Deck 6: Corporate-Level Strategy: Creating Value Through Diversification

Question 1

In a study of 270 international mergers between 2000 and 2003 it was found that sales growth increased,earnings growth increased,and market valuations increased overall for the merged companies.

Answer 1

False
Explanation: A study investigated 270 mergers that took place between 2000 and 2003 in multiple countries and regions. It found that after a merger, sales growth decreased by 6 percent, earnings growth dropped 9.4 percent, and market valuations declined 2.5 percent (figures are adjusted for industry trends and refer to three years pre- or postmerger).

Question 2

At times,the only other people who may have benefited from a merger-acquisition were the shareholders of the acquired firms or the investment bankers advising the acquiring firm.

Answer 2

True
Explanation: At times, the only other people who may have benefited were the shareholders of the acquired firms or the investment bankers who advise the acquiring firm, because they collect huge fees upfront regardless of what happens afterward.

Question 3

Sprint and Nextel merged in 2005.The successful merger resulted in a 31 billion USD merger-related charge that lead to a 76 percent decrease in its value by late 2012.

Answer 3

False
Explanation: This is an example of an unsuccessful merger. The stock price continued to be an issue when SoftBank announced that it would purchase Sprint Nextel in 2012 and found that its own stock price dropped 20 percent the week after announcing its acquisition intentions.

Question 4

Corporate-level strategy focuses on gaining short-term revenue through managing operations in multiple businesses.

Question 5

One of the reasons that the Cisco acquisition of the Flip product failed is that the core businesses were very different.

Question 6

When firms diversify into unrelated businesses,the primary potential benefits are horizontal relationships,i.e.,businesses sharing tangible and intangible resources.

Question 7

Benefits derived from horizontal and hierarchical relationships are mutually exclusive.

Question 8

Many acquisitions ultimately result in divestiture.

Question 9

Economies of scope are cost savings from leveraging core competencies or sharing unrelated activities among businesses in a corporation.

Question 10

Diversification initiatives must be justified by the creation of value for shareholders.

Question 11

ConAgra uses the related diversification vertical integration initiative to enhance market power.They do this to increase their power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.

Question 12

Research shows that the vast majority of acquisitions of public corporations results in value creation rather than value destruction.

Question 13

Cooper Industries has followed a successful strategy of related diversification.There are few similarities in the products it makes or the industries in which it competes.

Question 14

Reasons for acquisition failure include the effective integration of the acquisition.

Question 15

All diversification moves,including those involving mergers and acquisitions,erode performance.

Question 16

Novartis,formerly Ciba-Geigy,uses portfolio management to improve many key activities,including resource allocation and reward and evaluation systems.This is an example of using unrelated diversification corporate restructuring and parenting initiatives to create value.

Question 17

The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.

Question 18

In large,widely diversified firms,decision making can become slow and remote to market conditions thus creating potential difficulties for successful mergers as evidenced by the Cisco-Flip failure.

Question 19

Shaw Industries,a giant carpet manufacturer,increases its control over raw materials by producing much of its own polypropylene fiber,a key input to its manufacturing process.This is an example of using the related diversification vertical integration initiative to enhance their market power.

Question 20

When firms diversify into related businesses,the primary potential benefits come from horizontal relationships,which are businesses sharing intangible and tangible resources.

Question 21

IBM leverages its competencies in computing technology to provide health care services.This is an example of a core competence being used across dissimilar businesses within the same corporation.

Question 22

Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Question 23

Starbucks acquired the baker chain,La Boulange,with the intention of selling the bakery products at its coffee cafes.The increased market exposure for La Boulange is an example of a revenue enhancing benefit that can arise from the differentiation strategy.

Question 24

For a core competency to create value and provide a viable basis for synergy among the businesses in a corporation,it must at least create superior customer value and it must be difficult to imitate.

Question 25

In analyzing the Cabot Corporation portfolio using the BDG matrix,the company decided to shift away from its core competence to unrelated areas of its business.The ensuing decline in assets indicated that it needed to return to its core competence in order to grow.

Question 26

One of the criteria for a core competence is that the different businesses in the corporation must be similar in at least one important way related to the core competence.

