Deck 31: Mergers

Question 1

The following are dubious reasons for mergers:

A)diversification.
B)increased earnings per share (EPS) and industry consolidation.
C)lower financing costs and industry consolidation.
D)diversification, increased earnings per share (EPS), and lower financing costs.

Answer 1

diversification, increased earnings per share (EPS), and lower financing costs.

Question 2

Merging in order to lower financing costs is likely to fail for the following reason:

A)Costs of issuing larger amounts of debt increase.
B)Tax shields decrease for larger companies.
C)Any gain from lowering the required interest rate is offset by increased guarantees on the debt.
D)It is difficult for bondholders to calculate the postmerger debt outstanding.

Answer 2

Any gain from lowering the required interest rate is offset by increased guarantees on the debt.

Question 3

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.What is the cost of this merger?

A)$30 million
B)$20 million
C)$15 million
D)$10 million

Answer 3

$10 million

Question 4

The merger of two similar pharmaceutical firms is an example of a

A)horizontal merger.
B)cross-border merger.
C)conglomerate merger.
D)horizontal merger and conglomerate merger.

Question 5

The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm.How are investors potentially misled?

A)The firm's management generates cost savings via temporary layoffs of highly paid executives.
B)The firm gains intellectual property in a merger but then divests the operations of the target firm.
C)The firm's management changes the name of an acquired firm to feign diversification.
D)The firm acquires a target with low a P/E ratio, which generates short-term earnings per share growth without any true economic advantage.

Question 6

Companies A and B are valued as follows: $\begin{array} { l c c } & \mathrm { A } & \mathrm { B } \\\text { Number of shares } & 2,000 & 1,000 \\\text { Earnings per share } & \$ 10 & \$ 10 \\\text { Share price } & \$ 100 & \$ 50\end{array}$ Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding).If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger?

A)7.5
B)8.3
C)10
D)5

Question 7

Firm A plans to acquire Firm B by making a cash offer of $27 a share for all 100,000 shares of B.It estimates that the merger will produce cost savings with a present value of $800,000.Recently, Firm B's stock price increased from $20 to $24 per share, evidently due to its excellent financial performance.Firm A thus estimates Firm B's stand-alone price at $24.However, the CFO suggests a reevaluation of the offer, pointing out that the true stand-alone value of Firm B may be $20 per share, not $24 per share.If the stand-alone value is $20 per share, will the merger still generate positive NPV for Firm A?

A)No.The cost to acquire Firm B will exceed the postmerger gain of $800,000.
B)No.Firm A will break even, since the costs are $400,000 more than expected.
C)Yes.Firm A will still make a gain, although Firm B captures more of the economic gain than expected.
D)Yes.Since the market is efficient, the true stand-alone value of Firm B is $24 per share and the CFO's fear is unwarranted.

Question 8

Google's acquisition of Motorola Mobility is an example of a

A)cross-border merger.
B)horizontal merger.
C)conglomerate merger.
D)vertical merger.

Question 9

Firm A has a value of $100 million and Firm B has a value of $60 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $65 million.How much do Firm A's shareholders gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$5 million

Question 10

The following are sensible motives for mergers except

A)economies of scale.
B)complementary resources.
C)diversification.
D)eliminating inefficiencies.

Question 11

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.How much do Firm A's shareholders gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$10 million

Question 12

The merger between Facebook and WhatsApp Universal is an example of a

A)horizontal merger.
B)vertical merger.
C)conglomerate merger.
D)None of these options are correct.

Question 13

The following are sensible reasons for mergers:

A)economies of scale.
B)economies of scale, economics of vertical integration, and complementary resources.
C)economies of scale, complementary resources, preventing the target firm from wasting surplus funds, and eliminating target firm inefficiencies.
D)economies of scale, economics of vertical integration, complementary resources, preventing the target firm from wasting surplus funds, eliminating the target firm inefficiencies, and industry consolidation.

Question 14

The market for corporate control includes

A)mergers.
B)mergers and spin-offs and divestitures.
C)mergers, spin-offs and divestitures, and leveraged buyouts (LBOs).
D)mergers, spin-offs and divestitures, leveraged buyouts (LBOs), and privatizations.

Question 15

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the gain from this merger?

A)$30 million
B)$20 million
C)$15 million
D)$75 million

Question 16

Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?

