Deck 10: Mergers and Acquisitions

Question 1

In principle, the Federal Trade Commission will allow any acquisition involving firms with headquarters in the United States that could have the potential for generating monopoly or oligopoly profits in an industry.

Answer 1

False

Question 2

The price of each of a firm's shares multiplied by the number of shares outstanding is known as the firm's current market value.

Answer 2

True

Question 3

A privately held firm has not sold any shares on the public stock market.

Answer 3

True

Question 4

To be economically valuable, links between bidding and target firms must meet the same criteria as diversification strategies.

Question 5

In the first 11 months of 2008, there were 9,900 mergers and acquisitions in the United States.

Question 6

When the management of a target firm wants the firm to be acquired, this is known as a hostile takeover.

Question 7

According to the Federal Trade Commission, a firm engages in a horizontal merger when it acquires former suppliers or customers.

Question 8

While mergers typically begin as a transaction between equals, that is, between firms of equal size and profitability, they often evolve after a merger such that one firm is more dominant in the management of the merged firm than the other.

Question 9

In an acquisition a tender offer can only be made with the support of the management of the acquired firm.

Question 10

A firm engages in an acquisition when it purchases a second firm.

Question 11

For a firm to gain a controlling share in an acquisition, it must purchase more than 51% of the acquired firm's assets.

Question 12

If bidding and target firms are strategically related, then the economic value of these two firms combined is greater than their economic value as separate entities.

Question 13

In 2007, the total value of mergers and acquisition deals in the United States was $10 trillion.

Question 14

Diversification economies are achieved by the ability of firms to dictate prices by exerting market power.

Question 15

Despite the popularity of conglomerate mergers in the 1960s, most mergers and acquisitions among strategically related firms are divested shortly after they are completed.

Question 16

In a product extension merger, a firm acquires complementary products through merger and acquisition activities.

Question 17

When the assets of two similar-sized firms are combined, this is known as a merger.

Question 18

The acquisition of strategically unrelated targets will generate substantial economic profits for both the bidding and the target firms.

Question 19

If there is any hope that mergers and acquisitions will be a source of superior performance for bidding firms, it must be because of some sort of strategic relatedness between bidding and target firms.

Question 20

In all acquisitions bidding, firms will be willing to pay a price for a target up to the value that the firm adds to the bidder once it is acquired.

Question 21

One of the keys for a bidding firm to earn superior performance in an acquisition strategy is to make sure that multiple bidders are pursuing the same target.

Question 22

In an initial public offering, a firm (typically working with an investment banker) sells its equity to the public at large.

Question 23

Unfriendly takeovers can generate anger and animosity among the target firm management that is directed toward the management of the bidding firm.

Question 24

One study that reviewed 40 empirical merger and acquisition studies in the finance literature concluded that acquisitions, on average, increased the market value of bidding firms by about 25 percent and left the market value of the target firms unchanged.

Question 25

Operational, functional, strategic, and cultural differences between bidding and target firms can all be compounded by the merger and acquisition process especially if that process was unfriendly.

Question 26

One of the main reasons why bidding firms do not obtain competitive advantages from acquiring strategically related target firms is that several other bidding firms value the target firm the same way.

Question 27

Managerial hubris is the well-founded belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management.

Question 28

In mergers and acquisitions, the owners of the bidding firm appropriate the economic value created by the transaction.

Question 29

Perhaps the most significant challenge in integrating bidding and target firms has to do with cultural differences.

Question 30

Strategy researchers have found that in mergers and acquisitions, the more strategically related bidding and target firms are, the more economic value these mergers and acquisitions create.

Question 31

The value that a bidding firm brings to a target firm through an acquisition should be discounted by the cost of strategizing to implement an acquisition.

Question 32

When acquiring a publicly traded firm a bidder has to release all the information it has about the potential value of that target in combination with itself.

Question 33

A thinly traded market is a market where there are only a small number of buyers and sellers, where information about the opportunities in this market is not widely known, and where interests besides purely maximizing the value of a firm can be important.

Question 34

Firms should pursue merger and acquisition strategies only to obtain valuable economies of scope that outside investors find too costly to create on their own.

Question 35

The market for corporate control is the market that is created when multiple firms actively seek to acquire one or several firms.

Question 36

The difference between the unexpected value of an acquisition actually obtained by a bidder and the price the bidder paid for the acquisition is a profit for the equity holders of the target firm.

