Deck 7: Acquiring and Integrating Businesses

Question 1

The acquisition of DirecTV by News Corporation is an example of a horizontal acquisition.

Answer 1

False

Question 2

The law firm of Smith, Jones, and Richards, LLC, has entered into an agreement to combine its operations on a relatively equal basis with Garcia, Lopez, and Romero, LLC, another law firm. This transaction is an example of a

A) collaboration.
B) takeover.
C) combination.
D) merger.

Answer 2

D

Question 3

The main advantage of a horizontal acquisition is the potential economies of scale.

Answer 3

True

Question 4

Northwest Airlines has been acquired by Delta. This is an example of a ____ acquisition.

A) parallel
B) horizontal
C) vertical
D) network

Question 5

The key to successfully integrating two companies is to have a culture of strict equality between the target firm and the acquiring firm.

Question 6

When an unexpected and exciting acquisition opportunity occurs, the organization needs to be ready to act immediately and to be prepared to rethink the organization's basic strategy.

Question 7

Preventing managerial turnover in the target firm after an acquisition is very important if one of the acquiring firm's objectives is to gain new skills or knowledge from the target.

Question 8

Leveraged buyouts (LBOs) usually require significant amounts of debt to execute.

Question 9

The number of acquisitions involving firms from different countries continues to increase.

Question 10

The target firm's financial value is revealed in part by its historical and projected cash flows.

Question 11

The first step in the acquisition decision making process is

A) due diligence.
B) target negotiation.
C) target screening.
D) integration.

Question 12

Glorietta Manufacturing specializes in making luxury leather goods from exotic skins, such as snake, lizard, and alligator. In the last few years it has been increasingly difficult to obtain high quality, unblemished alligator skins. It's main source of alligator skins, Gator-Rama Ranch, has a number of other customers. So, Glorietta's management has decided to enter acquisition negotiations with Gator-Rama in order to gain control over Gator-Rama's output. This is an example of a

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

Question 13

An acquisition is a transaction in which a firm buys another firm with the intention of creating value by buying and selling the acquired firm's assets in the external markets.

Question 14

Acquisitions require such a substantial investment of resources that the evaluation of an acquisition opportunity is generally a slow process.

Question 15

Poor financial performance as a result of changing environmental conditions is driving consolidation in the airline industry.

Question 16

When the company can sell its products above competitive prices or when its costs are below those of its primary competitor, the company has

A) economies of scope.
B) acquisitive strength.
C) market power.
D) financial leverage.

Question 17

A ____ is a specialized type of acquisition in which the target firm reacts negatively to the acquiring firm's offer.

A) rescue
B) consolidation
C) takeover
D) merger

Question 18

In a fragmented market, firms can use an acquisition strategy to

A) avoid potential antitrust scrutiny by the Federal government.
B) increase market power through vertical acquisitions.
C) reduce overdiversification.
D) increase their growth rate.

Question 19

If firms wish to diversify their operations to reduce dependence on an intensely competitive market, they must make sure that shareholders cannot generate the same results merely by diversifying their portfolio.

Question 20

Acquiring companies should never pay a premium for an acquisition.

Question 21

Andrew is the chief financial officer for Glowlight Industries. Glowlight has been involved in a number of negotiations for acquisitions in the last few years, and Andrew feels the CEO is overly focused on making an acquisition. Andrew thinks the board of directors should

A) establish a system of checks and balances to challenge the CEO regarding proposed acquisitions.
B) establish a set walk-away price that applies to any future acquisition.
C) terminate the CEO.
D) ensure that the firm has adequate cash and debt capacity to complete a prospective acquisition.

Question 22

It is more likely that centers of excellence will emerge after an acquisition if the purpose of the acquisition was to

A) reduce dependence on an intensely competitive market.
B) learn to build capabilities.
C) increase organizational growth.
D) reduce costs.

Question 23

When the target and acquiring firms are learning from each other or brining complementary assets together this indicates that

A) the two firms are successfully integrating.
B) there has been a loss of differentiation after the acquisition.
C) that a merger between equals has occurred.
D) post acquisition turnover has been low.

Question 24

An acquisition will ultimately succeed or fail on the basis of

A) how long the acquirer spent on due diligence.
B) the price paid for the target by the acquirer.
C) how well the target and acquiring firms integrate their operations.
D) the quality and comprehensiveness of the post-acquisition integration plan.

Question 25

If the due diligence team turns up ____ this may signal possible unethical decisions made by the target firm.

A) logistical flaws.
B) operational inefficiencies.
C) accounting anomalies.
D) marketing miscues.

Question 26

There are opportunity costs to acquisitions because managers in the acquiring firm

A) neglect other aspects of the firm's operations.
B) tend be willing to pay too much for target firms.
C) are reluctant to take the time to do the necessary due diligence.
D) are susceptible to cognitive anchoring.

Question 27

What is due diligence, and what questions does due diligence answer?

Question 28

Why do firms make acquisitions? Include both rational and irrational reasons.

Question 29

When multiple acquirers bid up the price of a target and the ultimate acquirer ends up paying too much this is known as the

A) "loser's blessing."
B) "winner's curse."
C) "loser's curse."
D) "winner's blessing."

Question 30

Faced with limited growth opportunities in their mature home markets, large European banks have responded by

A) selling off assets.
B) closing marginal that they own.
C) pursuing profitable niches within their home countries.
D) expanding into other countries.

Question 31

If a firm generates excessive debt after an acquisition, credit rating agencies will reduce its credit rating. This reflects the fact that the firm

A) is likely to become an acquisition target itself.
B) did not perform adequate due diligence before the acquisition.
C) has become overdiversified.
D) is a riskier investment.

Question 32

Which of the following is not one of the major common pitfalls of acquisition?

A) paying too much for the target firm
B) overdiversification
C) executives who are slow to make acquisition decisions
D) excessive debt after the acquisition

Question 33

A pre-determined walk-away price prevents

A) true negotiations from taking place.
B) effective implementation of due diligence.
C) an eat-or-be-eaten mentality.
D) emotional decision making.

Question 34

With all the attention paid to target screening, selection, negotiating, and due diligence, why are irrational acquisitions made? What is a means of preventing these dysfunctional acquisitions?

Question 35

The typical organizational response to overdiversification is

A) anchoring.
B) termination of executives.
C) divestiture.
D) retrenchment.

Question 36

A leveraged buyout (LBO) is a type of ____ strategy.

A) acquisition
B) restructuring
C) realignment
D) integration

Question 37

The four basic questions of due diligence include all of the following except

A) What is the firm's walk-away price?
B) Where are the synergies between the combining firms?
C) What are the target firm's motives for selling?
D) What is the acquiring firm really buying?

Question 38

Some acquisitions are made to build capabilities. Others are made to gain market power, reducing costs, or increasing growth. Briefly describe these four reasons, and clarify the main difference between the building capabilities motivation and the other three motivations for acquisitions.

Question 39

The rational process by which acquiring firms evaluate target firms is

A) due diligence.
B) strategic analysis.
C) prospect screening.
D) meta-analysis.