A)The acquiring firm makes a stock offer, since its stock value is priced lower than it will be postmerger.
B)The acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet reflected in the market.
C)The acquiring firm attempts to gain majority ownership, but not complete ownership.
D)The acquiring firm makes an offer with the condition that management must be replaced.

Question 17

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the cost of this merger?

A)$30 million
B)$20 million
C)$5 million
D)$10 million

Question 18

The following are sensible motives for mergers:

A)to prevent the target firm from wasting surplus funds.
B)to prevent the target firm from wasting surplus funds and to eliminate target firm inefficiencies.
C)to prevent the target firm from wasting surplus funds, to eliminate target firm inefficiencies, and to acquire complementary resources.
D)to increase earnings per share (EPS).

Question 19

Firm A has a value of $150 million and Firm B has a value of $100 million.Merging the two would enable cost savings with a present value of $40 million.Firm A purchases Firm B for $120 million.What is the gain from this merger?

A)$20 million
B)$40 million
C)$100 million
D)$80 million

Question 20

Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different

A)production processes.
B)production processes and accounting methods.
C)corporate cultures.
D)production processes, accounting methods, and corporate cultures.

Question 21

If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the cost of this merger is

A)Cost = (PVAB) - (x) PVB.
B)Cost = (x) PVAB - PVB.
C)Cost = PVAB - (x) PVA.
D)Cost = (x) PVAB - (x) PVB.

Question 22

The following data on a merger are given: $\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB } \\\text { Price per share } & \$ 100 & \$ 10 & \\\text { Total earnings } & \$ 500 & \$ 300 & \\\text { Shares outstanding } & 100 & 40 & \\\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.

A)12.75
B)6.25
C)13.75
D)17.85

Question 23

When a merger of two firms is achieved by one firm, automatically assuming all the assets and all the liabilities of the other firm, such a merger requires

A)no shareholder meeting to vote.
B)the approval of at least 50 percent of the stockholders (or as specified by corporate charters or state laws) of each firm.
C)that the management of the two firms be tossed out.
D)that the target firm search for alternative suitors.

Question 24

Suppose that the market price of Company A is $50 per share and that of Company B is $20.If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A?s shares.)

A)-20 percent
B)+25 percent
C)-25 percent
D)+20 percent

Question 25

The following data on a merger are given: $\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB } \\\text { Price per share } & \$ 100 & \$ 10 & \\\text { Total earnings } & \$ 500 & \$ 300 & \\\text { Shares outstanding } & 100 & 40 & \\\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will earnings per share be for Firm A after the merger, assuming that cash is used in the acquisition?

A)$6
B)$7
C)$8
D)$5

Question 26

Historically, merger activity increases with which market condition?

A)Low stock market prices
B)High stock market prices
C)Moderate market prices
D)Merger activity is relatively constant throughout all market conditions.

Question 27

Assume the following data: $\begin{array}{lccl}& \text { Firm A } & \text { Firm B } & \text { Firm } \mathrm{AB} \text { (after merger of } \mathrm{A} \text { and } \mathrm{B} \text { ) } \\\text { Market Price per share } & \$ 20 & \$ 10 & \\\text { Number of shares } & 1,000,000 & \$ 200,000 & \\\text { Market value of the firm }&\$ 20 \text { million } & \$ 5 \text { million } &\$ 30 \text { milion }\end{array}$ If Firm A intends to pay $7 million cash for Firm B, then calculate the cost of this merger.

A)$2 million
B)$3 million
C)$1 million
D)zero

Question 28

The following data on a merger are given: $\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB } \\\text { Price per share } & \$ 100 & \$ 10 & \\\text { Total earnings } & \$ 500 & \$ 300 & \\\text { Shares outstanding } & 100 & 40 & \\\text { Total value } & \$ 10.000 & \$ 400 & \$ 11.000\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the gain from the merger.

A)$600
B)$150
C)$550
D)$700

Question 29

The following data on a merger are given: $\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB } \\\text { Price per share } & \$ 100 & \$ 10 & \\\text { Total eamings } & \$ 500 & \$ 300 & \\\text { Shares outstanding } & 100 & 40 & \\\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the NPV of the merger.

A)$200
B)$400
C)$600
D)$150

Question 30

Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

A)Consolidation
B)Aggregation
C)Purchase
D)None of these options are correct.