Question 37

The existence of strategic relatedness between bidding and target firms is sufficient for the equity holders of bidding firms to earn economic profits from their acquisition strategies.

Question 38

The cumulative abnormal return for a merger or acquisition can be positive or negative depending on whether the stock in question performs better or worse than what was expected without an acquisition.

Question 39

Mergers and acquisitions designed to create vertical integration should be managed through the M-form structure.

Question 40

Free cash flow is simply the amount of cash a firm has to invest after all positive net present-value investments in its ongoing businesses have been funded.

Question 41

________ economies are scale economies that occur when the physical processes inside a firm are altered so that the same amounts of input produce a higher quantity of outputs.

A) Pecuniary
B) Diversification
C) Technical
D) Vertical

Question 42

________ economies are achieved by the ability of firms to dictate prices by exerting market power.

A) Pecuniary
B) Technical
C) Diversification
D) Production

Question 43

________ economies are achieved by improving a firm's performance relative to its risk attributes or lowering its risk attributes relative to its performance.

A) Technical
B) Diversification
C) Pecuniary
D) Market

Question 44

If eBay were to acquire a smaller online auction company, this would be an example of a ________ merger.

A) conglomerate
B) vertical
C) market extension
D) horizontal

Question 45

When Sears and Kmart, two retail firms of relatively equal size in the United States, agreed to combine their assets, this was an example of a(n)

A) joint venture.
B) acquisition.
C) merger.
D) equity agreement.

Question 46

Which of the following is a source of diversification economies?

A) Marketing
B) Production
C) Scheduling
D) Portfolio management

Question 47

If an electronics manufacturer were to acquire a chain of retail electronic stores to sell its products, this would be an example of a ________ merger.

A) vertical
B) horizontal
C) market extension
D) product extension

Question 48

In an unrelated acquisition, if 5 firms are interested in acquiring a firm and each of the bidding firms had a current market value of $30,000 while the current market value of the target firm is $20,000, this acquisition is likely to generate economic profits of ________ for the acquiring firm.

A) $10,000
B) $20,000
C) $50,000
D) $0.00

Question 49

In 2007, the total value of announced merger and acquisition activities in the United States was

A) $2.5 trillion
B) $1.7 trillion.
C) $3.0 trillion.
D) $5.0 trillion.

Question 50

In a ________ merger, firms acquire complementary products through their merger and acquisition activities.

A) vertical
B) market extension
C) product extension
D) horizontal

Question 51

When eBay acquired Baaze.com, an Indian auction firm, in order to enter the Indian online auction market, this was an example of a ________ merger.

A) product extension
B) market extension
C) conglomerate
D) vertical

Question 52

If there are no vertical, horizontal, product extension, or market extension links between firms, the FTC defines the merger or acquisition activity between firms as a ________ merger.

A) conglomerate
B) vertical
C) horizontal
D) product extension

Question 53

When one firm acquires a(n) ________ of another firm, it has acquired enough of that firm's assets so that the acquiring firm is able to make all the management and strategic decisions in the target firm.

A) market stake
B) equity share
C) controlling share
D) equity stake

Question 54

Which of the following is a financial motivation for why bidding firms might want to engage in merger and acquisition strategies?

A) To increase leverage opportunities
B) To capture economies of scale
C) To adopt more efficient production or organizational technology
D) To engage in vertical integration

Question 55

The price of each of a firm's shares multiplied by the number of shares outstanding represents the firm's

A) total equity base.
B) current market value.
C) total market share.
D) current market share.

Question 56

The difference between the current market price of a target firm's shares and the price a potential acquirer offers to pay for those shares is known as an

A) acquisition premium.
B) acquisition discount.
C) acquisition margin.
D) acquisition price.

Question 57

A(n) ________ acquisition occurs when the management of a target firm wants to be acquired.

A) hostile
B) admirable
C) strategic
D) friendly

Question 58

When a firm has not sold shares on the public stock market, it is known as

A) closely held.
B) privately held.
C) publicly traded.
D) a small cap stock.

Question 59

In the first 11 months of 2008, there were ________ acquisitions or mergers in the United States.

A) 3,290
B) 4,160
C) 5,270
D) 8,190

Question 60

A firm engages in a(n) ________ when it purchases a second firm.

