Deck 19: Acquisitions and Mergers in Financial-Services Management

Question 1

The _____________________ Act requires each merging bank to seek approval from its principal federal regulating agency before a merger can take place.

Answer 1

Bank Merger

Question 2

Under the terms of Bank Merger Act,federal regulating agencies must give top priority to the ______________________ of a proposed merger.

Answer 2

competitive effects

Question 3

When the existing ownership of a bank experiences a loss in their share of the company due to an increased number of shares going to new stockholders,it is known as _____________________.

Answer 3

dilution of ownership

Question 4

The Financial Accounting Standards Board labels ____________ as the "intangible synergies" of a combined firm resulting from a merger.

Question 5

The _________________________________ is a measure of the market concentration in a given market area.The larger this number,the more concentrated the market.

Question 6

In the ____________________________ method of acquisition,a bank assumes all of the assets and liabilities of the other bank which ceases to exist.

Question 7

One of the reasons for a merger is _________________.This is where the merger is encouraged by the FDIC as a way to conserve scarce federal deposit insurance resources.

Question 8

If a bank can show that the merger it proposes results in significant ______________________________,it may be able to overcome anticompetitive problems of the merger.This is the impact the merger has upon the convenience and service needs of the community.

Question 9

Increase in earnings of a bank as a result of consolidation of operations and elimination of unnecessary duplication usually exhibits improving ___________ efficiency.

Question 10

A large metropolitan or money center bank is often called a(n)______________.

Question 11

The ______________________ is the proportion of shares of stock the shareholders of an acquired firm receive from the acquiring firm.

Question 12

To most authorities,the recent upsurge in mergers reflects the expectation of the stockholders that the profit potential will _____________ once the merger is completed.

Question 13

A(n)______________________ takeover is a merger which is resisted by the existing management and stockholders.

Question 14

The degree of dilution in earnings of a combined firm is a function of a differential in the _________ and relative size of the two merging companies.

Question 15

When a bank expands the number of service options it offers after acquiring another financial firm,they have practiced __________________ diversification.

Question 16

In the ______________________ method of acquisition,a bank purchases all or a portion of another bank's assets.

Question 17

One reason banks pursue mergers is for _____________________.This allows the bank to reduce fluctuations in revenues and net income.

Question 18

One reason banks pursue mergers is for _____________________.This allows the bank to enter new markets and find new sources of revenue.

Question 19

The amount paid over the current stock price to shareholders of the acquired firm by the acquiring bank in a merger is known as ___________________________.

Question 20

Many mergers arise from expected ___________________________ benefits.This takes place particularly when an acquired firm has earnings losses that can be used to offset taxable profits of the acquirer.

Question 21

A market served by just two banks,equal to each other in size,would have an HHI of 5,000.

Question 22

Under the purchase-of-stock method,the acquired bank ceases to exist as a separate corporation.

Question 23

The European Commission has emerged as a key arbiter for mergers involving European businesses.The commission is principally against the doctrine of _________________.

Question 24

When a merger takes place,some banks have been asked by the regulators to __________________ themselves of some of their branches to avoid anticompetitive activities.Many of these are sold to third parties.

Question 25

Bank executives identify the most important factor in choosing a merger target as the ability of the merged bank to better accommodate their corporate customers.

Question 26

Under the terms of the Bank Merger Act,each federal agency must give top priority to the competitive effects of a proposed merger.

Question 27

When a bank enters into a new market area as the result of a merger with another financial institution,they have practiced __________________ diversification.

Question 28

According to the textbook,the financial success of a bank merger depends heavily upon the comparative dollar amounts of earnings reported by the two banking organizations and their relative price-earnings ratios.

Question 29

According to a recent survey,many European bank mergers in the 1980s and 1990s were motivated by the desire to reduce operating costs(economies of scale).

Question 30

One of the major reasons behind the rapid growth of mergers in recent years is that stockholders expect the profit potential to increase once the merger is completed.

Question 31

A proposed merger between two or more banks must be ratified by the board of directors of each bank involved,followed by the management of each of the banks,and then all the shareholders of all the banks.The merger can proceed thereafter once regulators' approval is received.

