Question 1

Which of the following are archetypical strategies that have a higher probability of creating value as opposed to being one of the more difficult strategies for creating value?
I.Using a roll-up strategy.
II.Consolidating to improve competitive behavior.
III.Consolidating to remove excess capacity from industry.
IV.Picking winners early and helping them develop their business.

A)I and II only.
B)I,III,and IV only.
C)II,III,and IV only.
D)III and IV only.

D

Accepted Answer

D

Question 2

A large acquisition occurring is a good predictor of an increase in acquisitions.

Accepted Answer

When a large acquisition occurs, it often signals a healthy and active M&A market, which can encourage other companies to consider their own acquisitions or mergers. This can lead to an increase in overall acquisition activity.

Question 3

List the four components that determine the value created for the acquirer in an acquisition and whether an increase in each increases or decreases that value.

Accepted Answer

1.Increases in the stand-alone value of the target increase the value added to the acquirer.
2.Increases in the value of performance improvements increase the value added to the acquirer.
3.Increases in the market value of the target decrease the value added to the acquirer.
4.Increases in the acquisition premium decrease the value added to the acquirer.]

Question 4

About one-third of all acquisitions create value,about one-third destroy value,and for the remaining third it is not clear whether value is created or destroyed.

Accepted Answer

This statement is based on research and studies on acquisitions, and it is widely accepted in the business world that approximately one-third of acquisitions create value, one-third destroy value, and the remaining third have indeterminate results.

Question 5

The analysis of cost savings requires an industry-specific business system.Which of the following are requirements of an insightful industry-specific business system?
I.It uses a top-down approach.
II.It uses detail to identify the precise source of the savings.
III.It assigns each cost item of the target to one segment of the business system.
IV.It assigns the savings within the bidder's organization in the appropriate segments in the business system.

A)I and II only.
B)I and III only.
C)II,III,and IV only.
D)I,II,III,and IV.

Accepted Answer

For an industry-specific business system to provide insightful cost savings analysis, it should use a detailed approach to identify the exact source of savings (II) and assign each cost item to a segment in the business system (III). Additionally, it should allocate the savings within the bidder's organization according to the appropriate segments in the business system (IV). A top-down approach is not necessarily required for an insightful analysis, so (I) is not necessary. Therefore, the correct answer is (C), which includes II, III, and IV.

Question 6

When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if:&#10;A)The target is larger.&#10;B)The target is smaller.&#10;C)The stock market is in a bubble.&#10;D)The acquiring firm has relatively low debt-to-equity ratios.

Accepted Answer

When an acquiring firm has relatively low debt-to-equity ratios, it has a strong financial position to offer cash for the target. This would be beneficial for the acquiring firm as it would result in leverage ratios remaining stable and interest rates being unaffected. On the other hand, if the acquiring firm offers stock during this scenario, it may dilute the value of shares and negatively impact shareholder value. Therefore, it is best to offer cash when the acquiring firm has low debt-to-equity ratios.

Question 7

When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if the stock market is in a bubble.

Accepted Answer

The answer of When an acquiring firm is making the...

Question 8

Which of the following are usual costs associated with pursuing synergies from an acquisition?
I.Severance pay.
II.Rebranding campaigns.
III.Decommissioning a plant.
IV.Information technology integration costs.

A)I and II only.
B)I and III only.
C)II,III,and IV only.
D)I,II,III,and IV.

Accepted Answer

All listed options (I. Severance pay, II. Rebranding campaigns, III. Decommissioning a plant, IV. Information technology integration costs) are typical costs associated with pursuing synergies from an acquisition. These costs are incurred to streamline operations, integrate systems, and align the brands and assets of the combined entities.

Question 9

An all-equity firm worth $50 billion acquires for $4 billion cash a firm whose postacquisition value will be $6 billion.The acquiring firm had the cash and did not need to borrow.The current market value of the target is $3 billion.What is the estimated return to the shareholders of the acquiring firm?

A)2 percent.
B)4 percent.
C)6 percent.
D)8 percent.

Accepted Answer

The acquiring firm spends $4 billion in cash to acquire a firm that will be worth $6 billion post-acquisition, effectively generating a $2 billion increase in value on a $4 billion investment. This results in a 50% return on the specific acquisition investment. However, the question asks for the return to the shareholders of the acquiring firm, which is worth $50 billion. The $2 billion increase in value on the acquiring firm's overall value of $50 billion results in a 4% return to the shareholders of the acquiring firm.

Deck 27: Mergers and Acquisitions