Deck 21: Mergers, Acquisitions, and Corporate Control

Question 1

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

Answer 1

False

Question 2

Nine years after acquiring Chrysler,Daimler paid a leveraged buyout firm $677 million to take Chrysler off its hands.

Answer 2

True

Question 3

Carve-outs are similar to spin-offs except that shares in the new company are not given to existing stockholders but instead are sold in a public offering.

Answer 3

True

Question 4

When Bank of New York and Mellon Financial Corporation merged in 2007,management forecast annual cost savings of $700 million or over 8% of the current combined cost.

Question 5

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

Question 6

Vertical integration has fallen out of fashion recently.

Question 7

In high-tech industries an acrimonious takeover battle may cause many of the target's most valued staff to leave.

Question 8

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

Question 9

In June 2003 Oracle Corp announced a $5.1 billion cash tender offer for its rival PeopleSoft.

Question 10

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

Question 11

Strictly speaking,merger means the combination of all the assets and liabilities of two firms.

Question 12

Carve-outs are synonyms of spin-offs in the market of corporate control.

Question 13

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

Question 14

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

Question 15

In 2005 China National Offshore Oil Corporation (CNOOC)felt obliged to withdraw its bid for Unocal,after what is described as "unprecedented political opposition" in Congress.

Question 16

Today's buyouts are generally smaller and not leveraged as aggressively as the deals of the 1980s.

Question 17

Changing management is the only reason that firms make acquisitions.

Question 18

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 19

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

Question 20

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.

Question 21

In 2010,the SEC recently introduced a new rule allowing large investors (those holding a 3% ownership stake in the firm for at least 2 years)to nominate their own candidates for the board of directors.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

The costs for public companies of meeting the requirements of the Sarbanes-Oxley Act and other detailed regulations have helped push corporations to return to private ownership.

Question 35

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

Question 36

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

Question 37

On October 28,1988,the board of directors of RJR Nabisco revealed that the company's CEO had formed a group of investors prepared to buy all the firm's stock for $75 per share in cash and take the company private.RJR's share price immediately moved to about $75 from $56.

Question 38

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 39

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

Question 40

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

Question 41

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 42

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 43

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 44

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 45

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 46

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 repellents.
D) poison pills.

Question 47

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 not correct?

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 additional "cost."
D)Firm A's stockholders are better off than if the merger were cash financed for $10 million.

Question 48

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

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

Question 49

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 50

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 51

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 52

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 53

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 54

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) merger must be approved by at least 50% of the shareholders of the target firm.
D) target firm will cease to exist.

Question 55

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

A) Horizontal
B) Vertical
C) Conglomerate
D) All of these

Question 56

The cost of a merger equals the:

A) cash paid for the target firm.
B) increase in total earnings less 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 57

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 58

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 59

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 60

ABC Corp.has offered 1 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 61

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 62

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 63

Realizing 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 64

In which 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

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 66

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 67

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 68

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 69

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 70

Proxy fights are conducted in order to achieve a goal of:

A) changing the corporate charter.
B) bringing about economies of scale.
C) replacing the current board and management team.
D) having a public tender offer.

Question 71

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 postmerger gains if cash is used.
C) decreases as the postmerger 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 72

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) all of these.

Question 73

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 74

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 75

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

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

Question 76

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 77

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 78

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 79

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 80

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.