Deck 20: Mergers and Acquisitions

Question 1

Greenmail is a takeover defence in which:

A)a friendly investor helps to avoid a hostile takeover by buying the majority of shares of the target firm.
B)the target firm issues a charter that prevents individuals with more than 10% ownership of convertible securities to convert into equity.
C)the target firm issues rights or securities to its shareholders,giving them valuable benefits in the event that a significant number of its shares are acquired.
D)the target firm buys back the bidder's equity at a substantial premium over its market price on condition that the bidder suspends his or her bid.

Answer 1

D

Question 2

Which of the following should be considered by managers in making the decision on how to finance an acquisition?

A)Depreciation on existing assets
B)Credit rating of competitors
C)General tax implications
D)Book value of the firm's assets

Answer 2

C

Question 3

Tobin's q is defined as the ratio of:

A)the historical value of the firm?s assets to the replacement value of the assets.
B)the market value of the firm?s assets to the replacement value of the assets.
C)the operating cash flow of the firm to the market value of the assets.
D)the operating cash flow of the firm to the total equity of the firm.

Answer 3

B

Question 4

Which of the following is true of leverage buyouts (LBOs)?

A)LBOs create potential synergies.
B)LBOs are financed mainly with debt.
C)LBOs are purchase of all outstanding debt to gain control of the target firm.
D)LBOs are mostly associated with private firms.

Question 5

Explain the accounting differentiation between mergers and acquisitions in UK.

Question 6

What are conglomerate acquisitions?

Question 7

Explain how synergies are valued.

Question 8

In the UK,merger accounting uses:

A)the book value of the target firm to draw up consolidated accounts.
B)the fair value of the target firm to draw up consolidated accounts.
C)the market value of the target firm to draw up consolidated accounts.
D)the net realizable value of the target firm to draw up consolidated accounts

Question 9

A vertical merger:

A)is a merger which is financed only with equity.
B)refers to a merger between two dissimilar firms operating in different industries.
C)refers to a merger between competitors.
D)refers to a merger between a supplier and a customer.

Question 10

Which of the following is an advantage of diversifying takeovers?

A)It reduces the systematic risk of the merged firm.
B)It increases the leverage of the merged firm.
C)It enhances the flexibility of the organization.
D)It decreases the total debt of the firm.

Question 11

In a hostile takeover:

A)the acquirer makes an offer directly to the target company?s management or its board of directors.
B)the acquirer approaches the target?s shareholders with a direct tender offer to purchase their shares.
C)the acquirer believes that the target firm is undervalued relative to its assets.
D)the acquirer believes that the target firm is on the verge of bankruptcy and will be liquidated.

Question 12

Assuming risk neutrality and a zero discount rate,a firm's current share price can be expressed as:

A)Current share price = Current operating value + (Expected takeover premium $\times$ Takeover probability).
B)Current share price = Current operating value - (Expected takeover premium $\times$ Takeover probability).
C)Current share price = (Current operating value - Expected takeover premium) $\times$ Takeover probability.
D)Current share price = (Current operating value + Expected takeover premium) $\times$ Takeover probability.

Question 13

Which of the following is true of strategic acquisitions?

A)They involve operating synergies.
B)The acquisition is made with the intention to liquidate the acquired firm's assets.
C)The acquisition is because the target firm's assets are worth more than the share price.
D)They involve acquiring firms operating in a different industry for purely financial reasons.

Question 14

Investment bankers generally classify an acquisition that includes no operating synergies as a _____.

A)strategic acquisition
B)disciplinary takeover
C)hostile takeover
D)financial acquisition

Question 15

Which of the following is true of the share price reactions to takeover bids?

A)The combined market values of the shares of the target and bidder go up around the time of the announced bids.
B)The share prices of target firms almost always react unfavourably to merger and tender offer bids.
C)The bidder's share price reacts more unfavourably,on average,when the bidder makes a cash offer rather than an offer to exchange equity.
D)Since there is a net gain to bondholders around the time of the merger announcement the share prices will go down.

Question 16

Accruex's investors accumulated 10% of Pivot Corporation's equity following John's tender offer to purchase shares for £78.Accruex believes that the equity will be worth £90 per share if the offer succeeds,but only £60 per share if the offer fails.If Accruex tenders its shares,the offer will succeed for sure.However,if the shares are not tendered,the offer has a 50% probability of failure.How much does Accruex get if it tenders the shares?

A)£60 per share
B)£150 per share
C)£75 per share
D)£78 per share

Question 17

What are operating synergies?

Question 18

_____ are rights or securities that a firm issues to its shareholders,giving them valuable benefits in the event that a significant number of its shares are acquired.

A)Greenmails
B)White knights
C)Poison pills
D)White squires

Question 19

Takeover premium is the:

A)premium paid to the potential acquirer by a target firm to avoid a hostile takeover.
B)savings in operating costs due to the increase in efficiency from the merger after the takeover.
C)premium offered by the acquiring firm over the target's prevailing share price.
D)difference in the cost of capital of the parent company after the takeover.