Deck 19: Analysis of Takeovers

Question 1

Which of the following would shareholders regard as being an unacceptable reason for a takeover?

A)Increased market power.
B)Increase managerial perquisites.
C)Cost reductions.
D)Use of excess liquidity or free cash flows.

Answer 1

Increase managerial perquisites.

Question 2

Bishop,Dodd and Officer (1987)reported a close relationship between changes in share prices and the number of:

A)takeovers.
B)horizontal takeovers.
C)vertical takeovers.
D)conglomerate takeovers.

Answer 2

takeovers.

Question 3

Who restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity of ownership test or the same business test is satisfied?

A)The chairperson of the ACCC.
B)The Minister of Finance.
C)The Treasurer.
D)The Commissioner of Taxation.

Answer 3

The Commissioner of Taxation.

Question 4

Buzz Ltd,a tyre manufacturer,has recently taken over Bad-year Ltd,also a tyre manufacturer.This is an example of:

A)a horizontal takeover.
B)a vertical takeover.
C)a conglomerate takeover.
D)none of the given options.

Question 5

'It is unlikely that undervaluation of targets is the main reason for takeover activity.' This statement is:

A)false,since markets have been proven to be inefficient.
B)true,since management of the bidding company may have private information.
C)false,since management of the bidding company may recognise the existence of alternative,better uses for assets of the target.
D)true,since market efficiency implies that such opportunities are rarely found.

Question 6

Horizontal takeover can be best defined as a takeover of:

A)a target company operating in the same line of business as the acquiring company.
B)a target company operating in a different line of business.
C)a company which is a supplier of goods to the acquiring company.
D)a target company in an unrelated type of business.

Question 7

Which effect means that lenders to one company can now be paid out of the combined assets of both companies?

A)The insurance effect.
B)The co-insurance effect.
C)The taxation effect.
D)The free cash flow effect.

Question 8

Conglomerate takeovers are likely to indicate:

A)agency problems between management and shareholders.
B)benefits from diversification for shareholders.
C)companies can reduce risk.
D)that shareholders can benefit from lower risk of default on debt due to less than perfectly correlated earnings streams between the bidder and target.

Question 9

Cost saving is less likely to be a reason for takeover activity in:

A)horizontal takeovers.
B)vertical takeovers.
C)conglomerate takeovers.
D)both horizontal and vertical takeovers.

Question 10

Which of the following reasons is least likely to explain takeover activity?

A)Target companies are undervalued.
B)The presence of economies of scale in servicing shareholders.
C)Increased market power resulting from takeovers.
D)There are tax benefits.

Question 11

Which section of the Corporations Act gives a broad outline of the steps involved in a market bid?

A)Section 634.
B)Section 634A.
C)Section 634B.
D)Section 634C.

Question 12

Jetull Ltd,a furniture manufacturer,has recently acquired control of Pulp Ltd,a pulp and paper manufacturer.This is an example of:

A)a horizontal takeover.
B)a vertical takeover.
C)a conglomerate takeover.
D)none of the given options.

Question 13

A likely reason for a larger,listed company to acquire a smaller,unlisted company is that:

A)the smaller company is undervalued.
B)smaller companies are associated with greater tax benefits.
C)the management of the smaller company may lack expertise in some areas.
D)smaller companies tend to have excess liquidity.

Question 14

Fluctuations in domestic takeover activity over time is generally considered to be related to:

A)investment optimism and regulation.
B)managerial expertise.
C)changes in dividend policies.
D)waves in the degree of market efficiency over time.

Question 15

The market for corporate control can be defined as:

A)a market in which alternative teams of managers compete for the right to control corporate assets and make top-level management decisions.
B)the market of takeover activity.
C)the competition between management of a company to become the chief executive of a corporation.
D)an auction whereby alternative management teams make a bid to control a company.

Question 16

'Takeovers are value enhancing only because of synergistic gains'.Which of the following answers is most accurate regarding the aforementioned statement?

A)True.
B)False,value won't be affected by takeovers.
C)False,takeovers may also be value decreasing.
D)False,takeovers may be value enhancing for other reasons (e.g.replacing inefficient management).

Question 17

Which section of the Competition and Consumer Act 2010 prohibits a company from acquiring the shares or assets of another company where the acquisition is likely to result in a substantial lessening of competition in a market?

A)Section 52.
B)Section 50.
C)Section 51.
D)Section 53.

Question 18

Which of the following takeovers are most likely to be motivated by management inefficiency?

A)Horizontal takeover.
B)Vertical takeover.
C)Conglomerate takeover.
D)All of the given options.

