economies of scale
B) Economies of vertical integration
C) Combining complementary resources
D) Diversification

Question 48

The market for corporate control suggests that:

A) management and ownership make a large difference in a firm's results.
B) it is rare for mergers to show economic benefits over a sustained period.
C) hostile takeovers generate the most in additional value.
D) LBOs cost more than they are worth.

Question 49

The free-cash-flow theory of takeovers predicts that:

A) Firms without free cash flow will become the most common LBOs.
B) Firms with free cash flow will continue to be the acquirers.
C) Firms with excess cash do not have a tendency to use it wisely.
D) The riskiest takeover candidates are those with large amounts of free cash flow.

Question 50

A conglomerate merger occurs when:

A) both partners are large in size.
B) large synergies are expected to develop.
C) firms from different industries merge.
D) both management teams remain intact after the merger.

Question 51

In which merger type would it be least likely to observe economies of scale?

A) Horizontal
B) Vertical
C) Conglomerate
D) It is equally likely to observe economies of scale in all merger types

Question 52

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines),the merger would be:

A) a conglomerate.
B) a divestiture.
C) horizontal.
D) vertical.

Question 53

The observation that cash-rich firms often use the funds to diversify rather than increase dividends indicates that:

A) diversification is too costly for individuals.
B) growth is often valued for the sake of growth alone.
C) diversification is synergistic.
D) dividend-pricing models are of questionable value.

Question 54

If Microsoft acquires Apple Computer,it will be an example of a:

A) Vertical merger.
B) Horizontal merger.
C) Conglomerate merger.
D) Distribution-channel merger.

Question 55

If Canfor (lumber products)were to acquire a national homebuilding firm,the combination would be termed a:

A) Horizontal merger.
B) Vertical merger.
C) Conglomerate merger.
D) A spin-off by the national homebuilding firm.

Question 56

Which of the following statements is correct concerning the cost of two firms merging? The cost:

A) is fixed when the merger is financed with cash.
B) can be affected by post-merger gains if cash is used.
C) decreases as the post-merger share price increases when stock is used to finance the merger.
D) is not determined until after the merger, regardless of the type of financing.

Question 57

What type of financing is typically instrumental in bringing about leveraged buyouts?

A) Common-stock financing
B) Preferred-stock financing
C) Investment-grade bonds
D) Speculative-grade bonds

Question 58

If the shareholders of an acquired firm capture all of the merger's gain,then the:

A) cost of the merger is zero.
B) NPV of the merger is zero.
C) EPS will increase.
D) acquiring firm retains all merger benefits.

Question 59

The benefits of merger is easier when the merging companies:

A) have different computer systems.
B) have different pay structures.
C) have different resources.
D) have different company cultures.

Question 60

Other things equal,which of the following groups of stakeholders should expect to lose value as a result of an LBO?

A) Selling shareholders
B) Buying shareholders
C) Bondholders
D) Investment bankers

Question 61

Firms that are acquired to take advantage of bootstrapping often have:

A) a lower price-earnings ratio than the acquirer.
B) a higher price-earnings ratio than the acquirer.
C) more outstanding shares than the acquirer.
D) a higher market valuation than the acquirer.

Question 62

What does empirical evidence suggest about the distribution of gains from mergers?

A) Shareholders of the acquired firm gain the most.
B) Shareholders of the acquiring firm gain the most.
C) Neither group of shareholders is likely to gain.
D) Both groups of shareholders gain equally.

Question 63

Which of the following motives for mergers make economic sense?

A) To achieve economies of scale
B) To reduce risk by diversification
C) Merging to redeploy cash
D) To increase earnings per share

Question 64

Which of the following is not correct concerning a proposed merger of firms?

A) The acquired firm will cease to exist.
B) Shareholders of the acquired firm may receive securities in the acquiring firm.
C) Mergers are sometimes combinations of equals.
D) Shareholder approval to merge is not required.

Question 65

When an outside group acquires a firm,primarily through the use of borrowed funds,the acquisition is known as a:

A) Management buyout.
B) Tender offer.
C) Leveraged buyout.
D) Successful proxy fight.

Question 66

ABC Corp.has offered one million shares having a total market value of $8 million for XYZ Corp.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,what has happened to the cost of the merger?

A) It increases by $1 million
B) It decreases by $1 million
C) It increases by $9 million
D) It remains constant

Question 67

The cost of a merger may outweigh the potential gain if the:

A) present value of the acquired firm exceeds the price paid for it.
B) present value of the merged firms is greater than the sum of their individual values.
C) merger allows cost savings to occur.
D) acquired firm's shareholders receive more than the value of their firm.

Question 68

Shares of a corporation can,under certain circumstances,be priced at different amounts to different investors under the terms of a:

A) Proxy agreement.
B) Public tender offer.
C) Poison pill.
D) Shark repellent.

Question 69

What does it mean when a company is said to have been merged under the term acquisition?

A) Boards of directors will merge also.
B) Merger must be approved by 75% of the shareholders of the target firm.
C) Merger must be approved by at least 50% of the shareholders of the target firm.
D) Target firm will cease to exist.

Question 70

Which of the following statements is correct for a firm that has undergone a leveraged buyout?

A) Its shares are traded publicly
B) Its capital is mostly equity financed
C) Its shares are not traded publicly
D) It has a larger shareholder base

Question 71

Which of the following is the most appropriate reason for an acquiring firm's shareholders to prefer using stock financing for acquisitions?

A) There is no cash outflow
B) It mitigates the effects of overvaluation of the target firm
C) It mitigates the effects of undervaluation of the target firm
D) It avoids dilution of shares

Question 72

When a firm's management takes the firm private with the aid of substantial debt it is known as a(n):

A) Tender offer.
B) Greenmail offer.
C) MBO.
D) Hostile takeover.

Question 73

In the case of a merger that is stock financed,the assumed merger cost may be incorrect if the:

A) value of the acquired firm's shares changes after the merger announcement.
B) value of the acquiring firm's shares changes after the merger announcement.
C) long-term interest rates increase.
D) merger is either horizontal or vertical.

Question 74

Splitting AT&T in 1996 into four separate firms is an example of:

A) Leveraged buyout.
B) Spin-off.
C) Management buyout.
D) Tender offer.

Question 75

When two firms merge,the value of the acquiring firm will change by the:

A) gain from the merger.
B) NPV minus the cost of the merger.
C) NPV of the merger.
D) cost of the merger.

Question 76

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:

A) Bootstrap.
B) White knight.
C) Poison pill.
D) Greenmail attempt.

Question 77

Why is it not sufficient to state that a merger should occur simply because the economic gains are positive?

A) Gains are typically of an accounting nature
B) Shareholders of the target may capture all gains
C) Merger cost should be negative after discounting
D) The merger's gain must also exceed its NPV

Question 78

One of the reasons why proxy fights are rarely successful is that:

A) management is always viewed as performing their jobs well.
B) management can use corporate resources to defend against the fight.
C) mergers are a cheaper form of changing management.
D) shareholders are unconcerned with corporate management.

Question 79

Which of the following is not a method of changing the management of a firm?

A) Proxy contest
B) Merger and acquisition
C) LBO
D) MBO

Question 80

Which of the following methods is the least likely to provide a change of corporate management?

A) Successful proxy fight
B) Voluntary resignation of all managers
C) Leveraged buyout of the firm
D) Merger or acquisition