Question 32

The degree of __________________ in a market is measured by the proportion of assets controlled by the largest institutions serving that market.In the banking industry,this is measured but the Herfindahl-Hirschman Index.

Question 33

When a national bank wants to acquire another bank,it must apply to the __________________ for approval.

Question 34

If a bank with a higher stock price-to-earnings ratio acquires a bank with a lower price-earnings ratio,earnings per share of the combined organization will increase,even if combined earnings fall after the merger.

Question 35

A market area served by one bank which is the only provider of financial services in that market would have an HHI of 100 percent.

Question 36

The merger of Bank of America and Security Pacific in 1992 resulted in an expansion of branch offices for both banks.

Question 37

The acquisition of First City Bancorporation of Texas by Chemical Bank of New York was motivated by both banks seeking market-positioning benefits.

Question 38

In the United States,regulations require bank merger premiums to range between 150 to 250 percent.

Question 39

Mergers with anticompetitive effects can only be approved at the federal level if one of the banks involved is failing.

Question 40

In recent years,financial services industry has consistently ranked in the top five of all U.S.industries in the number or value of merger transactions every year.

Question 41

Some merger partners anticipate reduced earnings risk as a result of the merger.One reason for this may be that the merger opens up new markets with different economic characteristics.

Question 42

The 2007-2009 credit crunch resulted in numerous banks experiencing financial distress for which mergers and acquisitions were often the only option.

Question 43

Bank regulators may challenge a merger between two institutions but can never require banks to divest themselves of some of their offices in order to secure regulators' approval.

Question 44

There is little evidence for cost savings resulting from large financial institution mergers.

Question 45

According to the textbook,the lackadaisical profit performance surrounding a merger may be explained by the:

A)tax inefficiencies due to a merger.
B)lenders cutting off credit lines due to the merger.
C)accounting irregularities when reporting earnings of the combined entity.
D)managerial hubris and sizeable merger premium that acquirers have to pay to shareholders of the acquired firms.
E)All of the options are correct.

Question 46

The agency problem described in the textbook is referred to the idea of bank managers driven primarily by their own interest to increase salaries and benefits at the expense of company stockholders.

Question 47

Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless the banks can show that the combined bank would have significant public benefits.

Question 48

The federal law that requires each U.S.merging bank to notify its principal federal regulatory agency and request for an approval before a merger can take place is the:

A)Bank Merger Act.
B)Glass-Steagall Act.
C)Depository Institutions Deregulation and Monetary Control Act.
D)Garn-St Germain Depository Institutions Act.
E)Gramm-Leach-Bliley Act.

Question 49

The ratio of an acquired bank's current stock price per share plus the additional amount paid by the acquirer for each share of the acquired bank's stock,divided by the acquired bank's current stock price is the:

A)price-earnings ratio.
B)merger premium.
C)exchange rate (of a merger transaction).
D)combined stock price of the merging banks.
E)None of the options is correct.

Question 50

One of the most common motives for large banks to acquire smaller banks is to gain access to capable new management which is always in short supply at larger institutions.

Question 51

A study by the Federal Reserve Board indicates that there are economies of scale (cost savings)resulting from mergers among relatively smaller banks and insurance companies.

Question 52

_________________ is a danger faced by the stockholders of an acquiring firm in a merger if excessive numbers of new shares are issued relative to the value of their old shares.

A)Earnings volatility
B)Reduction of the exchange ratio
C)Dilution of ownership
D)Increased risk of bankruptcy
E)None of the options is correct

Question 53

According to FASB,goodwill must now be amortized over its useful life.

Question 54

According to the textbook,bank mergers are often motivated by:

A)profit potential.
B)expected reduction in the risk of fluctuations in cash flow and earnings.
C)expected tax benefits.
D)market-positioning strategies.
E)All of the options are correct.

Question 55

If one of the banks is in financial stress,a merger is not allowed to take place.

Question 56

According to the textbook,the principal beneficiaries of most bank mergers appear to be:

A)the stockholders of the acquired bank.
B)the stockholders of the acquiring bank.
C)the public (in the form of new services offered and lower service fees).
D)the staff of the acquired bank.
E)None of the options is correct.

