Question 1

Restaurant chain, Camin Holdings, acquired all of the assets and liabilities of Cheesecakes R Us. The combined firm is known as Camin Holdings and Cheesecakes R Us no longer exists as a separate entity. The
Acquisition is best described as a:
A) Merger
B) Consolidation
C) Tender offer
D) Spinoff
E) Divestiture

Accepted Answer

This scenario describes a merger, where one company (Camin Holdings) acquires another (Cheesecakes R Us), and the acquired company ceases to exist as a separate entity. The assets and liabilities of Cheesecakes R Us are absorbed into Camin Holdings.

Question 2

Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders during the last several decades have been
A) Trending down
B) Trending up
C) Unchanged
D) Doubling each decade
E) None of the above

Accepted Answer

Historically, abnormal returns to target firm shareholders around the announcement date of a merger or acquisition have been trending down over the last several decades. This trend is attributed to various factors including market efficiency improvements, regulatory changes, and the increasing sophistication of investors.

Question 3

A steel maker acquired a coal mining company. Which of the following terms best describes this deal?
A) Vertical
B) Conglomerate
C) Horizontal
D) Obtuse
E) Tender offer

Accepted Answer

A vertical acquisition occurs when a company acquires a supplier or a customer, which is in the same production value chain as the acquirer. In this case, the steel maker (the acquirer) acquired a coal mining company (the supplier), which means the acquisition is vertical.

Question 4

Which of the following are not true about economies of scale?
A) Spreading fixed costs over increasing production levels
B) Improve the overall cost position of the firm
C) Most common in manufacturing businesses
D) Most common in businesses whose costs are primarily variable
E) Are common to such industries as utilities, steel making, pharmaceutical, chemical and aircraft manufacturing

Accepted Answer

Economies of scale are most common in businesses whose costs are primarily fixed, not variable.

Question 5

Corporation of America announced its intention to purchase shares in another national newspaper chain. Which one of the following terms best describes this announcement?
A) Divestiture
B) Spinoff
C) Consolidation
D) Tender offer
E) Merger proposal

Accepted Answer

A tender offer is an offer by a company to purchase shares in another company at a specified price.

Question 6

Joe's barber shop buys Jose's Hair Salon. Which of the following terms best describes this deal?
A) Joint venture
B) Strategic alliance
C) Horizontal
D) Vertical
E) Conglomerate

Accepted Answer

When one company buys another company that operates in the same industry and at the same stage of production, it is known as a horizontal merger. Joe's barber shop buying Jose's Hair Salon is an example of a horizontal merger because both businesses operate in the hair care industry, providing similar services to customers.

Question 7

Post-merger financial performance of the new firm is often about the same as which of the following?
A) Joint ventures
B) Strategic alliances
C) Licenses
D) Minority investments
E) All of the above

Accepted Answer

Post-merger financial performance can be similar across various forms of business arrangements, including joint ventures, strategic alliances, licenses, and minority investments, as they all involve some level of collaboration, resource sharing, or investment that aims to enhance the participating entities' financial or strategic position.

Question 8

Pacific Surfware acquired Surferdude and as part of the transaction both of the firms ceased to exist in their form prior to the transaction and combined to create an entirely new entity, Wildly Exotic Surfware. Which one of the following terms best describes this transaction?
A) Divestiture
B) Tender offer
C) Joint venture
D) Spinoff
E) Consolidation

Accepted Answer

This transaction is a consolidation, as two separate entities were combined to create a new entity.

Question 9

Which of the following is not true of strategic realignment?
A) May be a result of industry deregulation
B) Is rarely a result of technological change
C) Is a common motive for M&As
D) A and C only
E) Is commonly a result of technological change

Accepted Answer

Strategic realignment is often a result of technological change, so option E is incorrect. Options A and C are true, as strategic realignment can be a result of industry deregulation and a common motive for M&As. Option D is also partially true, as options A and C are correct, but option B is not. Therefore, the correct answer is option B.

