Deck 7: Acquisition and Restructuring Strategies

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

In most nations, regulations limiting acquisition activity has been strengthened.

Question 8

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

Question 9

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 10

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 11

A related acquisition involves two firms in the same industry.

Question 12

Takeovers are unsolicited and unwanted acquisitions which are uniformly hostile.

Question 13

GE transformed its scope by acquiring several financial service firms.

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

An acquisition of a firm in a highly related industry is referred to as a horizontal acquisition.

Question 20

Evidence suggests that returns to shareholders of acquired firms are greater than those for acquiring firms.

Question 21

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 22

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 23

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

Question 24

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

Question 25

The effect of leverage on an acquiring firm's financial returns is negative and thus should be avoided.

Question 26

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 27

High levels of unrelated diversification will have a positive effect on a firm's long-term performance if managers focus on financial controls.

Question 28

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

Question 29

Private synergies exist between a potential acquisition target and all firms seeking to acquire it.

Question 30

One of the potential problems associated with acquisitions is that the size of the firm may exceed the economies of scale generated by the acquisition.

Question 31

Junk bonds are financial instruments commonly used to finance risky acquisitions that provide potential high returns for the bondholders.

Question 32

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 33

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

Question 34

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. Since both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Question 35

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

Question 36

Private synergies are widely present in most acquisitions.

Question 37

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

Question 38

Due diligence is performed by investment banking firms because of laws protecting shareholders during acquisitions.

Question 39

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

Question 40

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 41

Daimler Benz acquired Chrysler in 1998. In 2007, Daimler divested Chrysler. An action such as this divestiture is often a sign of a failed acquisition.

Question 42

Cross-border acquisitions involve

A) acquisitions by firms from developing countries of firms in developed countries.
B) acquisitions by firms from developed countries of firms in developing countries.
C) acquisitions made by firms both within and between developed and developing countries.
D) none of the above.

Question 43

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

Question 44

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

Question 45

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 46

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 47

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 48

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 five to eight 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 49

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 or firm size.
D) of managerial resistance. True mergers result in significant managerial-level layoffs.

Question 50

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 increase financial performance.
D) to shift a core business into different market.

Question 51

It has been found that both U.S. and Japanese firms engaging in downsizing activities achieve lower returns after downsizing.

Question 52

A leveraged buyout by a third party is often the result of managerial mistakes or management that has operated in its own self-interest rather than the firm's interest.

Question 53

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

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

Question 54

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.

A) result in above-average returns
B) provide approximately average returns
C) result in returns near zero
D) take some time to achieve private synergy, but eventually result in above-average returns

Question 55

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

Question 56

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 57

The majority of acquisitions completed during the acquisition boom of the 1970s through the 1990s did not enhance the strategic competitiveness of the firms involved.

Question 58

When the target firm's managers oppose an acquisition, it is referred to as a(an)

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

Question 59

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 60

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 61

Cross-border acquisitions are typically made to

A) increase a firm's market power.
B) reduce the cost of new product development.
C) take advantage of higher education levels of labor in developed countries.
D) circumvent barriers to entry in another country.

Question 62

The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because

A) of barriers to entry in many industries.
B) it is difficult and time intensive for companies to develop products that differ from their current product line.
C) innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting from acquisition.
D) unrelated acquisitions are usually uncomplicated because the acquired firm is allowed to continue to function independently as it did before acquisition.

Question 63

When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to ____ by making an acquisition.

A) increase new product speed to market
B) broaden its competitive scope
C) increase its economies of scale
D) overcome entry barriers

Question 64

Compared to internal product development, acquisitions allow

A) immediate access to innovations in mature product markets.
B) more accurate prediction of return on investment.
C) slower market entry.
D) more effective use of company core competencies.

Question 65

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 66

Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for

A) market discipline.
B) innovation.
C) risk analysis.
D) international diversification.

Question 67

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 68

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 69

Which of the following is NOT one of the primary reasons many pharmaceutical firms use acquisitions?

A) entering markets quickly
B) overcoming the high costs of internal product development
C) improving predictability of returns on investment.
D) extending patent rights on developed pharmaceuticals

Question 70

The majority of new product innovations are copied by rivals within ____ years of introduction.

A) one
B) three
C) four
D) six

Question 71

Mittal Steel, the world's largest producer of steel, is headquartered in the Netherlands and has operations on four continents. It acquired U.S.-based ISG, a U.S.-owned steel company, in 2004. This is an example of both a cross-border acquisition and

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

Question 72

Related acquisitions to build market power

A) are likely to undergo regulatory review.
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 73

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(an)

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

Question 74

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 75

A manager in your company is proposing the acquisition of Taylor company, which has developed a new, innovative product. If you were to argue in favor of internal product development as opposed to acquisition, your argument could include all of the following EXCEPT

A) the acquisition of Taylor also entails risks, such as high failure rates.
B) Taylor's innovation could become a part of all of your firm's products.
C) Taylor may be overrepresenting the innovation.
D) acquisitions could become a substitute for innovation within your firm.

Question 76

Two existing U.S. airlines, American West Airlines and U.S. Airways, have merged. The purpose of this merger is most likely to ____ and constitutes ____ action.

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

Question 77

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 78

Research has shown that the more ____, the greater is the probability that an acquisition will be successful.

A) related the acquired and acquiring firms are
B) diverse the resulting portfolio of competencies
C) disparate the corporate cultures
D) involved investment banking firms are in the due diligence process

Question 79

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(an)

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

Question 80

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

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