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

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

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 12

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

Question 13

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

Question 14

An operating merger 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.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

________ involves the combination of firms in unrelated businesses.

A) Congeneric merger
B) Conglomerate merger
C) Horizontal merger
D) Vertical merger

Question 22

The 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) conglomerate.

Question 23

The 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) conglomerate.

Question 24

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and acquiring new upper-level management personnel.

Question 25

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 26

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 maneuvering.

Question 27

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

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

Question 28

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) merger.
D) holding company.

Question 29

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 30

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

Question 31

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 32

Business combinations are used by firms to externally expand in order to achieve all of the following objectives EXCEPT

A) to increase productive capacity.
B) to increase liquidity.
C) to increase common stock outstanding.
D) to acquire needed assets.

Question 33

The tax loss carryforward benefits can be used in mergers but cannot be used in the formation of holding companies.

Question 34

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

A) Congeneric growth
B) Conglomerate diversification
C) Horizontal growth
D) Vertical growth

Question 35

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

Question 36

Subsidiary companies simply are corporations that have voting control of one or more other corporations and the companies they control are often referred to as holding companies.

Question 37

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 38

The combination of two or more companies that results in the firm maintaining the identity of one of the firms is

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

Question 39

________ results when a firm acquires a supplier or a customer.

A) Congeneric merger
B) Conglomerate merger
C) Horizontal merger
D) Vertical merger

Question 40

Common forms of business combination include all of the following EXCEPT

A) congeneric formation.
B) consolidations.
C) mergers.
D) holding companies.

Question 41

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 42

When a firm undertakes a merger in order to eliminate redundant functions or increase market share, this is an example of

A) financial merger.
B) hostile takeover.
C) friendly merger.
D) strategic merger.

Question 43

When a merger transaction is endorsed by the target firm's management, approved by its shareholders, and easily consummated, this is an example of

A) financial merger.
B) hostile takeover.
C) friendly merger.
D) strategic merger.

Question 44

A hostile merger is typically accomplished through

A) a cash purchase.
B) an exchange of the acquirer's stock.
C) a tender offer.
D) an exchange of the acquirer's stocks and bonds.

Question 45

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 46

Typically, reasons for undertaking mergers are

A) only financial.
B) only strategic.
C) strategic or financial.
D) in conflict with wealth maximization.

Question 47

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 48

Generally, a combination of two firms of unequal size is called

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

Question 49

One of the key motives for combinations is the tax benefit of

A) reducing the marginal tax rate.
B) taking advantage of the other firm's tax loss carryforward.
C) using capital gains.
D) increasing additional recaptured depreciation.

Question 50

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 51

________ 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

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

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

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

Question 54

Most firms seeking merger partners will hire the services of

A) a commercial banker.
B) an investment broker.
C) a private contractor.
D) an investment banker.

Question 55

When 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) friendly merger.
D) strategic merger.

Question 56

________ may result in expansion of operations in an existing product line and elimination of a competitor.

A) Congeneric merger
B) Conglomerate merger
C) Horizontal merger
D) Vertical merger

Question 57

A friendly merger transaction is typically consummated through all of the following EXCEPT

A) a cash purchase.
B) an exchange of the acquirer's stock.
C) a tender offer.
D) an exchange of the acquirer's stock and bonds.

Question 58

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) friendly merger.
D) strategic merger.

Question 59

All of the following are reasons for mergers EXCEPT

A) increasing managerial skills.
B) tax considerations.
C) synergism.
D) monopoly control of the markets.

Question 60

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 61

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

Question 62

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 relatively liquid assets that could be used as loan collateral.

Question 63

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 64

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, the donation of a unit to a charity, and the liquidation of assets.

Question 65

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 66

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 relatively liquid assets that could be used as loan collateral.

Question 67

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 68

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

Question 69

A financial merger is undertaken to increase

A) operating efficiency, which is used to increase cash flows.
B) cash flows, which are used to increase dividends to shareholders.
C) market share, which is used to maximize shareholder wealth.
D) cash flows, which are used to service the debt typically incurred to finance the merger transaction.

Question 70

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

Question 71

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, spin-offs, and the liquidation of assets.

Question 72

It is not unusual for acquirers in LBOs to be members of the firm's existing management team.

Question 73

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 74

Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives such as to generate cash for the expansion of product lines, to get rid of poorly performing operations, to streamline the company, or to restructure the business that is consistent with the firm's strategic goals.

Question 75

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

A) friendly takeover; tender offer
B) hostile takeover; merger
C) friendly takeover; merger
D) hostile takeover; tender offer

Question 76

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

Question 77

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

Question 78

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 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 and provide adequate working capital.

Question 80

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.