Deck 9: Acquisition and Restructuring Strategies

Question 1

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

Answer 1

False

Question 2

Acquisitions can become a substitute for innovation in some firms.

Answer 2

True

Question 3

Private synergies are widely present in most acquisitions.

Answer 3

False

Question 4

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

Question 5

Integrating two companies,becoming too large,overcoming entry barriers,avoiding excessive competition,and being unable to achieve synergies are a few of the problems associated with acquisitions.

Question 6

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

Question 7

As discussed in the chapter,some finance scholars view debt as a means to discipline managers.

Question 8

Firms may pursue internal product development rather than acquisitions,because internal product development provides a quicker way to enter a market,is less costly,and is less risky.

Question 9

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

Question 10

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

Question 11

Despite increasingly restrictive regulations,the amount of cross-border acquisition activity between nations within the European Community continues to rise.

Question 12

High levels of diversification will have a positive effect on a firm's long-term performance as long as that firm is not overdiversified.

Question 13

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

Question 14

The effect of debt on a firm's financial returns is always negative and should be avoided.

Question 15

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

Question 16

Internal product development is often perceived by managers as entailing higher risk than an acquisition.

Question 17

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

Question 18

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 19

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

Question 20

Acquisitions proposed to increase market power are not subject to regulatory review,but they must ultimately satisfy the demands of the financial markets.

Question 21

Research shows that in successful acquisitions,the two firms had established working relationships prior to the formal acquisition.

Question 22

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 23

Market power is derived primarily from the:

A) creativity of a 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 24

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

Question 25

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

Question 26

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

Question 27

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

A) avoid increased government regulation.
B) achieve greater market power.
C) avoid competition.
D) achieve greater financial returns in the short run.

Question 28

Burlington Northern Santa Fe's acquisition of Pro-Am Transportation Services is an example of a(n):

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

Question 29

____ is when one firm buys a controlling,or 100% interest,in another firm.

A) A merger
B) An acquisition
C) A takeover
D) Restructuring

Question 30

Each of the following is a rationale for acquisitions EXCEPT:

A) achieving greater market power.
B) overcoming significant barriers to entry.
C) increasing speed of market entry.
D) positioning the firm for a tactical competitive move.

Question 31

A(n) ____ percent of acquisitions have been across country borders in recent years.

A) decreasing
B) equal
C) small
D) increasing

Question 32

History shows that about 80% of acquisitions are successful.

Question 33

Researchers have found that shareholders of acquired firms often:

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

Question 34

A merger is when:

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 that seeks to conduct one given function.
D) two firms agree to share certain information,but their operations remain independent.

Question 35

Downsizing is an indicator of organizational decline.

Question 36

The intent of the owners in a 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.

Question 37

The majority of acquisitions completed during most of the 1970s,1980s,and 1990s did not enhance the value creation of the firms involved.

Question 38

Barriers to entry represent factors associated with:

A) a market,and/or firms currently operating in the market,that make it more expensive and difficult to enter that market.
B) a market,and/or firms currently operating in the market,that make it more expensive and difficult to leave that market.
C) differentiation strategies in which the firm maximizes its returns by emphasizing lower quality products than those found in markets without barriers to entry.
D) the presence of above-average returns for a firm.

Question 39

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

A) a horizontal acquisition.
B) an unrelated acquisition.
C) a hostile takeover.
D) a vertical acquisition.

Question 40

Company experience and research findings have shown acquisitions to be:

A) very effective,resulting in the earning of above-average returns.
B) marginally effective,providing some above-average returns.
C) ineffective,resulting in returns near zero for the acquiring firm.
D) equivalent in performance results when compared to other strategies.

Question 41

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 42

Managers often perceive ____ as a highly risky activity.

A) internal product development
B) related acquisitions
C) diversification
D) reducing time-to-market

Question 43

Private synergy:

A) occurs in most related acquisitions and allows firms to see increased returns.
B) is frequently achieved in conglomerates.
C) is not easy to understand and imitate.
D) is easily assessed by managers as they evaluate a potential acquisition.