Question 19

Synergy can best be demonstrated as:

A)Value (A + B)< Value (A)+ Value (B)
B)Value (A + B)> Value (A)+ Value (B)
C)Value (A + B)= Value (A)+ Value (B)
D)Value (A + B)= or > Value (A)+ Value (B)

Question 20

Conglomerate takeover can be best defined as a takeover of:

A)a target company operating in the same line of business as the acquiring company.
B)a target company operating in a different line of business.
C)a company which is a supplier of goods to the acquiring company.
D)a target company in an unrelated type of business.

Question 21

Which of the following does not influence the degree of competition in takeovers?

A)The use of defensive strategies by target companies.
B)Changes in government regulation.
C)Development of innovative financing techniques.
D)None of the given options.

Question 22

Small positive or negative returns to acquiring-company shareholders may be explained by:

A)tax loss benefits of a target.
B)perceived cost reductions due to economies of scale in operations.
C)perceived benefit of the method of financing the takeover to reduce agency costs.
D)the over-confidence of acquiring-company management in their ability to value other companies.

Question 23

Which of the following explanations is considered most likely to contribute to the positive wealth effects measured in empirical studies on takeovers?

A)Greater asset productivity.
B)Target undervaluations.
C)Shareholders' gains being transferred from debtholders or employees.
D)Cash liquidity.

Question 24

If Raider Ltd,the acquirer,has 2 million shares with a market value of $4 each and Sucker Ltd,the target,has 1 million shares with a market value of $1.50 each,what is the perceived benefit per share in Raider Ltd from the takeover if Raider Ltd offers two of its own shares for every one share of Sucker Ltd?

A)$3.25 per share.
B)$4 per share.
C)$0.00 per share.
D)$2.50 per share.

Question 25

The theory of free cash flow describes situations in which:

A)managers of companies are motivated to take over other companies in order to promote their own interests.
B)managers of companies are motivated to take over other companies in order to maximise shareholder wealth.
C)companies with excess liquidity are recognised as viable takeover targets.
D)companies with excess liquidity recognise viable takeover targets.

Question 26

Shares of Bongo Ltd have an EPS of $2.00,and shares of Congo Ltd have an EPS of $1.00.If both companies have 100 shares and Bongo acquires Congo,what will be the EPS for the new combined entity if Bongo issues one share for every Congo share?

A)3.00
B)1.00
C)2.00
D)1.50

Question 27

In which cases are takeovers likely to be hostile?

A)Cases where synergies are expected.
B)Cases where economies of scale are likely to result.
C)Cases where target management is inefficient.
D)Cases of horizontal takeovers.

Question 28

B has 1 million shares priced at $2 each.A plans to acquire 50 per cent of shares in B.The change in net operating cash flows expected from the takeover is $500 000 p.a.The cost of capital for A's assets is 10 per cent and 12.5 per cent for B's assets.What is the maximum price per share A should offer B in order to take it over given the aforementioned information?

A)$7 million
B)$6
C)$6.70
D)$12

Question 29

Takeover activity is regulated by Chapter 6 of the Corporations Act 2001,which seeks to ensure that:

A)the shareholders and directors of an acquiring company know the identity of the target.
B)the acquisition of control over voting shares in a listed company or an unlisted company with more than 20 members takes place in an efficient,competitive and informed market.
C)as far as practicable,all shareholders have a reasonable and equal opportunity to participate in any benefits offered by the bidder.
D)none of the given options.

Question 30

A leveraged buyout occurs where:

A)a company or division is purchased by a small group of investors,including its management.
B)a company employs a selective buyback to purchase the shareholding of a major shareholder.
C)a company or division is purchased by a small group of investors involving large amounts of debt.
D)assets,including a division,are sold to another company.

Question 31

Which of the following is not a role of takeovers that are associated with changes of control?

A)To take advantage of complementarity between assets.
B)The threat or potential for takeover can discipline management of acquiring companies.
C)To gain exposure in a new industry.
D)All of the given options.

Question 32

Which of the following statements is not one of the three general explanations identified by Jarrell and Poulsen (1989)to explain the negligible wealth effects for acquiring company shareholders?

A)Competition depresses returns to targets.
B)Takeovers are profitable,but the wealth effects are disguised.
C)Takeovers are neutral or poor investments.
D)None of the given options.

Question 33

Which of the following statements is true regarding the Corporations Act 2001 on takeovers?

A)A market takeover announcement can only be undertaken if either the offeror or target is a member of the ASX.
B)In a formal takeover,the target company must produce a Part A statement whilst the offeror must produce a Part B statement.
C)A bidder in a partial takeover must specify at the outset the proportion of each shareholder's shares that the bidder will offer to buy.
D)The acquisition of additional shares in a company is prohibited if it results in a shareholder being entitled to more than 20% of voting shares.

