Deck 21: Mergers, Acquisitions, and Corporate Control

Question 1

A typical poison pill may give existing shareholders the right to buy the company's shares at half price as soon as a bidder acquires more than 15% of the shares. The bidder is not entitled to the discount.

Answer 1

True

Question 2

Many companies are finding it more efficient to vertically integrate than to outsource many of their activities.

Answer 2

False

Question 3

Firm A's shareholders will be better off with a stock offer than with a cash offer if A makes too generous of an offer for Firm
B.

Answer 3

True

Question 4

By offering to buy shares directly from shareholders, the acquiring firm can bypass the target firm's management altogether.

Question 5

A vertical merger is one between firms at different levels of the production process.

Question 6

Instead of selling part of its operations, companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

Question 7

If a segment of a business is unrelated to the rest of the firm's activities, that segment is more likely to be spun off or carved out.

Question 8

Strictly speaking, the purchase of the stock or assets of another firm is an acquisition.

Question 9

Carve-outs and spin-offs both provide shares of the new firm to the divesting firm's shareholders.

Question 10

When a firm is taken over, its management is usually replaced.

Question 11

Evidence shows that investors will generally pay a premium for diversified firms, thus firms should merge for this reason.

Question 12

Synergy is equal to the value of a combined firm minus the total value of the firms prior to merger.

Question 13

Vertical integration makes sense when two firms are highly dependent upon each other.

Question 14

A merger must have the approval of at least 51% of the shareholders of each firm.

Question 15

Target firms frequently deter potential bidders by devising poison pills, which make the company unappetizing.

Question 16

The big savings from merging two banks would come from consolidating operations and eliminating redundant costs.

Question 17

Takeovers are often described as part of a broader market for corporate control.

Question 18

Changing management is the only reason that firms make acquisitions.

Question 19

Pfizer sold its infant nutrition business to Nestlé as part of its strategy to concentrate its focus on its core activities.

Question 20

A conglomerate merger is defined as the merger of two or more Fortune 500 companies.

Question 21

Duke Energy and Progress Energy anticipated their merger would result in cost savings in fuel and labor costs.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

Management buyouts are generally all-equity financed by the new shareholders.

Question 28

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

Question 29

On average, stockholders in target firms earn higher returns from mergers than the acquiring firm's stockholders.

Question 30

The Williams Act in addition to state laws set forth the rules for tender offers.

Question 31

One motive for acquiring a firm is the acquisition of the target firm's cash reserves.

Question 32

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

Question 33

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

Question 34

Only the U.S. has antitrust laws that can affect mergers and acquisitions.

Question 35

If investors believe a firm may be acquired, they may cause the true market value of the firm to be overstated by overvaluing the firm's shares.

Question 36

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

Question 37

The value of the target firm's bonds tend to decrease when a leveraged buyout is announced.

Question 38

The free-cash-flow theory supports the notion that the market gain from an LBO is basically the present value of the firm's future cash flows that were kept from being wasted.

Question 39

Bank of America's shareholders would have been better off if the firm had not acquired Countrywide Financial in 2007.

Question 40

The 1980s were a time of little merger activity.

Question 41

When one firm merges with another, the:

A) boards of directors will merge also.
B) merger must be approved by 75% of the shareholders of the target firm.
C) assets will be merged but the liabilities will not.
D)target firm will cease to exist.

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 any gains in earnings.

Question 43

When shareholders attempt to garner additional votes in an attempt to oust management, it is called a:

A) management buyout.
B) tender offer.
C) proxy contest.
D)poison pill.

Question 44

One indication that investors expect no synergy from a merger would be that the:

A) total market value of the merged firms does not change.
B) P/E ratio of the merged firms' changes.
C) acquiring firm financed the merger with cash.
D)merged firms are from different industries.

Question 45

A spinoff is an action in which:

A) the management bids for and acquires the firm.
B) one firm issues stock to acquire another firm.
C) successful product lines are sold to competitors.
D)a portion of the firm's assets is sold off to form a new company.

Question 46

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 47

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 48

ABC Corp. has offered 1 million shares having a total market value of $8 million for XYZ. After the merger is announced, shares in ABC trade for $7 each. If ABC is confident about XYZ's value, then the cost of the merger:

A) increased by $1 million.
B) decreased by $1 million.
C) increased by $9 million.
D)remained constant.