Question 31

The following data on a merger are given: $\begin{array} { l c l l } & \text { Firm A } & \text { Firm B}&\text { Firm AB }\\\text { Price per share } & \$ 100 & \$ 10 & \\\text { Total earnings } & \$ 500 & \$ 300 & \\\text { Shares outstanding } & 100 & 40 & \\\text { Total value } & \$ 10,000 & \$ 400 & \$ 11.000\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

A)$108
B)$110
C)$102
D)$114

Question 32

Antitrust law can be enforced by the U.S.federal government by

A)a civil suit brought by the Justice Department.
B)a civil suit brought by the Justice Department and proceedings initiated by the Federal Trade Commission (FTC).
C)a civil suit brought by the Justice Department, proceedings initiated by the Federal Trade Commission (FTC), and proceedings initiated by the Securities and Exchange Commission (SEC).
D)proceedings initiated by the Federal Trade Commission (FTC).

Question 33

What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?

A)Speculation causes an increased chance of antitrust lawsuits.
B)Hedge funds specialize in taking on the risk that the deal will fall through and allow risk-averse investors to cash out.
C)Hedge funds help reduce the cost of the merger to an acquirer.
D)Hedge funds enable international mergers.

Question 34

Given the following data, $\begin{array}{lccl}& \text { Firm A } & \text { Firm B } & \text { Firm } \mathrm{AB} \text { (after merger of } \mathrm{A} \text { and } \mathrm{B} \text { ) } \\\text { Market Price per share } & \$ 20 & \$ 10 & \\\text { Number of shares } & 1,000,000 & \$ 200,000 & \\\text { Market value of the firm }&\$ 20 \text { million } & \$ 5 \text { million } &\$ 30 \text { milion }\end{array}$ if Firm A offers 250,000 shares to Firm B's shareholders, calculate the cost of the merger.

A)$2 million
B)$3 million
C)$1 million
D)zero

Question 35

Which of the following actions is least effective in changing a firm's strategy?

A)Conducting a successful proxy contest
B)Threat of a takeover from a rival firm
C)Organizing a leveraged buyout by well-known wealthy private investors
D)The sale of shares by a minority shareholder

Question 36

The PEN Corporation with a book value of $20 million and a market value of $30 million has acquired the CNC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million.If the transaction is a purchase, then the total assets on the books of the new company will be

A)$38 million.
B)$39 million.
C)$29 million.
D)$26 million.

Question 37

Companies A and B are valued as follows: $\begin{array} { l c l } & \mathrm { A } & \mathrm { B } \\\# \text { of shares } & 2000 & 1000 \\\text { Earnings per share } & \$ 10 & \$ 10 \\\text { Share price } & \$ 100 & \$ 50\end{array}$ Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding).Suppose that the merger really does increase the value of the combined firms by $20,000..What is the cost of the merger?

A)zero
B)$2,000
C)$8,000
D)$4,000

Question 38

Which of the following is not an important piece of U.S.antitrust legislation?

A)Garn-St.Germain Act
B)Clayton Act
C)Hart-Scott-Rodino Act
D)Clayton Act and Hart-Scott-Rodino Act

Question 39

Who usually gains the most in a merger?

A)Acquiring firm's shareholders
B)Acquiring firm's management
C)Target firm's shareholders
D)Target firm's management

Question 40

Firm A is planning to acquire Firm B.If Firm A prefers to make a cash offer for the merger, it indicates that

A)firm A's managers are optimistic about the postmerger value of A.
B)firm A's managers are pessimistic about the postmerger value of A.
C)firm A's managers are neutral about the postmerger value of A.
D)firm A's managers are neutral about the postmerger value of B.

Question 41

As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover.These bonds are an example of

A)greenmail.
B)a "scorched earth" policy.
C)crown jewels.
D)a poison pill.

Question 42

A poison pill defense may be implemented by

A)giving stock away.
B)selling firm assets.
C)issuing rights at a cheap price.
D)adding seats to the board of directors.

Question 43

Examples of shark-repellent charter amendments include

A)supermajority.
B)waiting period.
C)supermajority and waiting period.
D)supermajority, waiting period, restricted voting rights, and staggered board.