Question 57

The most important goal of any merger should be to increase the market value of the surviving firm.

Question 58

In order to get regulatory approval for a merger,many a times banks have been required to open up a number of new branch offices.

Question 59

Recent research indicates that some merger activity may actually stimulate "de novo" bank entry into the marketplace.

Question 60

As a result of many bank mergers in the last few decades,research indicates that goodwill as an asset on many bank's balance sheets has grown exponentially.

Question 61

The Herfindahl-Hirschman Index is a measure of:

A)market concentration.
B)merger premium.
C)synergies gained from a merger.
D)employee strength of the combined firm after merger.
E)All of the options are correct.

Question 62

Suppose Bank A's stock price is $75 and Bank B's stock price is $25.Bank A is planning to purchase Bank B by paying Bank B's shareholders a bonus of $10 per share.If Bank B has 100,000 shares outstanding,how many shares of Bank A will the shareholders of Bank B receive?

A)100,000 shares
B)33,333 shares
C)46,667 shares
D)214,286 shares
E)None of the options is correct

Question 63

First National Bank's stock is currently selling at $40 per share and the bank recently reported earnings per share of $4.50 on its 200,000 shares outstanding.Second National Bank has 150,000 shares outstanding,with a current market price of $30 per share.It just reported its earnings per share of $5.If First National acquires Second National in a stock purchase,with the two banks agreeing to exchange stock at the current market prices,and post-merger earnings are expected to be $1,800,000,what is the expected EPS post merger?

A)$4.36
B)$5.76
C)$5.28
D)$5.14
E)None of the options is correct

Question 64

Suppose there are four banks in a local community.Each of these banks has 25 percent of the deposits in this community.Calculate the change in the Herfindahl-Hirschman Index (HHI)if two of these banks merge.

A)625
B)1,000
C)1,150
D)1,200
E)1,250

Question 65

Andover Bank is planning to purchase Berkley Bank.The current market value of Andover's stock is $55 per share while that of Berkley's stock is $15 per share.Andover plans to pay Berkley's stockholders a $5 bonus per share.Currently,Andover has 100,000 shares outstanding and earnings per share of $12,while Berkley has 50,000 shares outstanding and earnings per share of $5.Suppose that the earnings of the new bank are $1,600,000 and the combined bank will have 118,182 shares outstanding.What will be the earnings per share for the new bank?

A)$17.00 per share
B)$13.54 per share
C)$9.67 per share
D)$12.27 per share
E)None of the options is correct

Question 66

Andover Bank is planning to purchase Berkley Bank.The current market value of Andover's stock is $55 per share while that of Berkley's stock is $15 per share.Andover plans to pay Berkley's stockholders a $5 bonus per share.Currently,Andover has 100,000 shares outstanding and earnings per share of $12,while Berkley has 50,000 shares outstanding and earnings per share of $5.What is the merger premium that Andover will end up paying on Berkley's shares if the merger goes through?

A)367 percent
B)275 percent
C)133 percent
D)100 percent
E)None of the options is correct

Question 67

There are three banks in East Panhandle.First State Bank which currently has 25 percent of the deposits,Second State Bank which currently has 40 percent of the deposits,and Third State Bank which has the rest.According to the Department of Justice Guidelines,this market will be identified as:

A)unconcentrated.
B)mildly concentrated.
C)moderately concentrated.
D)highly concentrated.
E)monopoly.

Question 68

Andover Bank is planning to purchase Berkley Bank.The current market value of Andover's stock is $55 per share while that of Berkley's stock is $15 per share.Andover plans to pay Berkley's stockholders a $5 bonus per share.Currently,Andover has 100,000 shares outstanding and earnings per share of $12,while Berkley has 50,000 shares outstanding and earnings per share of $5.What will be the total number of shares outstanding for the new bank?

A)118,182 shares
B)150,000 shares
C)166,667 shares
D)200,000 shares
E)None of the options is correct

Question 69

Suppose there are four banks in a local community.Each of these banks has 25 percent of the deposits in this community.What is the Herfindahl-Hirschman Index (HHI)for this community?