Question 49

An increase in earnings per share after a merger may not indicate increased value if the:

A) number of shares has increased.
B) price of the acquirer's stock increases.
C) price-earnings ratios were different in the premerger firms.
D)firm's additional earnings are spent on legal expenses of the merger.

Question 50

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

A) increased market price.
B) increased financing.
C) economies of scale.
D)diversification.

Question 51

The shareholders of firm A have offered 1 million shares valued at $10 each to acquire firm B. After the merger is announced, stock A trades for $9 per share. Which of the following statements is false?

A) Firm A appears to have overbid for firm B.
B) The NPV of the merger may differ from expectations.
C) Shareholders of firm A absorb all the additional "cost."
D) Firm A's stockholders are better off than if the merger were cash financed for $10 million.

Question 52

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 53

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

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

Question 54

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

A) tender offer.
B) greenmail offer.
C) buyout.
D)hostile takeover.

Question 55

The cost of a merger equals the:

A) cash paid for the target firm.
B) increase in total earnings minus the price paid.
C) premium paid over the target's value as a separate entity.
D)sum of cash and stock paid for the target firm.

Question 56

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

A) conglomerate.
B) leveraged buyout.
C) horizontal merger.
D)vertical merger.

Question 57

A tender offer is one in which the firm's:

A) management offers to sell the company to an acquirer.
B) board of directors offers to sell the company to the public.
C) shareholders are propositioned to sell their shares to outsiders.
D)management offers to buy all outstanding shares of the corporation.

Question 58

Firm B's 1 million shares of stock currently sell for $12 each, but firm A is preparing a tender offer of $18 per share. Firm A estimates the gain of the merger to be $5 million. What percentage of the merger gains will be captured by firm B's stockholders?

A) 33.33%
B) 50.00%
C) 66.67%
D)54.55%

Question 59

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 60

Which one 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 61

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 62

Which one of the following is false 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 63

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:

A) proxy fights.
B) leveraged buyouts.
C) shark attractants.
D)poison pills.

Question 64

In which one of the following ways can the management teams of many corporations influence the board of directors?

A) By merging with another firm
B) Through appointment of shareholders to replace current board members
C) Through management's nomination of board candidates
D)By declaring a liquidating cash dividend

Question 65

If Georgia Pacific (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)spin-off by the national homebuilding firm.

Question 66

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

A) provides immediate benefit through improved management.
B) does not offer a positive NPV from the merger.
C) stays in effect only until EPS are increased.
D)does not require the approval of a majority of shareholders.

Question 67

A public offer to purchase the shares of existing stockholders in order to take the firm over is called a:

A) tender offer.
B) carve-out.
C) spin-off.
D)divestiture.

Question 68

Which percentage of shareholder approval would be most associated with a shark-repellent strategy?

A) 10%
B) 25%
C) 50%
D)80%

Question 69

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

A) management buyout.
B) spin-off.
C) successful greenmail attempt.
D)corporate breakup.

Question 70

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 firm may capture all of the gains.
C) Merger costs should be negative after discounting.
D)The merger's gain must also exceed its NPV.

Question 71

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 72

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

A) Selling stockholders
B) Buying stockholders
C) Pre-LBO bondholders
D)Investment bankers

Question 73

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

A) a higher price-earnings ratio.
B) higher total combined market value.
C) reduced future growth prospects.
D)increased free cash flow.

Question 74

If two merged firms are shown to have a higher combined market value than the sum of their individual market values, then:

A) economic gains are said to have taken place.
B) the firms were previously underpriced.
C) the merger provides diversification to investors.
D)there is no cost involved in the merger.

Question 75

Proxy fights generally occur when a group is trying to:

A) rewrite the corporate charter.
B) bring about economies of scale.
C) replace the current board and management team.
D)pursue a public tender offer.

Question 76

Firms with substantial amounts of free cash flow often discover that:

A) conglomerate mergers are the best use for the funds.
B) accounting profits are what truly matter.
C) they have become takeover targets.
D)their capital budgets have been too low.

Question 77

Which one 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 78

The observation that cash-rich firms often make questionable acquisitions in diverse industries, 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 79

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

A) without free cash flow will become the most common LBOs.
B) with free cash flow will continue to be the acquirers.
C) with excess cash do not have a tendency to use it wisely.
D)with excess cash tend to have the most carve-outs.

Question 80

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

A) management is always viewed as performing its job 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.