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

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

The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011.

Answer 3

False

Question 4

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

Question 5

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

Question 6

According to the Chapter 7 Opening Case, Google's acquisition strategy is different than Microsoft in that Google usually acquires earlier-stage companies such as YouTube.

Question 7

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

Question 8

A horizontal acquisition involves two firms in the same industry.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

An acquisition occurs when one firm buys a controlling or 100% interest in another firm and the acquired firm becomes a subsidiary business.

Question 15

The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies.

Question 16

Facebook's acquisition strategy is similar to that of Microsoft and Google in that it allows the acquired companies to survive as independent companies (Chapter 7 Opening Case).

Question 17

Takeovers are unfriendly acquisitions where the target firm does not solicit the acquiring firm's bid.

Question 18

Although the price Microsoft paid for the acquisition of Skype went up significantly from the earlier acquisition price for Skype paid by Silver Lake, the acquisition price per user went down significantly (Chapter 7 Opening Case).

Question 19

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

Question 20

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

Question 21

China remains a challenging environment for investors and political and legal obstacles make acquisitions in China risky and difficult.

Question 22

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

Question 23

The acquisition of Sun Microsystems (a computer hardware producer) by Oracle (a software firm) is an example of a horizontal acquisition.

Question 24

Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border acquisitions (Chapter 7 Strategic Focus).

Question 25

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 26

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

Question 27

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 28

A related acquisition involves two firms in the same industry.

Question 29

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 30

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

Question 31

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

Question 32

As noted in the Chapter 7 Strategic Focus, the current Chinese crossborder strategy is to focus on buying global berands, sales networks, and goodwill in in branded products.

Question 33

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

Question 34

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

Question 35

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

Question 36

The best acquisitions are driven by either strategic or defensive reasons. For example, the Teva Pharmaceuticals' acquisition of Cephalon should be driven by strategic factors (e.g., cost and revenue synergies) or defensive reasons (e.g., to gain sales revenue in the short run).

Question 37

In the comparison of the acquisition strategies of Chinese versus Indian firms (Chapter 7 Strategic Focus) in the agricultural sector, the Indian firms were more aggressive and likely to take greater risks. In comparison, Chinese firms were more cautious and had very strict payback rules for their acquisitions.

Question 38

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

Question 39

Research suggests (Chapter 7 Strategic Focus) that government ownership of emerging economy firms leads to overpayment in cross-border acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders).

Question 40

The Chapter 7 Strategic Focus shows that the first attempts at cross-border acquisitions by Chinese companies ended in failure.

Question 41

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

Question 42

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 43

Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for acquistions and the long-run performance of the newly formed form suffers.

Question 44

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

Question 45

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 46

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

Question 47

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 48

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 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

Citigroup's acquisitions and mergers were driven by the concept of a "financial supermarket" (Chapter 7 Strategic Focus) and was a success since very little or restructuring was later required.

Question 54

Although Citigroup (Chapter 7 Strategic Focus) is still involved in many financial services sectors, those that will remain after its restructuring will be more solidly focused on its on its main business, consumer and investment banking.

Question 55

Bucyrus took on a significant amount of debt because of several acquisitions and subsequently had to file for bankruptcy.

Question 56

P&G's acquisition of Gillette reshaped its competitive scope by giving P&G a stronger presence in some products for whom men are the target market.

Question 57

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

Question 58

Citigroup's acquisition strategy (Chapter 7 Strategic Focus) was effective in that created a firm that was not overdiversified or too large, and which was able to realize synergies between its units.

Question 59

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

Question 60

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

Question 61

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

Question 62

Firms often use the downscoping and downsizing strategies simultameously as did Citigroup in its restructuring ( Chapter 7 Strategic Focus).

Question 63

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

Question 64

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

Question 65

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 66

Some research findings have shown that acquisitions typically ____ for shareholders in 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 67

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 68

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

Question 69

During the recent financial crisis, M&A activity ______ whereas in 2011, M&A activity __________.

A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Question 70

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

Question 71

According to the Chapter 7 Opening Case, the difference between Google's and Microsoft's acquisition approaches is that

A) Microsoft tends to acquire earlier-stage companies whereas Google tends to acquire later-stage companies.
B) None of Google's acquisitions have survived as independent companies whereas Microsoft's have continued to operate as subsidiaries.
C) Google's approach is to acquire earlier-stage companies whereas Microsoft tends to acquire later-stage companies.
D) Google's acquisitions have all been friendly whereas Microsoft's have all been hostile.

Question 72

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

Question 73

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 74

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 75

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, human resources, and management.

Question 76

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

Question 77

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 78

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 79

According to the Chapter 7 Opening Case, the difference between Facebook's acquisition approach and the approaches of Microsoft and Google is that

A) Facebook tends to acquire earlier-stage companies whereas Microsoft and Google tend to acquire later-stage companies.
B) None of Facebook's acquisitions have survived as independent companies whereas those of Microsoft and Google have continued to operate as subsidiaries.
C) Facebook's approach is to acquire earlier-stage companies whereas Microsoft and Google tend to acquire later-stage companies.
D) Microsoft's and Google's acquisitions have all been friendly whereas Facebook's have all been hostile.

Question 80

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.