A)10,000
B)100
C)2,500
D)625
E)None of the options is correct

Question 70

Which of the following is(are)reason(s)that many bank mergers do not work?

A)Ill-prepared management
B)A mismatch of corporate cultures
C)Excessive price paid by the acquirer
D)A failure to take into account customers' feelings and concerns
E)All of the options are reasons bank mergers do not work.

Question 71

The most important goal of any merger should be to:

A)increase the market value of the surviving firm.
B)reduce the risk of the surviving firm through geographic diversification.
C)increase managerial compensation.
D)increase the efficiency of the target firm.
E)None of the options is correct.

Question 72

Andover Bank is planning to purchase Berkley Bank.The current market value of Andover's stock is $55 per share while that of Berkley's stock is $15 per share.Andover plans to pay Berkley's stockholders a $5 bonus per share.Currently,Andover has 100,000 shares outstanding and earnings per share of $12,while Berkley has 50,000 shares outstanding and earnings per share of $5.Suppose the earnings of the combined bank do not increase over the total earnings of the two banks before the merger.In addition assume that the new bank will have 118,182 shares outstanding.What will be the earnings per share for the new bank?

A)$17.00 per share
B)$13.54 per share
C)$9.67 per share
D)$12.27 per share
E)None of the options is correct

Question 73

There are three banks in East Panhandle.First National Bank which currently has 40 percent of the deposits in the area,Second State Bank which currently has 30 percent of the deposits,and New State Bank and Trust which also has 30 percent of the deposits.What is the Herfindahl-Hirschman Index for East Panhandle?

A)100
B)1,200
C)3,400
D)2,400
E)None of the options is correct

Question 74

A merger may increase a bank's expected future earnings or reduce its level of risk exposure by:

A)improved operating efficiency.
B)increased earnings per share.
C)geographic or product diversification.
D)product diversification.
E)All of the options are correct.

Question 75

Suppose Bank A's stock price is $75 and Bank B's stock price is $25.Bank A is planning to purchase Bank B by paying Bank B's shareholders a bonus of $10 per share.What is the merger premium that Bank B's shareholders will receive?

A)110 percent
B)46.6 percent
C)200 percent
D)140 percent
E)None of the options is correct

Question 76

There are three banks in East Panhandle.First State Bank which currently has 25 percent of the deposits in the area,Second State Bank which currently has 40 percent of the deposits,and Third State Bank which has the rest.What is the Herfindahl-Hirschman Index for East Panhandle (compute the share of Third State Bank first)?

A)100
B)2,200
C)3,450
D)3,640
E)None of the options is correct

Question 77

Recent research on interstate bank mergers suggests that generally such mergers have resulted in:

A)increased earnings.
B)improved employee productivity.
C)faster growth.
D)improved cost control.
E)All of the options are correct.

Question 78

Suppose there are four banks in a local community.Each of these banks has 25 percent of the deposits in this community.According to the Department of Justice guidelines,this market is:

A)unconcentrated.
B)mildly concentrated.
C)moderately concentrated.
D)highly concentrated.
E)None of the options is correct

Question 79

There are three banks in East Panhandle.First State Bank which currently has 25 percent of the deposits,Second State Bank which currently has 40 percent of the deposits and Third State Bank which has the rest.Compute the share of the Third State Bank in the market.Suppose First State Bank and Third State Bank propose to merge in order to compete with Second State Bank.According to the Department of Justice Guidelines,would this merger be allowed?

A)Very likely
B)Likely,but with certain regulatory restrictions
C)Highly unlikely
D)Not enough information to make the determination
E)None of the options is correct

Question 80

Andover Bank is planning to purchase Berkley Bank.The current market value of Andover's stock is $55 per share while that of Berkley's stock is $15 per share.Andover plans to pay Berkley's stockholders a $5 bonus per share.Currently,Andover has 100,000 shares outstanding and earnings per share of $12,while Berkley has 50,000 shares outstanding and earnings per share of $5.What is the exchange ratio for this transaction?

A)3:11
B)4:3
C)5:2
D)4:11
E)None of the options is correct