Question 1

The acquisition of DirecTV by News Corporation is an example of a horizontal acquisition.

Accepted Answer

The acquisition of DirecTV by News Corporation is an example of a vertical acquisition, as both companies are in the same industry but at different stages of the supply chain. News Corporation already had content creation and distribution capabilities, and the acquisition of DirecTV gave them a distribution channel for their content.

Question 2

The law firm of Smith, Jones, and Richards, LLC, has entered into an agreement to combine its operations on a relatively equal basis with Garcia, Lopez, and Romero, LLC, another law firm. This transaction is an example of a

Accepted Answer

The description of the transaction as a combination on a relatively equal basis suggests that this is a merger. A merger is a union of two companies into a single entity, typically with both companies being considered equal partners.

Question 3

The main advantage of a horizontal acquisition is the potential economies of scale.

Accepted Answer

A horizontal acquisition involves acquiring a competitor or a company in the same industry. This can lead to increased efficiencies and cost savings through economies of scale, as the combined company can eliminate duplicate functions and benefit from increased bargaining power with suppliers.

Question 4

Northwest Airlines has been acquired by Delta. This is an example of a ____ acquisition.

Accepted Answer

This is a horizontal acquisition because Delta and Northwest were both airlines operating in the same industry and at the same level of operation.

Question 5

The key to successfully integrating two companies is to have a culture of strict equality between the target firm and the acquiring firm.

Accepted Answer

While cultural alignment is important in integrating two companies, a culture of strict equality may not necessarily be the key to success. Each company may have its own unique strengths and weaknesses that need to be evaluated and integrated carefully in order to create a cohesive culture post-merger or acquisition.

Question 6

When an unexpected and exciting acquisition opportunity occurs, the organization needs to be ready to act immediately and to be prepared to rethink the organization's basic strategy.

Accepted Answer

The answer of When an unexpected and exciting acquisition opportunity...

Question 7

Preventing managerial turnover in the target firm after an acquisition is very important if one of the acquiring firm's objectives is to gain new skills or knowledge from the target.

Accepted Answer

If the acquiring firm aims to gain new skills or knowledge from the target, it is crucial to retain the experienced managers in the target firm who possess these capabilities. They can help integrate the operations and transfer their knowledge to the acquiring firm's managers. Thus, preventing managerial turnover in the target firm is essential.

Question 8

Leveraged buyouts (LBOs) usually require significant amounts of debt to execute.

Accepted Answer

Leveraged buyouts (LBOs) typically involve borrowing a large amount of debt to finance the purchase of a company through a combination of equity and debt financing. This debt is usually repaid with the cash flows generated by the acquired company.

Question 9

The number of acquisitions involving firms from different countries continues to increase.

Accepted Answer

The statement correctly describes the trend of increasing cross-border acquisitions.

Question 10

The target firm's financial value is revealed in part by its historical and projected cash flows.

Accepted Answer

The cash flows of a target firm can provide valuable information about its financial value, both in terms of historical data and projections for the future. This information is often considered alongside other financial metrics, such as earnings and revenue growth, in order to assess the overall health and potential of the firm.

Question 11

The first step in the acquisition decision making process is

Accepted Answer

The first step in the acquisition decision making process is target screening. This involves identifying potential acquisition targets and evaluating them based on various criteria such as financial performance, strategic fit, and cultural compatibility. Once suitable targets have been identified through target screening, due diligence, target negotiation, and integration can take place.

Question 12

Glorietta Manufacturing specializes in making luxury leather goods from exotic skins, such as snake, lizard, and alligator. In the last few years it has been increasingly difficult to obtain high quality, unblemished alligator skins. It's main source of alligator skins, Gator-Rama Ranch, has a number of other customers. So, Glorietta's management has decided to enter acquisition negotiations with Gator-Rama in order to gain control over Gator-Rama's output. This is an example of a

Accepted Answer

This decision by Glorietta Manufacturing to acquire Gator-Rama Ranch is an example of a vertical acquisition, as it involves the acquisition of a supplier in the same industry. Glorietta is seeking to control the supply of alligator skins by gaining ownership of their main source of supply.

Question 13

An acquisition is a transaction in which a firm buys another firm with the intention of creating value by buying and selling the acquired firm's assets in the external markets.

Accepted Answer

An acquisition is a transaction in which a firm buys another firm with the intention of integrating it into its operations and creating value through synergies, cost reductions, or gaining access to new markets or technologies, rather than primarily buying and selling the acquired firm's assets in the external markets.

Question 14

Acquisitions require such a substantial investment of resources that the evaluation of an acquisition opportunity is generally a slow process.

Accepted Answer

The answer of Acquisitions require such a substantial investment of...

Question 15

Poor financial performance as a result of changing environmental conditions is driving consolidation in the airline industry.

Accepted Answer

Poor financial performance due to factors such as increased competition, fuel prices, and changing consumer preferences has led to a trend of mergers and acquisitions in the airline industry.

Question 16

When the company can sell its products above competitive prices or when its costs are below those of its primary competitor, the company has

Accepted Answer

When a company can sell its products above competitive prices, it has market power. This means that it can set prices higher than its competitors and still maintain a significant share of the market. Alternatively, if the company's costs are below those of its primary competitor, it can price its products lower and still make a profit, giving it market power as well.

Question 17

A ____ is a specialized type of acquisition in which the target firm reacts negatively to the acquiring firm's offer.

Accepted Answer

In a takeover, the target firm usually does not want to be acquired by the acquiring firm and may even resist the acquisition. The acquiring firm may need to use other tactics, such as a hostile takeover, to acquire the target firm. This is different from a merger, where both firms are typically willing participants in the transaction. A rescue is a type of acquisition where a financially distressed firm is acquired to prevent its bankruptcy or liquidation. Consolidation refers to the combining of two or more firms to form a new entity.

Question 18

In a fragmented market, firms can use an acquisition strategy to

Accepted Answer

The answer of In a fragmented market, firms can use...

Question 19

If firms wish to diversify their operations to reduce dependence on an intensely competitive market, they must make sure that shareholders cannot generate the same results merely by diversifying their portfolio.

Accepted Answer

If shareholders can achieve the same diversification by adjusting their portfolio, then the diversification strategy of the firm would not provide any additional benefits for the shareholders, and the firm's efforts would be in vain. Therefore, firms must take measures to create value through diversification beyond what can be achieved by shareholders through simple adjustments to their portfolios.

Question 20

Acquiring companies should never pay a premium for an acquisition.

Accepted Answer

Generally, acquiring companies may pay a premium for an acquisition as it may be necessary to secure the deal and outbid other potential acquirers. The premium may also be justified if the acquisition is expected to bring significant long-term benefits to the acquiring company.

Quiz 7: Acquiring and Integrating Businesses