Deck 31: Mergers

Question 1

The merger between Comcast and NBC Universal is an example of a:

A)horizontal merger.
B)vertical merger.
C)conglomerate merger.
D)none of these options.

Answer 1

vertical merger.

Question 2

Firm A has a value of $150 million and Firm B has a value of $100 million.Merging the two would enable cost savings with a present value of $40 million.Firm A purchases Firm B for $120 million.What is the gain from this merger?

A)$20 million
B)$40 million
C)$100 million
D)$80 million

Answer 2

$40 million

Question 3

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$75 million

Answer 3

$20 million

Question 4

Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different:
I.production processes;
II.accounting methods;
III.corporate cultures

A)I only
B)I and II only
C)III only
D)I,II,and III

Question 5

The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm.How are investors potentially misled?

A)The firm's management generates cost savings via temporary layoffs of highly paid executives.
B)The firm gains intellectual property in a merger,but then divests the operations of the target firm.
C)The firm's management changes the name of an acquired firm to feign diversification.
D)The firm acquires a target with low a P/E ratio,which generates short-term earnings per share growth without any true economic advantage.

Question 6

Merging in order to lower financing costs is likely to fail for the following reason:

A)costs of issuing larger amounts of debt increase.
B)tax shields decrease for larger companies.
C)any gain from lowering the required interest rate is offset by increased guarantees on the debt.
D)it is difficult for bondholders to calculate the postmerger debt outstanding.

Question 7

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.How much do Firm A's shareholders gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$10 million

Question 8

The following are dubious reasons for mergers:
I.diversification;
II.increase earnings per share (EPS);
III.lower financing costs;
IV.industry consolidation

A)I only
B)II and IV only
C)III and IV only
D)I,II,and III only

Question 9

Google's acquisition of Motorola Mobility is an example of a:

A)cross-border merger.
B)horizontal merger.
C)conglomerate merger.
D)vertical merger.

Question 10

Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?

A)Acquiring firm makes a stock offer,since its stock value is priced lower than it will be postmerger.
B)Acquiring firm makes a cash offer,since this allows the acquirer to solely benefit from gains not yet reflected in the market.
C)Acquiring firm attempts to gain majority ownership,but not complete ownership.
D)Acquiring firm makes an offer with the condition that management must be replaced.

Question 11

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.What is the cost of this merger?

A)$30 million
B)$20 million
C)$15 million
D)$10 million

Question 12

The following are sensible motives for mergers EXCEPT:

A)economies of scale.
B)complementary resources.
C)diversification.
D)eliminating inefficiencies.

Question 13

The merger of two similar pharmaceutical firms is an example of a:
I.horizontal merger;
II.cross-border merger;
III.conglomerate merger;
IV.vertical merger

A)I only
B)II only
C)III only
D)I and III only

Question 14

Companies A and B are valued as follows:
Company A now acquires B by offering one (new)share of A for every two shares of B (that is,after the merger,there are 2500 shares of A outstanding).If investors are aware that there are no economic gains from the merger,what is the price-earnings ratio of A's stock after the merger?

A)7.5
B)8.3
C)10.0

Question 15

Firm A has a value of $100 million and Firm B has a value of $60 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $65 million.How much do Firm A's shareholders gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$5 million

Question 16

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the cost of this merger?

A)$30 million
B)$20 million
C)$5 million
D)$10 million

Question 17

The following are sensible reasons for mergers:
I.economies of scale;
II.economics of vertical integration;
III.complementary resources;
IV.prevent target firm from wasting surplus funds;
V.eliminate target firm inefficiencies;
VI.industry consolidation

A)I only
B)I,II,and III only
C)I,III,IV,and V only
D)I,II,III,IV,V,and VI

Question 18

The market for corporate control includes:
I.mergers;
II.spin-offs and divestitures;
III.leveraged buyouts (LBOs);
IV.privatizations

A)I only
B)I and II only
C)I,II,and III only
D)I,II,III,and IV

Question 19

Companies A and B are valued as follows:
Company A now acquires B by offering one (new)share of A for every two shares of B (that is,after the merger,there are 2500 shares of A outstanding).Suppose that the merger really does increase the value of the combined firms by $20,000..What is the cost of the merger?