Question 27

Portfolio management matrices generally consist of two axes that reflect industry or market growth and the market share of a business.

Question 28

Diversified public corporations,such as Berkshire Hathaway and Virgin Group,create value through management expertise by improving plans and budgets.This is an example of a related diversification strategy.

Question 29

With unrelated diversification,potential benefits can be gained from vertical or hierarchical relationships; that is,the creation of synergies from the interaction of the corporate office with outside stakeholders.

Question 30

Loews Corporation,a conglomerate with 15 billion USD in revenues,competes across several industries including oil and gas,tobacco,watches,insurance,and hotels.Its related diversification strategy is to buy low and sell high as in the example where they bought six oil tankers for 5 million USD and then sold them eight years later for 50 million USD.

Question 31

Core competencies do not create value in a business.

Question 32

Portfolio management should be considered as the primary basis for formulating corporate-level strategies.

Question 33

It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.

Question 34

Portfolio models such as the BCG Portfolio matrix are limited in value because they only compare the SBU on four dimensions.

Question 35

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant,positive change.

Question 36

Sharing activities across business units can provide two primary benefits: cost savings and cost enhancements.

Question 37

Economies of scope in a related diversification strategy result from the leveraging of core competencies and the sharing of activities among businesses in the corporation such as production.

Question 38

The acquisition of two or more counter-cyclical businesses is an example of using diversification to reduce risk.

Question 39

Gillette developed the Fusion and Mach 3 shaving systems that created superior customer value as a result of the company core competency in research and development.

Question 40

Risk reduction by itself is usually a means to create shareholder value,regardless of the overall diversification strategy of the firm.

Question 41

Poison pills always are used to protect the best interests of management.

Question 42

An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

Question 43

Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

Question 44

An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

Question 45

Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America.This practice demonstrates managerial greed.

Question 46

Through joint ventures,firms can directly acquire the assets and competencies of other firms.

Question 47

Compared to mergers and acquisitions,firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

Question 48

In recent years,many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

Question 49

Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

Question 50

An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Question 51

A golden parachute is a prearranged contract with managers specifying that,in the event of a hostile takeover,the target company managers will be paid a significant severance package.

Question 52

Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

Question 53

The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

Question 54

Managerial behaviors that erode shareholder returns include egotism,antitakeover tactics and controlled growth.

Question 55

Greenmail is an offer by a company,threatened by takeover,to offer its stock at a reduced price to a third party.

Question 56

When Oracle launched a hostile bid for PeopleSoft in 2003,CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign.The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

Question 57

Zara,a Spanish clothing company,operates stores in over 70 countries.When entering markets very distant from its home markets,Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

Question 58

One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

Question 59

Antitakeover defenses are always a management ploy to protect their own self interests.

Question 60

Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

Question 61

Polaris,a manufacturer of snowmobiles,motorcycles,watercraft,and off-road vehicles,shares manufacturing operations across its businesses.It also has a corporate research and development facility and staff departments that support all of the Polaris operating divisions.This is an example of using

A) related diversification to acquire market value by leveraging core competencies.
B) related diversification to acquire economies of scope by sharing.
C) unrelated diversification to acquire financial synergies through portfolio management.
D) related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 62

If a multinational firm fails to effectively integrate their acquisitions,this can result in

A) cost savings.
B) divestiture.
C) expansion.
D) further acquisition.

Question 63

Many leading high-tech firms such as Google,Apple,and Intel have dramatically enhanced their revenues,profits,and market values through a wide variety of diversification initiatives.Which of the following is not such an initiative?

A) acquisitions
B) strategic alliances
C) stockholder enhancement
D) joint ventures

Question 64

Shaw Industries,a giant carpet manufacturer,increases its control over raw materials by producing much of its own polypropylene fiber,a key input to its manufacturing process.This is an example of using

A) related diversification to acquire market power by pooling negotiating power.
B) related diversification to acquire economies of scope by leveraging core competencies.
C) related diversification to acquire economies of scope by integrating vertically in order to acquire market power.
D) related diversification to acquire market power by integrating vertically.

Question 65

Casio,a giant electronic products producer,synthesizes it abilities in miniaturization,microprocessor design,material science,and ultrathin precision castings to produce digital watches.It uses the same skills to produce card calculators,digital cameras,and other small electronics.These collective skills are known as

A) core competencies.
B) strategic resources.
C) shared activities.
D) economies of scope.

