Deck 20: External Growth Through Mergers

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act.

Answer 3

False

Question 4

One of the primary motives of merger activity is that acquiring companies find it less expensive to buy assets than to build.

Question 5

The term "Reverse LBO" refers to a company that had previously gone from a public company to a private company and sells stock to the public years later.

Question 6

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

Question 7

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

Question 8

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

Question 9

Many of the mergers that occurred in the late 1970s occurred because of the relatively low values that the market accorded to many firms that were considered to be of high quality.

Question 10

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.

Question 11

A pooling of interests treatment of a merger stated simply means that the financial statements of the two firms are combined with only some minor adjustments.

Question 12

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

Question 13

The 1990s had a slowdown in merger activity because of the credit crunch characteristic of this period.

Question 14

One advantage of receiving stock instead of cash in a buy-out is the deferment of the tax payment until the stock received is actually sold.

Question 15

The write off of goodwill is a tax deductible expense.

Question 16

A purchase of assets merger recording is desirable due to the possibility of the creation of goodwill on the books of the surviving firm.

Question 17

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

Question 18

In a merger, the short-term and long-term effect on EPS varies according to the relative P/E ratios and the differential future growth rates of the two firms.

Question 19

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
E.P.S.

Question 20

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

Question 21

The stock market 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 22

In light of accounting considerations, the acquiring company has some inducement to offer cash, and the acquired company would rather receive cash than face possible dilution.

Question 23

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 24

Goodwill may be created when a pooling of interests' merger is utilized.

Question 25

The primary advantage of a holding company is that it affords unusual opportunities for leverage.

Question 26

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

Question 27

The desire to expand management and marketing capabilities is a financial motive for merging.

Question 28

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

Question 29

Poison pills are usually put in place when one shareholder acquires a certain number of outstanding shares.

Question 30

Shareholders do not like a white knight since it always results in their receiving a lower share price.

Question 31

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

Question 32

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

Question 33

The subsidiaries of a holding company are separate legal entities, and one cannot force the bankruptcy of another.

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

Leveraged buyouts are restricted to "outside" tender offers.

Question 41

Which of the following is not one of the criteria for a pooling of interests recording on the balance sheet?

A) none of the companies can be identified as an acquirer
B) the combination is effected in a single transaction
C) 95% of the acquired firm's shareholders must agree to the merger
D) one company can own no more than 55 percent of the new company

Question 42

A tax loss carry-forward is a benefit to the acquired firm's shareholders.

Question 43

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 44

Officers of a selling firm are almost always released.

Question 45

When one company offers a large premium for another company, most of the upward movement in share price occurs after the public announcement of the merger offer and thus offers the best opportunity for profit to small investors.

Question 46

$\begin{array}{lrr}&\text {Alpha}&\text {Beta}\\ \text { Total earnings } & \$ 1,000,000 & \$ 600,000 \\\text { Number of shares outstanding } & 400,000 & 200,000 \\\text { Earnings per share } & \$ 2.50 & \$ 3.00 \\\text { Price/earnings } & 12 \mathrm{X} & 10 \mathrm{X} \\\text { Market price/share } & \$ 30.00 & \$ 30.00\end{array}$


-Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction. Calculate the post merger

A) $2.50
B) $3.00
C) $3.50
D) $4.00
E)P.S. for Alpha.

Question 47

Selling shareholders may receive a price well above current market value.

Question 48

Vertical integration represents acquisition of a competitor.

Question 49

White knights

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

Question 50

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

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

Question 51

The merger movement rebounded in 1990s after a few slow years due to which of the following factors?

A) lower interest rates
B) changing regulation
C) intense competition
D) all of the answers are correct

Question 52

Which of the following would be true concerning the

A) higher due to the merger.
B) the same with or without the merger.
C) lower without the merger.
D) lower with the merger.
E)P.S. of Alpha Corp. in 5 years? Alpha's EPS would be

Question 53

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) statutory amalgamation.

