Deck 12: Mergers and Acquisitions

Question 1

Since both P&G and Gillette are consumer products firms,this acquisition is best described as a

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

Answer 1

B

Question 2

P&G's purchase of AG-Hutchison Ltd in 2004 is an example of a

A)conglomerate merger.
B)vertical merger.
C)market extension merger.
D)conglomerate acquisition.

Answer 2

C

Question 3

If Gillette's total market value on the day the deal was announced was $48.30 billion,P&G's $57 billion offer would represent an

A)18% acquisition premium.
B)82% acquisition discount.
C)82% acquisition premium.
D)18% acquisition discount.

Answer 3

A

Question 4

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 5

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

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

Question 6

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

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

Question 7

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

Question 8

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 9

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

Question 10

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 11

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

Question 12

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

Question 13

Discuss the differences between mergers and acquisitions and differentiate between friendly and unfriendly acquisitions.

Question 14

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 15

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

Question 16

If P&G's bid for Gillette was invited by Gillette's management,this would be an example of a

A)hostile acquisition.
B)joint venture.
C)friendly acquisition.
D)merger.

Question 17

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

Question 18

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 19

P&G's acquisition of Wella in 2003 is an example of a

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

Question 20

In 2016,the total value of announced merger and acquisition activities worldwide was $________ trillion.

A)2)8
B)4)5
C)3)2
D)5)4

Question 21

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 22

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 23

Entrepreneurs must rely on capital generated from their ongoing operations or ________ and debt capital provided by banks.

A)initial public offering
B)retained earnings
C)venture capital firms
D)operating budgets

Question 24

________ 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 25

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 26

________ 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 27

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 28

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

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

Question 29

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)improve firm reputation.
C)reduce agency problems.
D)reduce managerial hubris.

Question 30

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 31

Which of the following is a source of diversification economies?

A)marketing
B)production
C)scheduling
D)portfolio management

Question 32

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

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

Question 33

In 2015,there were over ________ acquisitions worldwide.

A)8,000
B)17,000
C)45,000
D)61,000

Question 34

________ 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 35

The CEO and the top management team at Conglomerate,Inc.have the unrealistic belief that they should have an aggressive merger and acquisition strategy because they can manage the assets of a target firm better than the managers of the target firm.Conglomerate,Inc.'s CEO and the top management team suffer from ________.

A)managerial hubris
B)the Icarus paradox
C)arbitrage fever
D)underconfidence

Question 36

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 37

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 38

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 39

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 40

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 41

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

Question 42

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 43

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 44

The number of firms that have used merger and acquisition strategies to become diversified over the past few years is minimal after the credit crunch crisis in 2008.

Question 45

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

Question 46

In 2016,the total value of mergers and acquisition deals in the United States was $10 trillion.

Question 47

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 48

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 49

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.

Question 50

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 51

If one of the reasons P&G acquired Gillette was to gain greater market power in key industries,this would be an example of ________ economies.

A)technical
B)pecuniary
C)diversification
D)vertical

Question 52

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 53

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

Question 54

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

Question 55

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

Question 56

It is clear that mergers and acquisitions create value for firms implementing these strategies.

Question 57

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.

Question 58

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 59

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

Question 60

The number of firms that have used merger and acquisition strategies over the past few years is staggering.

Question 61

Describe and discuss five reasons why bidding firms might still engage in acquisitions even if,on average,they do not create value for a bidding firm's stockholders.

Question 62

Supermajority voting rules are an example of a

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

Question 63

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 64

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 65

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 66

A thinly traded market is a market where

A)there are only a small number of buyers and sellers,where information about opportunities in this market is not widely know,and where interests besides purely maximizing the value of a firm can be important.
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 67

If there is one target firm with a current market value of $20,000 as a stand-alone entity and five bidding firms,each of which has a current market value of $30,000 as a stand-alone entity,and the value of the target firms and any of the bidding firms combined is $60,000,estimate the price the bidding firms would be willing to pay for the target firm and the return to stockholders of bidding and target firms when there is strategic relatedness between firms.

Question 68

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 69

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 70

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 71

________ is an example of an ineffective and inconsequential response with the idea that sometimes a bidding firm is interested in just a few of the businesses currently being operated by the target firm.

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

Question 72

________ 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 73

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

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

Question 74

Identify the three potential sources of strategic relatedness between bidding and target firms that were detailed by Lubatkin in 1983 and the four general reasons why bidding firms might want to engage in merger and acquisitions as detailed by Jensen and Ruback in 1983.

Question 75

________ 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 76

If there are five bidders (each of which has a current market value of $50,000 )interested in a target firm that has no strategic relatedness with any of the bidding firms and has a current market value of $25,000,identify the economic profits that will be earned by both the bidding firm's equity holders and the target firm's equity holders and discuss this case.

Question 77

Identify and differentiate between the five different FTC categories of mergers and acquisitions.

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

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 80

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.