Question 66

Diversification initiatives include all of the following except

A) mergers and acquisitions.
B) strategic alliances.
C) shareholder development.
D) joint ventures.

Question 67

Corporate-level strategy focuses on

A) gaining long-term revenue.
B) gaining short-term profits.
C) decreasing business locations.
D) managing investment bankers and their interests.

Question 68

At Cooper Industries,there are few similarities in the products it makes or the industries in which it completes.The corporate office adds value through such activities as superb human resource practices and budgeting systems.This is an example of using

A) related diversification to acquire economies of scope by leveraging pooled negotiating power.
B) related diversification to acquire market power by leveraging core competencies.
C) unrelated diversification to acquire financial synergies through portfolio management.
D) unrelated diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 69

ConAgra,a diversified food producer,increases its power over suppliers by centrally purchasing huge quantities of packaging materials for all of its food divisions.This is an example of using

A) related diversification to acquire economies of scope by leveraging pooled negotiating power.
B) related diversification to acquire market power by leveraging pooled negotiating power.
C) unrelated diversification to acquire financial synergies through portfolio management.
D) unrelated diversification to acquire parenting, restructuring, and financial synergies through restructuring and parenting.

Question 70

The Cisco acquisition of Pure Digital Technologies,the parent of the Flip video camera,failed because

A) Cisco had valuable competencies.
B) the Flip division of Cisco was slow and less responsive to market pressures.
C) consumers continued to purchase the camera.
D) Cisco had good vision of the market.

Question 71

If a multinational company's motive for the acquisition may have been to enhance executive powers and prestige rather than to improve shareholder return,this can lead to

A) divestiture.
B) cost savings.
C) expansion.
D) acquisition.

Question 72

Which of the following is not a reason for merger and acquisition failures?

A) The acquiring company pays a premium for the common stock of the target company.
B) Top executives act in their best interests rather than those of the shareholders.
C) The acquired company assets are poorly integrated into the acquiring company business lines.
D) The acquisition leads to value creation.

Question 73

If a multinational firm is unable to understand how the acquired company's assets would fit with their own lines of business,this can lead to

A) expansion.
B) divestiture.
C) cost savings.
D) acquisition.

Question 74

Proctor and Gamble is a large multinational organization that has many business sharing distribution resources.Diversification strategies take advantage of the __________ that exist in their organization.

A) costs
B) employees
C) synergies
D) discontinuities

Question 75

If a multinational firm paid too high a premium for the common stock of the company,this can lead to

A) expansion.
B) cost savings.
C) divestiture.
D) acquisition.

Question 76

An acquisition that results in ______________ indicates that expectations were not met.

A) expansion
B) divestiture
C) cost savings
D) increased sales

Question 77

Firms have several choices of diversification initiatives that can be used to create value.Which of the following is not one of them?

A) using related diversification to acquire economies of scope leveraging pooled negotiating power
B) using related diversification to acquire market power by leveraging core competencies
C) using unrelated diversification to acquire financial synergies through portfolio management
D) using related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting

Question 78

In 2012,Microsoft admitted to a major _________ mistake when it wrote off essentially the entire 6.2 billion USD it paid for a digital advertising firm,aQuantive,that it purchased in 2007.

A) expansion
B) divestiture
C) cost savings
D) acquisition

Question 79

Novartis,formerly Ciba-Geigy,uses portfolio management to improve many key activities,including resource allocation and reward and evaluation systems.This is an example of using

A) related diversification to achieve value by leveraging pooled negotiating power to attain economies of scope.
B) related diversification to acquire market power by leveraging pooled negotiating power.
C) unrelated diversification to acquire financial synergies through portfolio management.
D) related diversification to acquire parenting, restructuring, and financial synergies through corporate restructuring and parenting.

Question 80

One of the reasons it is said that only the investment banker wins when a company is acquired is that they

A) assure the newly acquired company will be successful.
B) continue to work with the two companies involved.
C) collect huge up-front fees regardless of the outcome afterwards.
D) monitor the progress of both companies for long term growth.