Deck 14: External Growth Strategies: Mergers, Acquisitions, and Alliances

Question 1

Hewlett-Packard's disastrous acquisition of the software and services company,Autonomy,points to the problem that the acquirer has much less information about the company than the seller.An additional problem of the Autonomy acquisition is that acquisitions that are intended to change the acquirer's business model are riskier than acquisitions that seek to leverage the existing business model.

Answer 1

True

Question 2

In the case of cross-border amalgamations of companies,concerns of national domination often mean that mergers are preferred to acquisitions.

Answer 2

True

Question 3

Strategic alliances are only stable if they are reinforced by equity ownership between the partners.

Answer 3

False

Question 4

The forces that gave rise the created the industrial districts of Italy are essentially the same as those that have caused clustering of film production companies in Hollywood and electronics and IT companies in Silicon Valley.

Question 5

Mergers and acquisitions are attractive to the managers who instigate them because of the speed with which they can effect strategic changes rather than their proven financial benefits.

Question 6

In order to gain a new organizational capability,it is usually cheaper and less risky to acquire a company that already possesses that capability than to develop that capability internally.

Question 7

Cross-border acquisitions tend to have the strongest strategic logic but give rise to the greatest challenges of post-merger integration.

Question 8

In most cases,the primary goal of a strategic alliance is to acquire that than simply to access the partner's organizational capabilities.

Question 9

Mergers and acquisitions represent paradoxes in the sense that:

A)The stock market remains suspicious of them,despite widespread evidence of their effectives as tools of corporate strategy
B)Companies continue to be enthusiastic in initiating acquisitions despite empirical evidence that,on average,acquisitions destroy shareholder value for acquirers
C)The CEOs who initiate them are lauded by the business media,despite the suspicious that they are vehicles for CEO testosterone-fueled hubris
D)They are often initiated by companies that profess a stakeholder orientation despite the fact that it is investment bankers who are the main beneficiaries,while consumers and employees are the main losers

Question 10

The main reason that multinational corporations choose t enter emerging markets by means of a joint venture with a local partner is usually the desire t share risk rather than the need to access local knowledge and distribution channels.

Question 11

An important lesson from the troubled development of Boeing's 787 Dreamliner is that,for developing complex,technically-advanced products,the hub firm needs to have the capability to manage networks of strategic alliances.

Question 12

The "lemons problem" in the market for companies refers to the fact that the sellers of companies have better information about the company than do would-be buyers.

Question 13

The main parallel between the merger boom in the US at the end of the 19^th century and the recent merger boom in the chemicals,beer,food,media and communications,and pharmaceutical industries is that both involves horizontal mergers and resulted in the creation of market-dominating companies:

Question 14

Mergers and acquisitions go in waves.Because acquirers prefer to pay low prices for acquired companies,these M&A waves tend to be inversely correlated with stock market fluctuations.

Question 15

Issues of pre-acquisition planning and post-acquisition management should be viewed as separate: activities best led by separate teams.

Question 16

Mergers,acquisitions,and alliances may be viewed not just as instruments of corporate strategy but as strategies in themselves.

Question 17

In Capron and Mitchell's decision framework for selecting the right growth path,if a firm finds that its resources and capabilities do not fit with its current strategy,then acquisition should be first option considered and internal development the last option.

Question 18

Identifying the strategic rationale and likely benefits of mergers and acquisitions is easier in the case of diversifying mergers and acquisitions than for horizontal mergers and acquisitions.

Question 19

Internal business ventures rather than external mergers,acquisitions and alliances are the preferred means by which most established firms achieve major extensions in the scope of their activities.

Question 20

The key difference between a merger and an acquisition is that,in the case of a merger,the participating companies combine to create a new company.

Question 21

Most of the biggest mergers and acquisitions since 2000 have been horizontal-i.e.between companies in the same industry.This reflects the fact that:

A)Antitrust authorities have been more concerned with vertical than horizontal mergers and acquisitions
B)By showing that diversification does not offer significant risk-spreading benefits,modern financial theory has undermined the attractions of diversifying mergers and acquisitions
C)Horizontal mergers and acquisitions offer the greatest potential for value creation through cost reduction and moderating competition
D)CEOs favor horizontal mergers and acquisitions because of their desire to eliminate rivals.

Question 22

Acquiring companies typically pay between 20% and 40% more than the pre-bid market capitalization to acquire target companies.The main reason for this sizable acquisition premium is:

A)To gain acceptance of the bid by the majority of a target company's shareholders,acquirers must pay a significant premium over the target company's stock market valuation
B)Information asymmetry: acquiring companies knows less about the true value of target companies than do these companies themselves
C)Excessive optimism causes acquirers to overvalue their acquisition targets
D)Investment bankers typically mislead the9r clients in their company valuations in an effort to boost their fees

Question 23

The main reason that a strategic alliance is often an attractive alternative to a merger or acquisition is:

A)Alliances avoid government restrictions relating to antitrust and foreign direct investment
B)Alliances permit firms to access one another's resources and capabilities without the costs and risks of a merger or acquisition
C)Alliances allow a firm to create growth options
D)Alliances allow risk sharing in giant projects.