Question 44

The use of high levels of debt in acquisitions has contributed to:

A) the increase in above-average returns earned by acquiring firms.
B) an increased risk of bankruptcy.
C) the negative returns earned by both firms.
D) an increase in investments that have long-term payoffs and reduced firm competitiveness.

Question 45

To finance their acquisitions during the 1980s and 1990s,some companies:

A) sought out new capital specifically from overseas sources.
B) elected to trim their payrolls in an effort to cut costs.
C) established 401k plans.
D) significantly increased their level of debt.

Question 46

When GE reduced its emphasis in electronic markets by acquiring firms in the financial services sector,it did so in part to reshape:

A) the structure of its industry.
B) its manufacturing processes.
C) its competitive scope.
D) its new product development process.

Question 47

Research shows that ____ percent of mergers and acquisitions are successful.

A) 20
B) 40
C) 60
D) 80

Question 48

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

A) the more related the acquired and acquiring firms are
B) the more diverse the resulting portfolio of competencies
C) the more disparate the corporate cultures
D) the more concentrated management attention is given to making acquisitions

Question 49

Compared to internal product development,acquisitions allow quicker routes to:

A) expanded economies of scope.
B) new markets and new capabilities.
C) synergy within a portfolio of businesses.
D) financial economies of scale.

Question 50

High levels of debt can be a positive force because it allows firms to:

A) take advantage of expansion opportunities.
B) postpone unnecessary investments.
C) invest in tax avoiding ventures.
D) maintain their value creation.

Question 51

Private synergy refers to:

A) synergy that takes place in a firm that is taken private through the use of junk bonds.
B) a benefit from merging the acquiring and target firms that only one or two individuals in a firm may recognize.
C) a benefit from merging the acquiring and target firms that is due to a unique set of resources that are complementary between the two firms.
D) a benefit from merging the acquiring and target firms that is due to a unique resource that is not complementary between the two firms but which is available to other bidders for the target firm.

Question 52

About ____ percent of innovations fail to achieve adequate returns.

A) 10
B) 30
C) 60
D) 90

Question 53

Junk bonds are characterized by the:

A) small firms for which they are typically issued.
B) high technology firms for which they are typically issued.
C) high return offered to the bondholders.
D) low risk to the bondholders.

Question 54

It is estimated that 60 percent of innovations are effectively imitated within ____ year(s) after patents are obtained.

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

Question 55

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

A) To enter markets quickly
B) To overcome the high costs of internal product development
C) To reduce investment risk
D) To extend patent rights on developed pharmaceuticals

Question 56

The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms:

A) not being diversified enough.
B) having too much debt.
C) being unable to achieve synergy.
D) growing too large.

Question 57

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

A) strategic planning.
B) innovation.
C) risk analysis.
D) international diversification.

Question 58

The problems associated with acquisitions include all of the following EXCEPT:

A) paying too much for the target firm.
B) experiencing problems integrating the two firms.
C) facing the high costs of financing the acquisition.
D) developing too much market power.

Question 59

According to a researcher cited in the text,the ____ is probably the single most important determinant of shareholder value creation in mergers and acquisitions.

A) pre-acquisition negotiations phase
B) pre-acquisition due diligence phase
C) post-acquisition integration phase
D) post-acquisition restructuring phase

Question 60

Cross-border acquisitions are becoming more popular because they allow the acquiring firm to:

A) market a broader range of products and negotiate better contracts with distributors.
B) increase profits,better serve customers,and gain market control.
C) overcome barriers to entering a new market while giving that firm more control over foreign operations when compared to the control offered by alliances.
D) exploit resources in the acquired firm,gain new technical knowledge,and access new sources of capital.

Question 61

A recent study revealed that downsizing leads to lower returns:

A) only for American firms.
B) only for Japanese firms.
C) for both American and Japanese firms.
D) for most American firms,but few Japanese firms.

Question 62

A leveraged buyout refers to:

A) a firm restructuring itself by selling off unrelated units of the company's portfolio.
B) a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background.
C) a restructuring action whereby the managers of the firm,the employees,and/or an external party buy all of the assets of a business,financed largely with debt,and take the firm private.
D) an action where the management of the firm and/or an external party buy all of the assets of a business financed largely with equity.