A) acquisition
B) joint venture
C) strategic alliance
D) equity alliance

Question 61

Mergers and acquisitions used to create diversification strategies should be managed through the

A) M-form structure.
B) functional structure.
C) U-form structure.
D) matrix structure.

Question 62

A ________ is another bidding firm that agrees to acquire a particular target in the place of the original bidding firm.

A) golden parachute
B) greenmail
C) white knight
D) crown jewel

Question 63

A thinly traded market is a market where

A) there are only a small number of buyers and sellers.
B) many firms are implementing acquisition strategies.
C) information about opportunities in this market is widely known.
D) the only important interest is to maximize the value of a firm.

Question 64

The most significant challenge in integrating bidding and target firms has to do with

A) accounting differences.
B) cultural differences.
C) operational differences.
D) logistic differences.

Question 65

A ________ is a compensation arrangement between a firm and its senior management team that promises these individuals substantial cash payment if their firm is acquired and they lose their jobs in the process.

A) white knight agreement
B) greenmail agreement
C) shark repellent
D) golden parachute

Question 66

________ firms typically raise money from numerous smaller investors, which they then invest in a portfolio of entrepreneurial firms.

A) Business angel
B) Venture capital
C) Closely held
D) Private equity

Question 67

________ is (are) a maneuver in which a target firm's management purchases any of the target firm's stock owned by a bidder and does so for a price that is greater than the current market value of that stock.

A) Standstill agreements
B) Poison pills
C) Shark repellents
D) Greenmail

Question 68

In a(n) ________, a firm, typically working with an investment banker, sells its equity to the public at large.

A) FTC
B) merger
C) IPO
D) acquisition

Question 69

Which of the following actions should bidding firm managers take to help earn superior performance in an acquisition strategy?

A) Share information with other bidders.
B) Delay the closing of the deal.
C) Avoid winning bidding wars.
D) Operate in competitive acquisition markets.

Question 70

Research suggests that, on average, acquisitions increased the market value of target firms by about ________ percent and ________.

A) 50; left the market value of the bidding firms unchanged
B) 25; left the market value of the bidding firms unchanged
C) 50; increased the market value of the bidding firms by 25 percent
D) 25; increased the market value of the bidding firms by 15 percent

Question 71

Wealthy individuals who provide capital to entrepreneurs to help them grow their businesses are known as

A) business angels.
B) venture capitalists.
C) stockholders.
D) CEOs.

Question 72

________ include a variety of relatively minor corporate governance changes that, in principle, are supposed to make it more difficult to acquire a target firm.

A) Shark repellents
B) White knights
C) Greenmail
D) Poison pills

Question 73

In a related acquisition, if there is one target firm and ten bidding firms, and the value of each of the bidding firms as a stand-alone entity is $50,000 and the value of the target firm as a stand-alone entity is $30,000, the market value of the combined entity will be

A) $0.00.
B) less than $80,000.
C) $80,000.
D) more than $80,000.

Question 74

To ensure that the owners of target firms appropriate whatever value is created by a merger or acquisition, managers in these target firms should

A) create a thinly traded market for their firm.
B) seek information from bidders.
C) close the acquisition deal quickly.
D) limit the number of bidders involved in the bidding competition.

Question 75

Supermajority voting rules are an example of a

A) poison pill.
B) white knight.
C) golden parachute.
D) shark repellent.

Question 76

Which one of the following is not one of the reasons that Jensen and Ruback listed as to why bidding firms might want to engage in merger and acquisition strategies?

A) To reduce production or distribution costs
B) To gain market power in product markets
C) To expand individual managers' power within an organization
D) To eliminate inefficient target management

Question 77

________ is an example of an ineffective and inconsequential response by a target firm.

A) A Pac Man defense
B) A Blue Man defense
C) A crown jewel sale
D) A golden parachute defense

Question 78

Firms using ________ fend off an acquisition by taking over the firm or firms bidding for them.

A) shark repellents
B) a crown jewel sale
C) the Pac Man defense
D) a golden parachute

Question 79

Managers of bidding firms continue to engage in merger or acquisition strategies even though they usually do not generate profits for bidding firms in order to

A) ensure survival.
B) generate free cash flow.
C) reduce agency problems.
D) reduce managerial hubris.

Question 80

________ does not affect the wealth of target firm equity holders.

A) Blue Man defense
B) Pac Man defense
C) Golden parachute
D) Silver parachute