Question 24

The tendency for M&A activity is highly cyclical,with a heavy clustering in specific sectors reflects:

A)General economic conditions
B)Changing monetary conditions including interest rates and quantitative easing
C)Imitative behavior among companies
D)Excessive liquidity on company balance sheets

Question 25

The fact that acquisitions impose substantial costs on acquiring firms (including both the acquisition premium and legal and advisory fees)implies that:

A)Acquirers need to be sure that potential of the acquisition to create value exceeds the costs of incurred by the acquisition
B)Acquisitions tend to be in the interests of managers but contrary to the interests of shareholders
C)Small acquisitions to be preferred to large acquisitions
D)Boards of directors should be more active in opposing acquisition proposals.

Question 26

For acquiring firms,empirical studies show that,on average,the returns to shareholders are:

A)Slightly positive
B)Slightly negative
C)Insignificant from zero
D)Too varied to generalize.

Question 27

The continuing popularity of mergers and acquisitions among companies despite the lack of empirical evidence of their benefits suggests:

A)Many mergers and acquisitions are motivated by growth rather than profitability
B)Mergers and acquisitions by the leading firms in an industry promotes imitation by other firms in the industry
C)Both (a)and (b)
D)Both (a)and (b)plus the fact that most investment analysts view takeovers as a sign of a dynamically-managed company.

Question 28

A major motive for the acquisition of pubic companies by private equity companies is:

A)To remove incompetent senior management teams
B)To create value through increasing financial leverage
C)To stimulate innovation
D)Reduce risk

Question 29

Acquisition is the preferred mode of diversification for most firms because:

A)For companies with high price/earnings ratios,acquiring companies in other sectors that have low price/earnings ratios offers an attractive means of boosting market capitalization
B)Empirical research shows that diversifying acquisitions typically create significant value for the acquiring firm
C)The alternative of acquiring a minority stake does not give the diversifying firms significant decision-making influence over the target firm
D)The alternative of setting up a new enterprise in the industry to be entered is slow and risky.

Question 30

In technology-based industries,the most common reason for established companies to acquire small,start-up firms is in order to:

A)Preempt competitive attacks from potential rivals
B)Acquire capabilities in emerging areas of technology
C)Boost revenue growth as their own core businesses experience slower growth
D)Recruit the entrepreneurial leaders of stat-up companies in order to revitalize their own managerial ranks.

Question 31

Reckitt Benckiser's multiple acquisitions of consumer products companies has been motivated by its quest for:

A)Restructuring opportunities
B)International diversification
C)Building a portfolio of consumer brands
D)Scale economies in production and marketing.

Question 32

Studies that compare post-merger accounting profitability with the pre-merger accounting profitability of the companies involved show little consistency.This is because: it to the companies' performance prior to merging.The problem here is separating
The effects of the merger from the multitude of other factors that influence
Companies' performance over time.returns fails to provide conclusive evidence on the performance outcomes of mergers and acquisition is that:

A)The identification problem: it is difficult to distinguish the effects of mergers from the many other factors that influence profitability
B)The effects of mergers on profitability are diverse
C)Both (a)and (b)
D)Neither (a)nor (b)-we do not know why studies of the effects of mergers on firm performance have been s inconclusive

Question 33

Which are the following statements about pre-merger planning is untrue?

A)It is easier to predict the outcomes of horizontal M&A than other types of M&A
B)In the case of horizontal M&A,it is easier to predict the impact on revenues than the impact on costs
C)The outcomes of a hostile acquisition are more difficult to predict than the outcomes of a friendly acquisition
D)Acquisitions that are directed towards a firm reinventing its business model should be regarded as riskier than those which leverage its existing business model.

Question 34

Which of the following was not a contributory factor to the success of Disney's post-acquisition integration of Pixar?

A)Personal and professional respect among key personnel at the two companies
B)Disney's rapid integration of Pixar within its own animated productions unit
C)Protection of Pixar's creative culture and employment arrangements
D)Maintaining the support of Pixar's president by making him head of Disney's combined animated productions unit.

Question 35

Strategic alliances frequently play an important role in a firm's internationalization strategy because:

A)Alliances offer a means of sharing the high risks involved in international expansion
B)Internationalizing firms often lack the local knowledge and access to distribution channels that a local partner can provide
C)Alliances offer greater security than a wholly-owned subsidiary
D)Alliances offer greater flexibility than alternative internationalization modes.

Question 36

What distinguishes a joint venture from other types of strategic alliance is that in a joint venture:

A)The partners hold equity stakes in one another
B)The partners combine their top management teams
C)The partners create a new company which they jointly own
D)The partners are from different countries.

Question 37

The transformations of:
• Interbrew into Anheuser-Busch Inbev,the world's biggest beer company,
• North Carolina National Bank into Bank of America Corporation,the #2 bank in the US
• Comcast into the world's biggest media company
Are evidence of:

A)The opportunities that the turbulent world offers to ambitious corporate leaders
B)The capacity of mergers and acquisition to effect major strategic transformations within a short time
C)The critical importance of timing when using mergers and acquisitions to initiate major strategic transformations
D)The need for antitrust policy to concentrate upon preventing the emergence of dominant firms,not on regulating their behavior once they have been created

Question 38

For companies that are seeking to augment their own resource and capability base with those of another company,the choice between acquisition and strategic alliance rests primarily upon:

A)How close a relationship is necessary in order to gain use f the desired resource of capability
B)Whether or not the companies are located in different countries
C)Whether the companies involved are listed or privately held
D)Whether the desired resource or capability is tradable