A)zero
B)$2,000
C)$8,000
D)$4,000

Question 20

The following are sensible motives for mergers:
I.prevent target firm from wasting surplus funds;
II.eliminate target firm inefficiencies;
III.complementary resources;
IV.increasing earnings per share (EPS)

A)I only
B)I and II only
C)I,II,and III only
D)IV only

Question 21

Following an acquisition,the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

A)Consolidation
B)Aggregation
C)Purchase
D)None of these options

Question 22

The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

A)$108
B)$110
C)$102
D)$114

Question 23

Antitrust law can be enforced by the U.S.federal government by:
I.a civil suit brought by the Justice Department;
II.proceedings initiated by the Federal Trade Commission (FTC);
III.proceedings initiated by the Securities and Exchange Commission (SEC)

A)I only
B)I and II only
C)I,II,and III
D)II only

Question 24

The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the postmerger P/E ratio assuming cash is used in the acquisition.

A)12.75
B)6.25
C)13.75

Question 25

The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will earnings per share be for Firm A after the merger assuming that cash is used in the acquisition?

A)$6
B)$7
C)$8
D)$5

Question 26

Who usually gains the most in a merger?

A)Acquiring firm's shareholders
B)Acquiring firm's management
C)Target firm's shareholders
D)Target firm's management

Question 27

Given the following data:
If Firm A offers 250,000 shares to Firm B's shareholders,calculate the cost of the merger:

A)$2 million
B)$3 million
C)$1 million

Question 28

Which of the following is NOT an important piece of U.S.antitrust legislation?
I.Garn-St.Germain Act;
II.Clayton Act;
III.Hart-Scott-Rodino Act

A)I only
B)II only
C)III only
D)II and III only

Question 29

If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm,then the cost of this merger is:

A)Cost = (PV_AB)- (x)PV_B
B)Cost = (x)PV_AB - PV_B
C)Cost = PV_AB - (x)PV_A
D)Cost = (x)PV_AB - (x)PV_B

Question 30

The DOC Corporation with a book value of $20 million and a market value of $30 million has acquired the CIC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million.If the transaction is a purchase,will there be any goodwill,and if so,what is the amount of goodwill?

A)No goodwill; 0
B)Yes goodwill; 3
C)Yes goodwill; 1
D)Cannot be calculated with the information given

Question 31

What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?

A)Speculation causes an increased chance of antitrust lawsuits.
B)Hedge funds specialize in taking on the risk that the deal will fall through and allow risk averse investors to cash out.
C)Hedge funds help reduce the cost of the merger to an acquirer.
D)Hedge funds enable international mergers.

Question 32

The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the NPV of the merger.

A)$200
B)$400
C)$600
D)$150

Question 33

When a merger of two firms is achieved by one firm,automatically assuming all the assets and all the liabilities of the other firm,such a merger requires:

A)no shareholder meeting to vote.
B)the approval of at least 50% of the stockholders (or as specified by corporate charters or state laws)of each firm.
C)that the management of the two firms be tossed out.
D)that the target firm search for alternative suitors.

Question 34

Historically,merger activity increases with which market condition?

A)Low stock market prices
B)High stock market prices
C)Moderate market prices
D)Merger activity is relatively constant throughout all market conditions.

Question 35

Assume the following data:
If Firm A intends to pay $7 million cash for Firm B,then calculate the cost of this merger.

A)$2 million
B)$3 million
C)$1 million
D)zero

Question 36

Which of the following actions is least effective in changing a firm's strategy?

A)Conducting a successful proxy contest
B)Threatening a takeover from a rival firm
C)Organizing a leveraged buyout by well-known wealthy private investors
D)The sale of shares by a minority shareholder

Question 37

Assume the following data:
Suppose that Firm A offers 250,000 shares of the combined firm,Firm AB,to Firm B's shareholders.Calculate the cost of the merger.

A)$2 million
B)$3 million
C)$1 million
D)zero

Question 38

The PEN Corporation with a book value of $20 million and a market value of $30 million has acquired the CNC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million.If the transaction is a purchase,then the total assets on the books of the new company will be:

A)$38 million
B)$39 million
C)$29 million
D)$26 million

Question 39

The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the gain from the merger.

A)$600
B)$150
C)$550
D)$700

Question 40

Suppose that the market price of Company A is $50 per share and that of Company B is $20.If A offers half a share of common stock for each share of B,what is the percentage increase in wealth for B's shareholders?

A)-20%
B)+25%
C)-25%
D)+20%

Question 41

If an acquisition is completed using a cash payment,then the acquisition is:

A)taxable.
B)viewed as exchanging of shares and is not taxed.
C)a tax-free transaction as no capital gains or losses are recognized.
D)none of these options.

