Deck 20: External Growth Through Mergers

Question 1

A tax loss carryforward is a benefit to the acquired firm's shareholders.

Answer 1

False

Question 2

Vertical integration usually represents acquisition of a competitor.

Answer 2

False

Question 3

The desire to expand management and marketing capabilities is a direct financial motive for an acquisition.

Answer 3

False

Question 4

Synergy is the greatest and most easily measured nonfinancial benefit in a merger.

Question 5

In a merger, two or more companies are combined to form an entirely new entity.

Question 6

Risk-averse investors may discount the future earnings of the merged firm at a higher rate if they move in different directions during business cycles.

Question 7

Selling stockholders may receive a price well above current market or book value.

Question 8

While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company.

Question 9

One potential advantage of a merger to the acquiring firm is the "portfolio effect," which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.

Question 10

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Question 11

A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Question 12

The stock market's reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business, or if it seems to sharpen the company's focus.

Question 13

Synergy is said to take place when the whole is less than the sum of the parts.

Question 14

Too much diversification has led many companies to sell off companies previously acquired during the merger boom.

Question 15

In a horizontal merger, the integration that occurs comes from acquiring companies that supply resources to the company's production process.

Question 16

Vertical integration is usually prohibited or severely restricted by government antitrust regulations.

Question 17

Mergers often improve the financing flexibility that a larger company has available.

Question 18

Most mergers are horizontal in nature in order to avoid the potential antitrust complications involved with the elimination of competition.

Question 19

The potential of a tax loss carryforward has no effect when considering the acquisition of a company.

Question 20

Antitrust policy can preclude the acquisition of a competitor.

Question 21

The earnings-per-share impact of a merger is influenced by relative price-earnings ratios and the terms of exchange.

Question 22

The "two-step buyout" procedure induces stockholders to delay their reaction to the offer, since they will receive a higher price later.

Question 23

"Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider.

Question 24

The "two-step buyout" procedure allows the acquiring firm to pay a lower total price than if a single offer is made.

Question 25

One of the reasons that companies merge with other companies is to secure access to a competing industry.

Question 26

A "takeover tender offer" describes the attempted purchase of a firm with the consent of that firm's management.

Question 27

The existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market price.

Question 28

For mergers occurring after 2001, goodwill must be amortized and written off over 40 years or less.

Question 29

A motive for selling stockholders may be the bias against smaller companies.

Question 30

A "takeover tender offer" lets a company attempt to acquire a target firm against its will.

Question 31

Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

Question 32

Leveraged buyouts are restricted to "outside" tender offers.

Question 33

If an acquiring firm's merger proposal was initially rejected by a target firm's management and its board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

Question 34

Although corporate managers have a responsibility to act in the shareholders' best interest, management frequently opposes acquisitions due to personal motives.

Question 35

Leveraged takeovers occur to firms that have an unusually large cash/total assets position.

Question 36

After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.

Question 37

By using cash instead of stock, a company may diminish the perceived dilutive effects of a merger.

Question 38

A cash purchase of one company by another is similar to a capital budgeting decision.

Question 39

If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in earnings per share.

Question 40

Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate.

Question 41

It is possible to merge with a company so that the merger results in the same earnings per share but still lowers the new firm's cost of capital.

Question 42

Which of the following is NOT a motive for selling by the stockholders of the acquired company?

A)The opportunity to diversify
B)Gaining a tax advantage
C)An attractive price
D)Avoiding bias against smaller businesses

Question 43

The rising ratio of divestitures to new acquisitions that occurred in the past suggests that

A)poison pills are no longer effective as a defense against takeovers.
B)too much diversification strained the operating capabilities of many firms.
C)the portfolio effect has been a highly successful method of reducing risk.
D)multinational firms are increasingly considered high risky investments.

Question 44

Synergy is

A)the 2 + 2 = 3 effect.
B)the 2 + 2 = 4 effect.
C)the 2 + 2 = 5 effect.
D)always present in a merger.

Question 45

Nonfinancial motives for mergers include

A)synergy.
B)the portfolio effect.
C)vertical integration.
D)synergy and vertical integration.

Question 46

Which of the following is NOT a financial motive, but rather an operating motive, for merger and consolidation?

A)The portfolio diversification effect
B)Tax loss carryforward
C)Greater financing capability
D)Synergy

Question 47

Which of the following type of merger decreases competition?

A)A horizontal merger
B)A vertical merger
C)A cash purchase
D)A stock-for-stock exchange

Question 48

An example of a horizontal merger would be

A)Pepsi and Sears.
B)McDonald's and Pillsbury.
C)Pepsi and Frito Lay.
D)Coca-Cola and Dr Pepper.

Question 49

Selling stockholders who are offered cash or another company's stock in a merger may be willing to part with the shares they hold because

A)the offered shares may be more marketable.
B)the price they are offered for their shares may be above market value.
C)they can attain a greater degree of diversification as a result.
D)All of these options

Question 50

The direct financial motives for merger activity include all of the following except for which one?

A)The portfolio effect
B)An improved financial posture and greater debt
C)The utilization of tax loss carryforwards
D)Vertical integration

Question 51

When a tobacco firm merges with a steel company, it would be called

A)a horizontal merger.
B)a vertical merger.
C)a conglomerate merger.
D)a consolidation.

