Deck 20: External Growth Through Mergers

Question 1

The stock market reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business, or if it seems to sharpen the company's focus.

Answer 1

True

Question 2

A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Answer 2

True

Question 3

In a merger, two or more companies are combined to form an entirely new entity.

Answer 3

False

Question 4

The desire to expand management and marketing capabilities is a direct financial motive.

Question 5

The potential of a tax loss carryforward has no effect when considering the acquisition of a company.

Question 6

While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company.

Question 7

Antitrust policy can preclude the acquisition of a competitor.

Question 8

Synergy is said to take place when the whole is less than the sum of the parts.

Question 9

Selling stockholders are often anxious to sell because of the potential of higher profits.

Question 10

Vertical integration is usually prohibited or severely restricted by government antitrust regulations.

Question 11

Synergy is the greatest and most easily measured nonfinancial benefit in a merger.

Question 12

Most mergers are horizontal in nature in order to avoid the potential antitrust complications involved with the elimination of competition.

Question 13

Vertical integration represents acquisition of a competitor.

Question 14

One potential advantage of a merger to the acquiring firm is the Portfolio Effect which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.

Question 15

In a horizontal merger, the integration that occurs comes from acquiring companies that supply resources to the company's production process.

Question 16

Risk averse investors may discount the future earnings of the merged firm at a higher rate if they move in different directions during business cycles.

Question 17

Mergers often improve the financing flexibility that a larger company has available.

Question 18

Too much diversification has led many companies to sell off companies previously acquired during the merger boom.

Question 19

A tax loss carryforward is a benefit to the acquired firm's shareholders.

Question 20

The portfolio effect of a merger is greatest for the selling stockholders.

Question 21

After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.

Question 22

Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate.

Question 23

Although corporate managers have a responsibility to act in shareholders' best interest, management frequently opposes acquisitions due to personal motives.

Question 24

"Poison pills" are strategies which reduce the value of a firm if it is taken over by a corporate raider.

Question 25

Selling stockholders may receive a price well above current market or book value.

Question 26

Existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market.

Question 27

A Tender Offer describes the attempted purchase of a firm with the consent of that firm's management.

Question 28

The earnings per share impact of a merger is influenced by relative price-earnings ratios and the terms of exchange.

Question 29

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

Question 30

Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

Question 31

The two step buy-out procedure induces stockholders to delay their reaction to the offer, since they will receive a higher price later.

Question 32

A takeover tender offer lets a company attempt to acquire a target firm against its will.

Question 33

The two step buy-out procedure allows the acquiring firm to pay a lower total price than if a single offer is made.

Question 34

If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm, the surviving firm will automatically get an increase in
E.P.S.

Question 35

A cash purchase is similar to a capital budgeting decision.

Question 36

By using cash instead of stock, a company may diminish the perceived dilutive effects of a merger.

Question 37

Leveraged Takeovers occur to firms that have an unusually large cash/total assets position.

Question 38

For mergers occurring after 2001, goodwill must be amortized over 40 years or less.

Question 39

Leveraged buyouts are restricted to "outside" tender offers.

Question 40

A motive for selling stockholders may be the bias against smaller companies.

Question 41

A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a

A) consolidation.
B) holding company.
C) conglomerate.
D) merger.

Question 42

Multinational mergers provide economic and political diversification which can lead to a higher cost of capital for the new firm.

Question 43

When a tobacco firm merges with a steel company, it would be called

A) a horizontal merger.
B) a vertical merger.
C) a conglomerate merger.
D) a consolidation.

Question 44

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as

A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.

Question 45

Synergy is

A) the 2 + 2 = 3 effect.
B) the 2 + 2 = 4 effect.
C) the 2 + 2 = 5 effect.
D) always present in a merger.

Question 46

The direct financial motives for merger activity include all of following EXCEPT

A) the portfolio effect.
B) improved financial posture and greater debt.
C) the utilization of tax loss carryforwards.
D) vertical integration.

Question 47

The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a nondiscounted basis) the sum of ______________ for the carryforward alone.

A) $108,000
B) $52,000
C) $63,000
D) $1,200,000

Question 48

Selling stockholders who are offered cash or another company's stock in a merger may be willing to part with the shares they hold because

A) the offered shares may be more marketable.
B) the price they are offered for their shares may be above market value.
C) they can attain a greater degree of diversification as a result.
D) all of these

Question 49

Which of the following is not a potential benefit of a merger?

A) Improved Financing Posture
B) Portfolio Effect
C) Dilution of Earnings Per Share
D) Tax Loss Carryforward

Question 50

Which of the following types of mergers is most likely to lead to diversification benefits?

A) Horizontal merger
B) Vertical merger
C) Tax free exchange
D) Conglomerate

Question 51

Which of the following type of merger decreases competition?

A) Horizontal merger
B) Vertical merger
C) Cash purchase
D) Stock-for-stock exchange

Question 52

Synergy is said to occur when the whole is

A) equal to the sum of the parts.
B) less than the sum of the parts.
C) greater than the sum of the parts.
D) greater than or equal to the sum of the parts.

Question 53

It is possible to merge with a company which results in the same earnings per share but still lowers the new firm's cost of capital.

