Deck 7: Merger and Acquisition Strategies

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

In terms of results, one attribute of a successful acquisition is that a firm with strong complementaries is acquired and overpayment is avoided.

Question 5

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

Question 6

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

Question 7

One attribute of a successful acquisition is that financing is easier and less costly to obtain

Question 8

In a horizontal acquisition, similarity in characteristics support efforts to integrate the two firms.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

A horizontal acquisition involves two firms in the same industry.

Question 14

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

Question 15

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

Question 16

A related acquisition involves two firms in the same industry.

Question 17

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 18

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

Question 19

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

Question 20

Among the challenges associated with integration processes is the need to link different financial and control systems.

Question 21

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

Question 22

Company experiences show that 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 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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 30

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

Question 31

One of the attributes of a successful acquisition is that the acquiring firm conducts effective due diligence to select target firms and evaluate the target firm's health.

Question 32

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

Question 33

Royalware, based in New England, wanted to establish a foothold in the Midwest, so it made an unsolicited bid to purchase TrueBlue, a similar firm based in Indiana.This is an example of a takeover.

Question 34

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

Question 35

Acquisitions can become a substitute for innovation in some firms and can leave a firm vulnerable.

Question 36

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

Question 37

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

Question 38

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 39

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

Question 40

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 41

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 42

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

Question 43

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

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

Question 44

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 45

Downsizing tends to be of more long-term, or tactical, value than short-term, or strategic, value, making it an optimal restructuring option for managers with a vision for the future.

Question 46

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

Question 47

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 48

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 49

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

Question 50

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 51

Research results indicate all of the following EXCEPT:

A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines in the majority of cases.
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 52

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

Question 53

Restructuring is a strategy through which a firm changes its set of businesses or its financial structure.

Question 54

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 55

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 56

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

Question 57

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, and human resources management.

Question 58

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 59

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 60

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

Question 61

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 62

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 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(n):

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

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 since the acquired firm is allowed to continue to function independently as it did before acquisition.

Question 65

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 66

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 67

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 68

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

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

Question 69

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 70

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

A) are likely to undergo regulatory review by various governmental entities.
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 71

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 72

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 73

TableTop Industries just went through a restructuring and is experiencing reduced labor costs.It is most likely that TableTop just completed what?

A) A downsizing
B) A downscoping
C) A management buyout
D) An employee buyout

Question 74

Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately __________ percent of innovations fail to achieve adequate returns.

A) 48
B) 68
C) 88
D) 98

Question 75

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 76

A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product, instead of adopting 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 77

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

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

Question 78

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 79

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 80

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