Deck 18: Mergers, Lbos, Divestitures, and Business Failure

Question 1

A takeover target's management will not support a proposed takeover due to a very high tender offer.

Answer 1

False

Question 2

A tender offer is a formal offer to purchase a given number of shares of a firm's stock at a specified price.

Answer 2

True

Question 3

A holding company is a corporation which is controlled by one or more other corporations.

Answer 3

False

Question 4

A merger transaction endorsed by a target firm's management, approved by its stockholders, and easily consummated is called a friendly merger.

Question 5

In the broadest sense, activities involving expansion or contraction of a firm's operations or changes in its assets or ownership structure are called corporate restructuring.

Question 6

Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.

Question 7

Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

Question 8

Subsidiary companies are corporations having no voting control on holding companies.

Question 9

A strategic merger is a merger transaction undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

Question 10

The companies controlled by a holding company are normally referred to as its subsidiaries.

Question 11

The overriding goal for merging is the maximization of the owners' wealth as reflected in the acquirer's share price.

Question 12

The synergy of mergers is the economies of scale resulting from the merged firm's lower overhead.

Question 13

Tax loss carryforward benefits can be used in mergers.

Question 14

A merger occurs when two or more firms are combined to form a completely new corporation.

Question 15

An acquisition of a "cash-rich" company immediately increases the acquiring firm's borrowing power by decreasing its financial leverage.

Question 16

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.

Question 17

A consolidated corporation has voting control of one or more other corporations.

Question 18

A financial merger is a merger transaction undertaken to achieve economies of scale.

Question 19

Holding companies are corporations that have voting control of one or more other corporations and the companies they control are referred to as subsidiaries.

Question 20

Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

Question 21

A combination of two or more companies that results in a firm maintaining the identity of one of the firms is ________.

A) amalgamation
B) consolidation
C) merger
D) a holding company

Question 22

Firms' motives to merge include growth or diversification, synergy, fund raising, tax considerations, and defense against takeover.

Question 23

A congeneric merger is a merger combining firms in unrelated businesses.

Question 24

A friendly merger is a ________.

A) merger in which the acquirer gains control of the target firm by buying sufficient shared through private placement
B) merger in which the acquirer can attempt to gain control of the target firm by buying sufficient shares of the target firm in the marketplace.
C) merger transaction that is endorsed by the target firm's management, approved by its stockholders, and easily consummated
D) merger in which the target firm's management acts to deter rather than facilitate the acquisition

Question 25

Business combinations are used by firms to externally expand in order to increase ________.

A) provision for doubtful accounts
B) common stock outstanding
C) production capacity
D) financial leverage

Question 26

A congeneric merger is a merger in which a firm acquires a supplier or a customer.

Question 27

A firm undertakes a merger in order to eliminate redundant functions or increase market share. This is an example of ________.

A) financial merger
B) divestiture
C) spin-off
D) strategic merger

Question 28

A horizontal merger is a merger in which one firm acquires another firm in the same general industry but neither in the same line of business nor a supplier or customer.

Question 29

The key benefit of a horizontal merger is its ability to reduce risk by merging firms that have different seasonal or cyclic patterns of sales and earnings.

Question 30

A corporation that has voting control of one or more other corporations is called a ________.

A) holding company
B) congeneric formation
C) subsidiary
D) target firm

Question 31

A conglomerate merger is a merger combining firms in unrelated businesses.

Question 32

A vertical merger may result in expansion of operations in an existing product line and elimination of a competitor.

Question 33

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a ________.

A) financial merger
B) hostile takeover
C) divestiture
D) strategic merger

Question 34

Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.

Question 35

A combination of companies where the former corporations cease to exist is ________.

A) a congeneric formation
B) a consolidation
C) a merger
D) a holding company

Question 36

A vertical merger is a merger of two firms in the same line of business.

Question 37

A merger transaction is not supported by the target firm's management, forcing the acquiring company to try to gain control of the firm by buying shares in the marketplace. This is an example of ________.

A) financial merger
B) hostile takeover
C) congeneric formation
D) strategic merger

Question 38

A firm in a merger transaction that attempts to merge or takeover another company is called the ________.

A) target company
B) holding company
C) acquiring company
D) consolidated company

Question 39

The combination of two or more companies to form a completely new corporation is a ________.

A) congeneric formation
B) consolidation
C) spin-off
D) conglomerate merger

Question 40

A firm in a merger transaction that is being pursued as a takeover potential is called the ________.

A) acquiring company
B) target company
C) holding company
D) consolidated company

Question 41

The combination of two or more companies that results in one of the corporations having a voting control of one or more of the other companies is a ________.

A) congeneric formation
B) consolidation
C) spin-off
D) holding company

Question 42

An attempt to gain control of a target firm by buying sufficient shares of it in the marketplace is known as a ________ and is typically accomplished through a ________.

A) friendly takeover; leveraged buyout
B) leveraged buyout; consolidation
C) friendly takeover; consolidation
D) hostile takeover; tender offer

Question 43

A financial merger is undertaken to ________.