Question 34

In some studies,it has been found that a target company's shareholders have gained even where a takeover bid has been unsuccessful.A likely reason for this is that:

A)the bid prompted a change in the target company's investment strategy.
B)the market may expect another bid for the target company.
C)gains to target shareholders result from the market's reassessment of previously undervalued shares.
D)the bid prompted a change in the target company's investment strategy and that the market may expect another bid for the target company.

Question 35

A positive argument for 'spin offs' is:

A)that 'centralising' of business operations leads to better decision-making processes.
B)that individual entities are likely to be better managed separately than as parts of a complex conglomerate.
C)that the selling company may benefit from removing diseconomies of scale.
D)none of the given options.

Question 36

A likely shortcoming in valuing a target based on deducting total liabilities from total assets is:

A)that balance sheet figures do not represent market values.
B)intangible assets may not be included in the balance sheet.
C)there may be complementarity between assets.
D)all of the given options.

Question 37

A possible reason for little effect on the wealth of acquiring-company shareholders in reaction to a takeover announcement even though a takeover might be profitable is:

A)the expected gains from the takeover may have already been reflected in the company's share price.
B)the market is inefficient in impounding such information.
C)that returns to shareholders may have changed over time.
D)the takeover is not profitable.

Question 38

Empirical evidence on takeovers reveals that:

A)takeovers do not benefit shareholders of target companies.
B)actions by managers to prevent offers are most likely to be harmful to shareholders.
C)takeover gains result from the creation of monopoly power.
D)acquiring company shareholders earn significant losses.

Question 39

Market-based studies are associated with positive wealth effects for takeovers,yet studies using accounting numbers have not found this.A possible explanation for this discrepancy is that:

A)some takeovers are good investments whilst others are bad investments.
B)benefits of a takeover may take years to be fully reflected in accounting earnings.
C)market-based studies suffer from potential measurement problems.
D)benefits of a takeover may take years to be fully reflected in accounting earnings and that market-based studies suffer from potential measurement problems.

Question 40

A problem with valuing a target using P/E ratios is:

A)the assumption that risk differences between the bidder and target can be captured in the discount rate.
B)the assumption that 'future maintainable earnings' can represent a company's future earnings.
C)the assumption that the risk of the target can be fully captured in the discount rate.
D)all of the given options.

Question 41

An acquiring firm cannot use its own shares as consideration in a market takeover bid.

Question 42

The separation of certain assets from a firm to create a new entity under essentially the same ownership as before is known as a __________________.

Question 43

Which of the following statements is false?

A)A spin-off implies that the target is worth more to the acquiring company than it was worth to its previous shareholders.
B)Cost savings can be achieved in a vertical takeover.
C)The free cash flow theory shows how some takeovers are evidence of the conflicts of interest between shareholders and managers,while others are a response to the problem.
D)None of the given options.

Question 44

A _______________ takeover is the takeover of a target company that is either the supplier or consumer of goods produced by the consumer.

Question 45

In a takeover where consideration is provided in the form of shares,shareholders in the target company are able to defer a potential capital gains tax liability until the shares in the acquiring company they accepted as consideration are sold.

Question 46

Jarrell and Poulsen (1989)provide explanations for the negligible wealth effects for acquiring-company shareholders.With regards to these explanations,which of the following statements is false?

A)The expected gains from a known strategy of growth through acquisition may already be reflected in the company's share price.
B)The positive effect of the information related to the financing of the takeover may be offset by the negative signal made by a share-exchange offer.
C)Since acquiring firms are much larger than targets,the gain is small relative to the acquiring company's total value.
D)None of the given options.

Question 47

One approach to valuing target companies for a takeover bid is to use a multiple of the target company's earnings per share and P/E ratio.

Question 48

Which of the following statements is not a conclusion drawn by Jensen (1988)based on US evidence?

A)Actions by managers that prevent mergers are the most likely to be harmful to shareholders.
B)Takeover gains do not result from the creation of monopoly power.
C)Takeovers often waste credit or resources.
D)None of the given options.

Question 49

The most predominant piece of legislation that regulates takeovers is the ___________________ Act.

Question 50

The term _____________ is often used to describe instances where the value of a combined entity exceeds the values of those entities as separate components.

Question 51

The net cost in a cash takeover is defined as the amount of cash paid,minus the value of the target as an independent entity.

Question 52

A creeping takeover allows the acquisition of no more than 6 per cent of a target company's shares every six months,provided that the threshold level of 19 per cent has been maintained for at least six months.

Question 53

A ________ is a strategic move by a company to make themselves less attractive to potential acquirers.

Question 54

Empirical evidence has shown that shareholders in the acquiring company gain most of the benefits from a takeover.

Question 55

Cost reductions are the primary purpose that drives most conglomerate takeovers.