Question 54

Which of the following is not a motive for selling by the stockholder's of the acquired company?

A) Opportunity to diversify
B) Tax advantage
C) Attractive price
D) Avoid bias against smaller businesses

Question 55

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

Question 56

The rising ratio of divestitures to new acquisitions which occurred in the past suggests that

A) poison pills are no longer effective as a defense against takeovers.
B) too much diversification strained the operating capabilities of many firms.
C) the portfolio effect has been a highly successful method of reducing risk.
D) multinational firms are increasingly considered highly risky investments.

Question 57

In planning mergers, there is a tendency to _____ synergistic benefits.

A) overestimate
B) underestimate
C) correctly estimate
D) not estimate

Question 58

Which of the following is not a financial motive but rather an operating motive for merger and consolidation?

A) The portfolio diversification effect
B) Tax-loss carryforward
C) Greater financing capability
D) Synergy

Question 59

One of the reasons that companies merge with other companies is to secure access to a competing industry.

Question 60

An example of a horizontal merger would be

A) Pepsi and Sears.
B) McDonalds and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca Cola and Dr. Pepper.

Question 61

The price that a company has to pay to purchase another firm is usually

A) the book value.
B) the market value.
C) some premium over current market value.
D) some discount of current market value.

Question 62

White Knights

A) advise companies on ways to avoid being taken over.
B) offer a higher purchase price and more friendly offer in the event of an unsolicited and unfriendly takeover attempt.
C) attempt to make money in the stock market on stocks that are likely merger candidates.
D) buy depressed stock of quality companies when merger talks are discontinued.

Question 63

All of the following are methods of avoiding takeovers except:

A) increasing the firm's cash level
B) moving corporate offices to advantageous states
C) staggering election of boards of directors
D) buying back shares

Question 64

In regard to two step buyouts,

A) the SEC highly approves of them.
B) the FTC highly approves of them.
C) the SEC is keeping a close eye on them.
D) the FTC is keeping a close eye on them.

Question 65

All of the following are potential challenges or downsides to mergers except:

A) anti-trust laws
B) dilution
C) firm valuation
D) synergies

Question 66

Which of the following terms is not specifically related to an unfriendly buyout?

A) Takeover tender offer.
B) White knight.
C) Saturday night special.
D) Synergy.

Question 67

Dilution in earnings per share occurs when a company with

A) a high P/E ratio buys a company with a low P/E ratio.
B) a low P/E ratio buys a company with a high P/E ratio.
C) a high growth rate in earnings per share buys a company with a low growth rate in earnings per share.
D) a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.

Question 68

Which of the following is a tender offer that utilizes borrowed funds and the acquired firm's assets as collateral?

A) Unfriendly take-over
B) Divestiture
C) Two-step buy-out
D) Leveraged buy-out

Question 69

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis, Aardvark should

A) not purchase Zebra Computer Services.
B) purchase Zebra Computer Services.
C) purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
D) purchase Zebra only if Aardvark's cost of capital is above 10%.

Question 70

Under a two step buy-out procedure

A) shareholders receive a higher total price than if a single offer is made.
B) the second offer is at a higher price per share.
C) shareholders are encouraged to react quickly to the offer.
D) two of the above are correct.

Question 71

The portfolio effect in a merger has to do with

A) increasing EPS.
B) reducing risk.
C) creating tax advantages.
D) writing off goodwill.

Question 72

The Prad Corporation is considering a merger with the Stone Company which has 500,000 outstanding shares selling for $30. An investment banker has advised that to succeed in its merger Prad Corp. would have to offer $45 per share for Stone's stock. Prad Corp. stock is selling for $25. How many shares of Prad Corp. stock would have to be exchanged to acquire all of Stone's stock?

A) 266,667
B) 600,000
C) 900,000
D) none of these

Question 73

The two step buy-out is a recent merger ploy that has which of the following characteristics?

A) It is negotiated in a social, rather than a business setting.
B) The acquiring firm offers to pay a very high price for the target company's stock, and a short time later announces another price which may be higher or lower.
C) The acquiring firm offers to pay a very high price for the target company's stock for a limited time only, after which it will pay a considerably lower price.
D) It forces stockholders to sell out.

Question 74

Which of the following is not a form of compensation that selling stockholders could receive?

A) Stock
B) Cash
C) Stock Options
D) Fixed Income Securities

Question 75

Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 1,500,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28 per share. The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $31.00 per share.
Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.
a) What is the total cost of the two-step buyout?
b) What is the total cost of the single step proposal?
c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Question 76

The typical merger premium is

A) 0-20%
B) 40%
C) 40-60%
D) 60-80%

Question 77

The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $175,000 in after-tax cash flow (after-tax income plus depreciation) each year for the next 20 years. In addition, Roanoke has a $400,000 tax loss carryforward which King Solomon Mining can use over the next two years ($200,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the cash price it should be willing to pay to acquire Roanoke based solely on it's cash-flow benefit over the next 20 years?

Question 78

Under SFAS 141 and 142, the following occurred

A) goodwill is now amortized
B) at least 4 times per year, goodwill must be tested to determine if impaired
C) allowed a one time write-down of all past goodwill impairment
D) created pooling of interests accounting