Deck 20: External Growth Through Mergers

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

U.S. is different from other countries in regards to what is considered taxable income. If income is earned overseas, the company still has to pay tax to the U.S. government regardless if the income has already been charged tax in another country.

Answer 3

True

Question 4

An example of horizontal integration is if Macy's and JC Penney were to merge.

Question 5

The stock market's 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.

Question 6

The 2017 Tax Cuts and Jobs Act has put US companies on the same footing as foreign competitors and eliminates the need for inversions, meaning US companies no longer need to keep foreign earnings abroad to avoid paying US taxes when they bring the cash back to the US.

Question 7

Vertical integration usually represents acquisition of a competitor.

Question 8

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

Question 9

Synergy is said to take place when the merged companies are greater than the individual companies working separately.

Question 10

The 2017 Tax Cuts and Jobs Act created a territorial tax system where taxes are accrued in the country where the income is earned.

Question 11

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

Question 12

Antitrust policy can preclude the acquisition of a competitor.

Question 13

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 14

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Question 15

One motivation to merge is through tax savings.

Question 16

Synergy effect is said to happen when the merged companies are able to work together and eliminate some of the repeated divisional tasks, proving that the company is better off being merged.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

For mergers occurring after 2001, goodwill is valued and placed on the balance sheet as an asset and impairment is the only way to devalue it.

Question 25

If the purchasing firm's price earnings ratio is greater than the acquired firm's price earnings, the surviving firm will automatically get an increase in earnings per share.

Question 26

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

Question 27

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

Question 28

A cash purchase of one company by another is similar to a capital budgeting decision.

Question 29

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

Question 30

The 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 price.

Question 31

A "takeover tender offer" describes the attempted purchase of a firm with the consent of that firm's management.

Question 32

If an acquiring firm's merger proposal was 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 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Goodwill is created when the purchasing firm pays more than what the acquired firm is worth.

Question 39

Following a merger, the change in the risk profile of the merged companies may influence the price earnings ratio just as much as the change in the overall growth rate.

Question 40

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

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

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

A) A horizontal merger
B) A vertical merger
C) A tax-free exchange
D) A conglomerate merger

Question 43

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

A) The portfolio effect
B) An improved financial posture and greater debt
C) The utilization of tax loss carryforwards
D) Vertical integration

Question 44

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

Question 45

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

Question 46

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

Question 47

Synergy is said to occur when the merged company is

A) able to eliminate divisions that were doing the same tasks.
B) able to combine the marketing efforts of all merged companies.
C) able to get the employees from all merged companies to work towards one company goal.
D) all of the answers are correct.

Question 48

The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring Shirt Company, a firm in the 21% tax bracket, would be willing to pay (on a non-discounted basis) the sum of ________ for Celluloid Collar Corporation's carryforward alone.

A) $108,000
B) $52,000
C) $44,100
D) $700,000

Question 49

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

Question 50

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 51

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

Question 52

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

Question 53

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

Question 54

The rising ratio of divestitures to new acquisitions that 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 high risk investments.

Question 55

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 56

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

Question 57

Leveraged buyouts are restricted to "outside" tender offers.

Question 58

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 59

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

A) An improved financing posture
B) A portfolio effect
C) Dilution of earnings per share
D) A tax loss carryforward

Question 60

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

Question 61

The two-step buyout 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 that 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 lower price.
D) It forces stockholders to sell out.

Question 62

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 the current market value.
D) some discount of the current market value.

Question 63

The typical merger premium is ________.

A) 0-20%
B) 40%
C) 40-60%
D) 80-100%

Question 64

An example of a horizontal merger would be

A) Pepsi and Sears.
B) McDonald's and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca-Cola and Dr Pepper.

Question 65

Which of the following is NOT a motive for stockholders of the acquired company to sell?

A) The opportunity to diversify
B) Gaining a tax advantage
C) An attractive price
D) Avoiding bias against smaller businesses

Question 66

Which of the following types of mergers goes against the antitrust policy?

A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange

Question 67

Nonfinancial motives for mergers include

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

Question 68

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

A) Active Corp. will have an immediate increase in EPS.
B) Active Corp. will have an immediate decrease in EPS.
C) Active Corp. will have an immediate increase in the growth rate of EPS.
D) Active Corp. will have an immediate decrease in the P/E ratio.

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 facts provided, 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

Which of the following is NOT a financial motive, but rather an operating motive for mergers and consolidations?

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

Question 71

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 72

White knights

A) advise companies on ways to avoid being taken over.
B) offer a higher purchase price and "friendlier 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 73

The Prada 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, Prada Corp. would have to offer $45 per share for Stone's stock. Currently, Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to acquire all of Stone Company's stock?

A) 266,667
B) 600,000
C) 900,000
D) 20,000

Question 74

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

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

Question 75

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 76

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 77

Earnings per share of the purchasing firm usually goes in which direction during a merger?

A) EPS will increase immediately if the purchased firm has a lower P/E ratio.
B) EPS will decrease immediately if the purchased firm has a lower P/E ratio.
C) EPS is not affected by the merger.
D) EPS will increase in the future if the purchased firm is less aggressive.

Question 78

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

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

Question 79

Which of the following types of mergers decreases competition?

A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange

Question 80

The portfolio effect in a merger has to do with

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