Question 44

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

Question 45

The DOC Corporation with a book value of $20 million and a market value of $30 million has acquired the CIC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million.If the transaction is a purchase, will there be any goodwill, and if so, what is the amount of goodwill?

A)No goodwill; 0
B)Yes, goodwill; 3
C)Yes, goodwill; 1
D)Goodwill cannot be calculated with the information given.

Question 46

Which of the following factor(s) influence(s) the acquiring firm's choice between merger and an acquisition of stock?

A)Shareholders are dealt with directly to bypass target management and board of directors.
B)In a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption.
C)Target management may be unfriendly and resist an offer.Resistance often increases the acquisition price.
D)Shareholders are dealt with directly to bypass target management and board of directors; in a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption; and target management may be unfriendly and resist an offer.Resistance often increases the acquisition price.

Question 47

The main difference to shareholders between a tax-free and a taxable acquisition is that

A)in a tax-free acquisition, the shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed.
B)in a tax-free acquisition, a capital gain or loss is realized and then new shares are issued; in a taxable transaction, the assets are revalued, taxed on any capital gains or losses, and then shares are exchanged.
C)in a tax-free acquisition, the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity.
D)in a tax-free acquisition, the shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed; and in a tax-free acquisition, the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity.

Question 48

What are the tax consequences of a taxable merger?

A)Selling shareholders can defer any capital gain until they sell their shares in the merged company.
B)Depreciation tax shields are unchanged by the merger.
C)Selling shareholders must recognize any capital gain.
D)All goodwill must be written off immediately.

Question 49

The easiest task for the managers of an acquiring firm is the integration of the target firm.

Question 50

Takeover defenses appear to favor

A)stockholders.
B)workers.
C)creditors.
D)managers.

Question 51

The following are methods available to change the management of a firm:

A)a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team.
B)a takeover of one firm by another firm and a leveraged buyout of the firm by a private group of investors.
C)a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team; a takeover of one firm by another firm; and a leveraged buyout of the firm by a private group of investors.
D)a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team, and a leveraged buyout of the firm by a private group of investors.

Question 52

If an acquisition is completed using a cash payment, then the acquisition is

A)taxable.
B)viewed as exchanging of shares and is not taxed.
C)a tax-free transaction as no capital gains or losses are recognized.
D)None of these options are correct.

Question 53

Two companies can sensibly be considered for a merger if they have complementary resources.

Question 54

A conglomerate merger is one in which an acquiring firm buys a closely related firm.

Question 55

A modification of the corporate charter that requires 80 percent shareholder approval for a takeover is called a(n)

A)repurchase standstill provision.
B)exclusionary self-tender.
C)supermajority amendment.
D)tender offer.

Question 56

If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus Firm B's value as a separate entity.

Question 57

Diversification is a very sensible reason for two companies to merge.

Question 58

Compensation paid to top management who lose their jobs in the event of a takeover is called a

A)poison pill.
B)golden parachute.
C)self-tender.
D)buyout.

Question 59

A dissident group solicits votes in an attempt to replace existing management.This is called a

A)proxy fight.
B)shareholder derivative action.
C)tender offer.
D)management freeze-out.

Question 60

The gain from a merger is computed as Gain = PVAB - (PVA + PVB).

Question 61

It appears that target companies capture most of the gains in hostile takeovers.

Question 62

Who gains the most in mergers?

Question 63

Briefly explain what is meant by "the cost of acquisition" in the context of a merger?

Question 64

Briefly discuss the different forms of acquisition.

Question 65

Briefly explain what is meant by the economic gain from a merger?

Question 66

A poison pill protects the rights of shareholders.

Question 67

Briefly explain the term economies of scale.

Question 68

Discuss the difficulties associated with a typical merger.

Question 69

Name the agencies that have successfully blocked mergers on antitrust (antimonopoly) grounds.

Question 70

Briefly describe some of the good motives for mergers.

Question 71

In the purchase method of merger accounting, a new asset category called goodwill is created.

Question 72

The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

Question 73

Explain the central tenet of the Clayton Act of 1914.

Question 74

Briefly discuss takeover defenses.

Question 75

Briefly describe the different types of mergers.

Question 76

Supermajorities give shareholders more control over the firm.

Question 77

A would-be acquirer making a tender offer directly to shareholders represents another form of a proxy fight.

Question 78

Who are antitakeover defenses designed to protect?