Question 63

Firms such as GE demonstrate that:

A) related diversification always outperforms unrelated diversification.
B) conglomerate firms can be successful.
C) a firm can never have too much diversification.
D) related linked diversification leads to more consistent performance than does related constrained diversification.

Question 64

Which of the following is NOT an attribute of a successful acquisition?

A) The acquiring firm has a large amount of financial slack.
B) The acquired and acquiring firms have complementary assets and/or resources.
C) Innovation and R&D investments continue as part of the firm's strategy.
D) Investments in advertising and image building are made quickly.

Question 65

As an attribute of a successful acquisition,a friendly acquisition usually results in:

A) effective integration.
B) easily obtained financing.
C) a long-term competitive advantage.
D) achieving many synergies.

Question 66

One problem with becoming too large is that firms:

A) become too easy to manage.
B) often adopt a decentralized decision-making philosophy.
C) gain increasing efficiencies.
D) usually increase bureaucratic controls.

Question 67

A friendly acquisition:

A) raises the price that has to be paid for a firm.
B) ensures that the top management of the acquired firm will be welcome in the newly combined firm.
C) facilitates the integration of the acquired and acquiring firms.
D) allows joint ventures to be developed.

Question 68

Overdiversification is more likely to occur with:

A) related businesses.
B) unrelated businesses.
C) all types of businesses.
D) single business units.

Question 69

At a minimum,____ includes deliberate and careful selection of target firms and evaluations of relative health of those firms.

A) acquisition assessment
B) merger and acquisition assessment
C) due diligence
D) a statement of initial intent

Question 70

Evidence suggests that firms using acquisitions as a substitute for internally developed innovations:

A) usually generate more innovation for each research and development dollar spent.
B) outperform those that do not.
C) eventually encounter performance problems.
D) can leverage their core competencies across a broader range of products.

Question 71

____ allows the acquiring firm to keep valuable human resources in the acquired firm from leaving.

A) Financial slack
B) Experience with change
C) Effective integration
D) High compensation

Question 72

Bureaucratic controls refer to:

A) formalized supervisory and behavioral rules and policies that are designed to ensure consistency across units.
B) those activities that promote creativity in an organization.
C) procedures that are not beneficial to an organization.
D) formalized supervisory and behavior controls that must be sought out in a firm and eliminated.

Question 73

Which of the following is NOT a goal that a downsizing firm might seek?

A) Improved manufacturing technologies
B) Reduced costs
C) Improved operating efficiency
D) Increased profitability

Question 74

It is generally believed that LBOs (leveraged buyouts) occur because of:

A) managerial mistakes or self-interest.
B) poor performance.
C) lack of managerial knowledge and expertise.
D) changes in the competitive environment.

Question 75

Firms use downsizing as a restructuring strategy for different reasons,but the most frequently cited one is:

A) poor unit performance from decreasing industry attractiveness.
B) decreasing market share from increasing industry competition.
C) shifting industry characteristics.
D) an expectation of improved profitability from cost reductions and more efficient operations.

Question 76

Whole-firm LBOs tend to result in all EXCEPT the following negative outcomes:

A) increased risk of bankruptcy.
B) failure to invest in R&D.
C) risk-averse management.
D) inefficient operations.

Question 77

The trend in Europe,Latin America,and Asia has been:

A) related diversification.
B) whole-firm leveraged buyouts.
C) building conglomerates.
D) downscoping.

Question 78

Transaction costs include all of the following EXCEPT:

A) charges from investment bankers who complete due diligence for the acquiring firm.
B) the loss of key employees following the acquisition.
C) managers' time spent evaluating target firms.
D) managers' time spent planning the diversification strategy of the firm.

Question 79

The ____ that is (are) sometimes used when firms implement an acquisition strategy and become too large can have a negative effect on performance.

A) product development innovation
B) bureaucratic controls
C) complementary assets
D) rapid integration

Question 80

Which of the following is NOT a result of overdiversification?

A) Top-level managers do not have a rich understanding of all of the firm's business units.
B) Managers emphasize strategic controls rather than financial controls.
C) Firms use acquisition as a substitute for innovation.
D) Managers become short-term in their orientation.