A) increase profit margin to enhance the retained earnings of the merged firm
B) improve raw material sourcing and finished product distribution
C) increase market share, which is used to maximize shareholder wealth
D) increase cash flows to service the debt incurred to finance the merger

Question 44

A(n) ________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

A) operating merger
B) strategic merger
C) financial merger
D) hostile takeover

Question 45

A hostile merger is accomplished through ________.

A) a cash purchase of stock
B) leveraged buyouts
C) a tender offer
D) divestitures

Question 46

Which of the following is a reason for undertaking mergers?

A) increasing dividends
B) profit maximization
C) easy process
D) wealth maximization

Question 47

The overriding goal for merging is to ________.

A) develop monopoly control over the markets
B) maximize shareholders' wealth as reflected in the acquirer's share price
C) maximize shareholders' profit as reflected in the share price of the target firm
D) maximize dividend payout ratio

Question 48

The acquisition of a "cash-rich" company allows the acquiring company ________.

A) to reap greater tax benefits
B) to reduce leverage and to increase borrowing power
C) to develop monopoly control over the markets
D) to achieve economies of scale in some phase of the business

Question 49

Motive for merging includes ________.

A) increased financial leverage
B) increased common stock outstanding
C) increased provision for doubtful accounts
D) increased liquidity

Question 50

One of the key motives for mergers is ________.

A) reducing the marginal tax rate
B) taking advantage of the other firm's tax loss carryforward
C) to sell the assets of the target company to increase the cash balance
D) increasing additional recaptured depreciation

Question 51

A merger involving the purchase of a specific product line, rather than the whole company is ________.

A) an operating merger
B) a financial merger
C) a selective lines merger
D) a variation of the strategic merger

Question 52

A ________ occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm.

A) financial merger
B) hostile takeover
C) operating merger
D) strategic merger

Question 53

Which of the following is true of a conglomerate merger?

A) It occurs when a firm acquires a supplier or a customer.
B) It involves the combination of firms in unrelated businesses.
C) It is achieved by acquiring a firm that is in the same general industry but neither in the same line of business nor a supplier or customer.
D) It results in the expansion of a firm's operations in a given product line and at the same time eliminates a competitor.

Question 54

The combination of a dress manufacturer and a credit bureau is an example of ________.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 55

A ________ results from the combination of firms in the same line of business.

A) congeneric merger
B) conglomerate diversification
C) horizontal merger
D) hostile takeover

Question 56

A major impetus fueling financial mergers during the 1980s was ________.

A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing

Question 57

Which of the following is a reason for mergers?

A) to reduce common stock outstanding
B) to gain monopoly control over the markets
C) to decrease the level of provision for doubtful accounts
D) to gain increased managerial skills

Question 58

Which of the following is true of a horizontal merger?

A) The key benefit of this merger stems from the merged firm's increased control over the acquisition of raw materials or the distribution of finished goods.
B) The key benefit of this form of merger is its ability to reduce risk by merging firms that have different patterns of sales and earnings.
C) This form of merger results when two firms in the same line of business are merged.
D) This form of merger occurs when a firm acquires a supplier or a customer.

Question 59

A ________ is when a firm acquires a supplier or a customer.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 60

A friendly merger transaction ________.

A) is a transaction in which merger is completed by forceful acquisition of the target's shares from the secondary market
B) requires a public announcement for its plan of acquisition
C) can be consummated through an exchange of the acquirer's stock and cash
D) can only be completed by purchasing all the outstanding bonds of the target firm

Question 61

LBOs are an example of a financial merger undertaken to create a high-debt private corporation with improved cash flow and value.

Question 62

In an LBO, 90 percent or more of the purchase price is financed with debt.

Question 63

An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of debt and a low level of "bankable" assets.

Question 64

The selling of some of a firm's assets for various strategic motives is called divestiture.

Question 65

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of liquid assets.

Question 66

The motive for divestiture is often to get rid of a poorly performing operation in order to generate cash for expansion of other product lines.

Question 67

A spin-off is a form of divestiture in which an operating unit becomes an independent company by issuing shares in it, on a pro rata basis to the parent company's shareholders.

Question 68

The ability to use the same sales and distribution channels to reach customers of both businesses is a benefit of ________.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 69

One of the key attributes that makes a firm a good candidate for an LBO is that it has a solid position in the industry with reasonable expectations for future growth.

Question 70

An attractive candidate for acquisition through leveraged buyout must have a good position in its industry with a solid profit history and reasonable expectation for growth.

Question 71

A ________ may result in the expansion of a firm's operations in an existing product line and elimination of a competitor.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 72

The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.

Question 73

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively low level of debt and a high level of liquid assets that could be used as loan collateral.

Question 74

Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm's relatively high debt levels.

Question 75

Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives in a manner that is consistent with the firm's strategic goals.

Question 76

A merger of a paper manufacturer and a logging company is an example of ________.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 77

The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns of sales or earnings is a key benefit of ________.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 78

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of a ________.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger

Question 79

One of the key attributes that makes a firm a good candidate for an LBO is that it has stable and predictable cash flows that are adequate to meet interest and principal payments on the debt.

Question 80

A ________ is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.

A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger