Deck 7: Merger and Acquisition Strategies

Question 1

The current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in branded products.

Answer 1

False

Question 2

In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations.

Answer 2

False

Question 3

Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.

Answer 3

True

Question 4

A horizontal acquisition involves two firms in the same industry.

Question 5

Restructuring strategies are commonly used to correct or deal with the results of ineffective mergers and acquisitions.

Question 6

The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies.

Question 7

Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.

Question 8

Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm.

Question 9

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry.

Question 10

A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.

Question 11

A related acquisition involves two firms in the same industry.

Question 12

Typical returns on acquisitions for acquiring firms are close to zero.

Question 13

A merger is defined as a strategy in which one firm purchases controlling interest in another firm.

Question 14

Research suggests that horizontal acquisitions result in higher performance when the firms have similar strategies, assets, and capabilities.

Question 15

An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review.

Question 16

The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011.

Question 17

The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.

Question 18

Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels.

Question 19

In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders.

Question 20

An acquisition occurs when one firm buys a controlling or 100 percent interest in another firm and the acquired firm becomes a subsidiary business.

Question 21

The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.

Question 22

Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border acquisitions.

Question 23

Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers.

Question 24

Large or extraordinary debt is defined as overpaying for an acquired firm.

Question 25

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

Question 26

Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders.

Question 27

Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful.

Question 28

Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy.

Question 29

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the merged firm.

Question 30

A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate.

Question 31

United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy.

Question 32

Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using a related diversification strategy.

Question 33

Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company.

Question 34

Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies.

Question 35

It is relatively common for a firm to develop new products internally to diversify its product lines.

Question 36

Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for acquisitions and the long-run performance of the newly formed form suffers.

Question 37

Research suggests that government ownership of emerging economy firms leads to overpayment in cross-border acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders).

Question 38

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls.

Question 39

The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself.

Question 40

Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions.

Question 41

The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.

Question 42

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.

Question 43

Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms.

Question 44

One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power.

Question 45

Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.

Question 46

Top manager participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success.

Question 47

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

Question 48

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

Question 49

When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies.

Question 50

Researchers have found that shareholders of acquired firms often:

A) earn above-average returns.
B) earn below-average returns.
C) earn close to zero as a result of the acquisition.
D) are not affected by the acquisition.

Question 51

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners:

A) resisted selling at any price.
B) sold the company to the larger brewer.
C) designed a poison pill to discourage a takeover.
D) looked for smaller brewers to acquire instead of selling to the larger brewer.

Question 52

During the recent financial crisis, M&A activity ______, whereas in 2011, M&A activity ______.

A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Question 53

Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of the shareholders.

Question 54

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in 5-8 years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose.

Question 55

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Because both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Question 56

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

Question 57

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself.

Question 58

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm.

Question 59

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

Question 60

All of the following statements are correct EXCEPT:

A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines.
B) shareholders of acquired firms often earn above-average returns from an acquisition.
C) the majority of acquisitions increase long-term value for the acquiring firm.
D) shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

Question 61

Cross-border acquisitions are critical to U.S. firms competing internationally:

A) if they are to develop differentiated products for markets served.
B) when market share growth is the focus.
C) where consolidated operations are beneficial.
D) if they wish to overcome entry barriers to international markets.

Question 62

Currently, the rationale for making an acquisition includes each of the following EXCEPT:

A) to increase market power.
B) to decrease taxes paid by shareholders.
C) to overcome entry barriers.
D) to increase diversification.

Question 63

SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market, SpeakEasy would be best served if it considers a(an):

A) vertical acquisition of a firm that uses technical translation products.
B) acquisition of a highly related firm in the technical translation market.
C) cross-border merger, preferably with an Indian or Chinese company.
D) strategy of internally developing the technical translation products needed to compete in this market.

Question 64

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n):

A) stealth raid.
B) adversarial acquisition.
C) takeover or unfriendly acquisition.
D) leveraged buyout.

Question 65

The presence of barriers to entry in a particular market will generally make acquisitions ____ as an entry strategy.

A) less likely
B) more likely
C) prohibitive
D) illegal

Question 66

Market power is derived primarily from the:

A) core competencies of the firm.
B) size of a firm and its resources and capabilities.
C) quality of a firm's top management team.
D) depth of a firm's strategy.

Question 67

There are few true mergers because:

A) few firms have complementary resources.
B) integration problems are more severe than in outright acquisitions.
C) one firm usually dominates in terms of market share, size, or value of assets.
D) of managerial resistance. True mergers result in significant managerial-level layoffs.

Question 68

Horizontal, vertical, and related acquisitions to build market power:

A) are likely to undergo regulatory review and analysis by financial markets.
B) are rarely permitted to occur across international borders.
C) typically involve a firm purchasing one of its suppliers or distributors.
D) concentrate on capturing value at more than one stage in the value chain.

Question 69

Cross-border acquisitions are primarily made to:

A) reshape the firm's competitive scope.
B) reduce the cost of new product development.
C) take advantage of higher education levels of labor in developed countries.
D) overcome barriers to entry in another country.

Question 70

A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product instead of a strategy of developing new products in-house. All of the following arguments are correct EXCEPT:

A) the acquisition of Taylor should be primarily for defensive rather than strategic reasons.
B) research suggests that acquisition strategies are a common means of avoiding risky internal ventures.
C) the outcomes of acquisitions can be estimated more easily and accurately than the outcomes for an internal product development process.
D) acquisitions could become a substitute for innovation within your firm.

Question 71

A primary reason for a firm to pursue an acquisition is to:

A) avoid increased government regulation.
B) achieve greater market power.
C) exit a hyper-competitive market.
D) achieve greater financial returns in the short run.

Question 72

The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n):

A) vertical acquisition.
B) unrelated acquisition.
C) horizontal acquisition.
D) merger of equals.

Question 73

Internal product development is often viewed as:

A) carrying a high risk of failure.
B) the only reliable method of generating new products for the firm.
C) a quicker method of product launch than acquisition of another firm.
D) critical to the success of biotech and pharmaceutical firms.

Question 74

Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the suppliers' products are sold. This purchase is a(n):

A) merger.
B) unrelated acquisition.
C) horizontal acquisition.
D) vertical acquisition.

Question 75

A(n) ____ occurs when one firm buys a controlling, or 100 percent interest, in another firm.

A) merger
B) acquisition
C) spin-off
D) restructuring

Question 76

Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately _______ percent of innovations are imitated within 4 years after patents are obtained.

A) 5
B) 10
C) 60
D) 20

Question 77

When a firm acquires its supplier, it is engaging in a(n):

A) merger.
B) unrelated acquisition.
C) hostile takeover.
D) vertical acquisition.

Question 78

Baby Doe's, a designer and manufacturer of children's clothing, has decided to purchase a retail chain specializing in children's clothing. This purchase is a(n):

A) merger.
B) unrelated acquisition.
C) horizontal acquisition.
D) vertical acquisition.

Question 79

In a merger:

A) one firm buys controlling interest in another firm.
B) two firms agree to integrate their operations on a relatively coequal basis.
C) two firms combine to create a third separate entity.
D) one firm breaks into two firms.

Question 80

The announcement that P&G was acquiring premium dog and cat food manufacturer Iams was a _________ acquisition and is intended to ________.

A) vertical; increase diversification
B) horizontal; increase market power
C) vertical; overcome entry barriers
D) related; increase speed to market