Question 52

The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ______________ for the carryforward alone.

A)$108,000
B)$52,000
C)$63,000
D)$1,200,000

Question 53

Multinational mergers provide economic and political diversification, which can lead to a higher cost of capital for the new firm.

Question 54

In planning mergers, there is a tendency to _____ synergistic benefits.

A)overestimate
B)underestimate
C)correctly estimate
D)not estimate

Question 55

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

Question 56

Which of the following is NOT a potential benefit of a merger?

A)An improved financing posture
B)A portfolio effect
C)Dilution of earnings per share
D)A tax loss carryforward

Question 57

Which one of the following types of mergers is most likely to lead to diversification benefits?

A)A horizontal merger
B)A vertical merger
C)A tax-free exchange
D)A conglomerate merger

Question 58

Synergy is said to occur when the whole is

A)equal to the sum of the parts.
B)less than the sum of the parts.
C)greater than the sum of the parts.
D)greater than or equal to the sum of the parts.

Question 59

A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a

A)consolidation.
B)holding company.
C)conglomerate.
D)merger.

Question 60

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as

A)horizontal integration.
B)vertical integration.
C)synergy.
D)the portfolio effect.

Question 61

Sandler Inc. plans to acquire Young Corp. Information on each for last year and today, the last day of that period, follows (all shares outstanding are common shares):

Question 62

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

A)Active Corp.will have an immediate increase in EPS.
B)Active Corp.will have an immediate decrease in EPS.
C)Active Corp.will have an immediate increase in the growth rate of EPS.
D)Active Corp.will have an immediate decrease in the P/E ratio.

Question 63

Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 1,500,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28 per share. The second step would be to exchange each remaining share of Garfunkel common stock for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $31.00 per share.
Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.
a) What is the total cost of the two-step buyout?
b) What is the total cost of the single-step proposal?
c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Question 64

Which of the following is NOT a form of compensation that selling stockholders could receive?

A)Stock
B)Cash
C)Stock options
D)Fixed income securities

Question 65

In regard to two-step buyouts,

A)the SEC highly approves of them.
B)the FTC highly approves of them.
C)the SEC is keeping a close eye on them.
D)the FTC is keeping a close eye on them.

Question 66

The typical merger premium is _______.

A)0-20%
B)40%
C)40-60%
D)60-80%

Question 67

Dilution in earnings per share occurs when a company with

A)a high P/E ratio buys a company with a low P/E ratio.
B)a low P/E ratio buys a company with a high P/E ratio.
C)a high growth rate in earnings per share buys a company with a low growth rate in earnings per share.
D)a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.

Question 68

The portfolio effect in a merger has to do with

A)increasing EPS.
B)reducing risk.
C)creating tax advantages.
D)writing off goodwill.

Question 69

The price that a company has to pay to purchase another firm is usually

A)the book value.
B)the market value.
C)some premium over the current market value.
D)some discount of the current market value.

Question 70

Under the Financial Accounting Standards Board's SFAS 141 and 142, which of the following occurred?

A)Goodwill is now amortized.
B)At least four times per year, goodwill must be tested to determine if it is impaired.
C)It allowed a one-time write-down of all past goodwill impairment.
D)It created pooling of interests accounting.

Question 71

The Prada Corporation is considering a merger with the Stone Company, which has 500,000 outstanding shares selling for $30. An investment banker has advised that to succeed in its merger, Prada Corp. would have to offer $45 per share for Stone's stock. Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to acquire all of Stone's stock?

A)266,667
B)600,000
C)900,000
D)None of these options

Question 72

The two-step buyout is a recent merger ploy that has which of the following characteristics?

A)It is negotiated in a social, rather than a business setting.
B)The acquiring firm offers to pay a very high price for the target company's stock, and a short time later announces another price that may be higher or lower.
C)The acquiring firm offers to pay a very high price for the target company's stock for a limited time only, after which it will pay a lower price.
D)It forces stockholders to sell out.

Question 73

Which of the following is NOT a method of avoiding a takeover?

A)Increasing the firm's cash level
B)Moving corporate offices to advantageous states
C)Staggering the election of boards of directors
D)Buying back shares

Question 74

Which of the following terms is not specifically related to an unfriendly buyout?

A)Takeover tender offer
B)White knight
C)Saturday night special
D)Synergy

Question 75

Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis and the facts provided, Aardvark should

A)not purchase Zebra Computer Services.
B)purchase Zebra Computer Services.
C)purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
D)purchase Zebra only if Aardvark's cost of capital is above 10%.

Question 76

Under a two-step buyout procedure

A)shareholders receive a higher total price than if a single offer is made.
B)the second offer is at a higher price per share.
C)shareholders are encouraged to react quickly to the offer.
D)Two of the options are correct.

Question 77

The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward that King Solomon Mining can use over the next two years ($200,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on its cash-flow benefit over the next 20 years?

Question 78

Which of the following is NOT a potential challenge or downside to a merger?

A)Anti-trust laws
B)Dilution
C)Firm valuation
D)Synergy

Question 79

White knights

A)advise companies on ways to avoid being taken over.
B)offer a higher purchase price and "friendlier offer" in the event of an unsolicited and unfriendly takeover attempt.
C)attempt to make money in the stock market on stocks that are likely merger candidates.
D)buy depressed stock of quality companies when merger talks are discontinued.