Question 42

Compensation paid to top management in the event of a takeover is called a:

A)poison pill.
B)golden parachute.
C)self-tender.
D)buyout.

Question 43

The main difference to shareholders between a tax-free and a taxable acquisition is that:
I.in a tax-free acquisition the shares are only exchanged,while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed;
II.in a tax-free acquisition a capital gain or loss is realized and then new shares are issued; in a taxable transaction the assets are revalued,taxed on any capital gains or losses,and then shares are exchanged;
III.in a tax-free acquisition the shareholders simply take the cash and depart,while in a taxable transaction the shareholders must stay with the new entity

A)I only
B)II only
C)III only
D)I and III only

Question 44

Which of the following factors influence the acquiring firm's choice between merger and an acquisition of stock?
I.Shareholders are dealt with directly to bypass target management and board of directors.
II.In a tender offer,usually some minority shareholders do not tender,stopping complete firm absorption.
III.Target management may be unfriendly and resist an offer.Resistance often increases the acquisition price.

A)I only
B)II only
C)III only
D)I,II,and III

Question 45

A conglomerate merger is one in which an acquiring firm buys a closely related firm.

Question 46

The easiest task for the managers of an acquiring firm is the integration of the target firm.

Question 47

A dissident group solicits votes in an attempt to replace existing management.This is called a:

A)proxy fight.
B)shareholder derivative action.
C)tender offer.
D)management freeze-out.

Question 48

The following are methods available to change the management of a firm:
I.a successful proxy contest in which a group of shareholders vote in a new board of directors who then pick a new management team;
II.a takeover of one firm by another firm;
III.a leveraged buyout of the firm by a private group of investors

A)I only
B)II and III only
C)I,II,and III
D)I and III only

Question 49

Two companies can sensibly consider a merger if they have complementary resources.

Question 50

Examples of shark-repellent charter amendments include:
I.supermajority;
II.waiting period;
III.restricted voting rights;
IV.staggered board

A)I only
B)II only
C)I and II only
D)I,II,III,and IV

Question 51

A poison pill defense may be implemented by:

A)giving stock away.
B)selling firm assets.
C)issuing rights at a cheap price.
D)adding seats to the board of directors.

Question 52

A modification of the corporate charter that requires 80% shareholder approval for a takeover is called a(n):

A)repurchase standstill provision.
B)exclusionary self-tender.
C)supermajority amendment.
D)tender offer.

Question 53

The gain from a merger is computed as: Gain = PV_AB - (PV_A + PV_B).

Question 54

Diversification is a very sensible reason for two companies to merge.

Question 55

Takeover defenses appear to favor:

A)stockholders.
B)workers.
C)creditors.
D)managers.

Question 56

In the purchase method of merger accounting a new asset category called goodwill is created.

Question 57

What are the tax consequences of a taxable merger?

A)Selling shareholders can defer any capital gain until they sell their shares in the merged company.
B)Depreciation tax shields are unchanged by the merger.
C)Selling shareholders must recognize any capital gain.
D)All goodwill must be written off immediately.

Question 58

As a defensive maneuver,a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover.These bonds are an example of:

A)greenmail.
B)a "scorched earth" policy.
C)crown jewels.
D)a poison put.

Question 59

If Firm A acquires Firm B for cash,then the cost of the merger is equal to the cash payment minus Firm B's value as a separate entity.

Question 60

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

Question 61

A poison pill protects the rights of shareholders.

Question 62

Who gains the most in mergers?

Question 63

Briefly explain what is meant by the economic gain from a merger?

Question 64

Briefly describe the different types of mergers.

Question 65

Who are antitakeover defenses designed to protect?

Question 66

Briefly describe some of the good motives for mergers.

Question 67

It appears that target companies capture most of the gains in hostile takeovers.

Question 68

Discuss the difficulties associated with a typical merger.

Question 69

A would-be acquirer making a tender offer directly to shareholders represents another form of a proxy fight.

Question 70

Briefly explain what is meant by "the cost of acquisition" in the context of a merger?

Question 71

Supermajorities give shareholders more control over the firm.

Question 72

Explain the central tenet of the Clayton Act of 1914.

Question 73

Briefly discuss takeover defenses.

Question 74

Briefly explain the term economies of scale.

Question 75

Name the agencies that have successfully blocked mergers on antitrust (antimonopoly)grounds.

Question 76

Briefly discuss the different forms of acquisition.

Question 77

The following are pre-offer defenses: litigation,asset restructuring,and liability restructuring.