Question 54

The impact on

A) relative debt/equity ratios of the firms.
B) exchange ratio.
C) relative earnings growth rates of the firms.
D) premium paid above market value for the acquired firm.
E)P.S. is influenced by all but the

Question 55

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

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

Question 56

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 57

Which of the following is not a form of compensation that selling shareholders could receive?

A) stock
B) cash
C) stock options
D) fixed income securities

Question 58

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

Question 59

Mergers in the 1980s were characterized by

A) companies finding it cheaper to expand through mergers than through internal growth.
B) established, conservative firms entering the merger market.
C) an increasing number of unfriendly mergers and buyouts.
D) all of the answers are correct

Question 60

Risk averse investors may discount the future earnings of the merged firm at a higher rate.

Question 61

A pacman defence involves

A) buying the acquirer.
B) selling the crown jewels.
C) applying shark repellent.
D) all of the other answers are correct

Question 62

The Prad Corporation is considering a merger with the Stone Company which has 400,000 outstanding shares selling for $25. An investment dealer has advised that to succeed in its merger Prad Corp. would have to offer $45 per share for Stones's stock. Prad Corp. stock is selling for $30. How many shares of Prad Corp. stock would have to be exchanged to acquire all of Stones's stock?

A) 266,667
B) 600,000
C) 720,000
D) None of these

Question 63

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

A) overestimate
B) underestimate
C) correctly estimate
D) need more information

Question 64

Hostile takeovers are less common in Canada because

A) Canadians are less risk oriented.
B) share ownership is not widely held.
C) companies have more cyclical cash flows.
D) two of the other answers are correct

Question 65

Which of the following is not a motive for selling by the shareholders of the acquired company?

A) opportunity to diversify
B) tax advantage
C) attractive price
D) avoid bias against smaller businesses

Question 66

Which of the following type of merger creates goodwill?

A) horizontal merger
B) vertical merger
C) pooling of interests
D) purchase of assets

Question 67

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 68

The rising ratio of divestitures to new acquisitions which has occurred in the later part of this century suggests that

A) poison pills are no longer effective as a defence 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 highly risky investments.

Question 69

The Celluloid Collar Corporation has $360,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a nondiscounted basis) the sum of ______________ for the carryforward alone.

A) $108,000
B) $252,000
C) $350,000
D) $1,200,000

Question 70

Which of the following is a tender offer that utilizes borrowed funds and the acquired firm's assets as collateral?

A) unfriendly take-over
B) divestiture
C) repurchase
D) leveraged buyout

Question 71

The average premium paid in the late 1970s and 1980s merger movement was

A) 20-25%.
B) 30-40%.
C) 40-50%.
D) 50-60%.

Question 72

Over how many years can goodwill be written off for accounting purposes?

A) 0 years
B) 20 years
C) 40 years
D) 50 years

Question 73

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 74

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) desire for greater size

Question 75

The largest and most significant mergers occurring in the late 1990s were in which of the following industries?

A) entertainment
B) airlines
C) manufacturing
D) telecommunications

Question 76

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,000,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years. 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 77

An example of a horizontal merger would be

A) Husky Oil and Sears.
B) McDonalds and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca Cola and Canada Dry.

Question 78

Selling shareholders who are offered cash or another company's shares 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 book value or market value.
C) they can attain a greater degree of diversification as a result.
D) all of the other answers are correct

Question 79

Company A buys Company B for $3,500,000. Company A had a pre-merger net worth of $8,000,000; B's net worth was $2,000,000. The transaction was accounted for as a pooling of interests. Company A wants to write off any available goodwill as slowly as allowable. How much would Company A write off each year?

A) $112,500
B) $ 37,500
C) $150,000
D) 0

Question 80

The financial motives for merger activity include all of the following EXCEPT

A) the portfolio effect.
B) improved financial posture and greater debt.
C) the utilization of tax loss carryforwards.
D) vertical integration.