Question 10

Which of the following is not true of unrelated diversification?
A) Involves buying firms outside of the company's primary lines of business
B) Involves shifting from a firm's core product lines into those which are perceived to have higher growth potential
C) Generally results in higher returns to shareholders
D) Generally requires that the cash flows of acquired businesses are uncorrelated with those of the firm's existing businesses
E) A and D only

Accepted Answer

Unrelated diversification does not always result in higher returns to shareholders. Some studies have found that it can actually lead to lower returns, as the firm may not have the necessary expertise to effectively manage the new businesses.

Question 11

Google Acquires Motorola Mobility in a Growth-Oriented as well as Defensive Move

Key Points
The acquisition of Motorola Mobility positions Google as a vertically integrated competitor in the fast-growing wireless devices market.
The acquisition also reduces their exposure to intellectual property litigation.
______________________________________________________________________________
By most measures, Google’s financial performance has been breathtaking. The Silicon Valley–based firm’s revenue in 2011 totaled $37.9 billion, up 29% from the prior year, reflecting the ongoing shift from offline to online advertising. While the firm’s profit growth has slowed in recent years, the firm’s 26% net margin remains impressive. About 95% of the firm’s 2011 revenue came from advertising sold through its websites and those of its members and partners.  Google is channeling more resources into “feeder technologies” to penetrate newer and faster-growing digital markets and to increase the use of Google’s own and its members’ websites. These technologies include the Android operating system, designed to power wireless devices, and the Chrome operating system, intended to attract Windows- and Mac-based computer users.

Faced with a need to fuel growth to sustain its market value, Google’s announcement on August 15, 2011, that it would acquire Motorola Mobility Holdings Inc. (Motorola) underscores the importance it places on the explosive growth in wireless devices. The all-cash $12.5 billion purchase price represented a 63% premium to Motorola’s closing price on the previous trading day. Chicago-based, Motorola makes cellphones, smartphones, tablets, and set-top boxes; its status as one of the earliest firms to develop cellphones and one of the leading mobile firms for the past few decades meant that it had accumulated approximately 17,000 patents, with another 7,500 pending. With less than 3% market share, the firm had been struggling to increase handset shipments and was embroiled in multiple patent-related lawsuits with Microsoft.

As Google’s largest-ever deal, the acquisition may be intended to transform Google into a fully integrated mobile phone company, to insulate itself and its handset-manufacturing partners from patent infringement lawsuits, and to gain clout with wireless carriers, which control cellphone pricing and distribution. Revenue growth could come from license fees paid on the Motorola patent portfolio and sales of its handsets and by increasing the use of its own websites and those of its members to generate additional advertising revenue.

Google was under pressure from its handset partners, including HTC and Samsung, to protect them from patent infringement suits based on their use of Google’s Android software.  Microsoft has already persuaded HTC to pay a fee for every Android phone manufactured, and it is seeking to extract similar royalties from Samsung. If this continues, such payments could make creating new devices for Android prohibitively expensive for manufacturers, forcing them to turn to alternative platforms like Windows Phone 7. With a limited patent portfolio, Google also was vulnerable to lawsuits against its Android licenses.

Innovation in information technology usually relies on small, incremental improvements in software and hardware, which makes it difficult to determine those changes covered by patents. Firms have an incentive to build up their patent portfolios, which strengthens their negotiating positions with firms threatening to file lawsuits or demanding royalty payments. Historically, firms have simply cross-licensed each other’s technologies; today, however, patent infringement lawsuits create entry barriers to potential competitors, as the threat of lawsuits may discourage new entrants. It now pays competitors to sue routinely over alleged patent infringements.

Risks associated with the deal include the potential to drive Android partners such as Samsung and HTC to consider using Microsoft’s smartphone operating system, with Google losing license fees currently paid to use the Android operating system. The deal offers few cost savings opportunities due the lack of overlap between Google, an Internet search engine that also produces Android phone software, and handset manufacturer Motorola. Google is essentially becoming a vertically integrated cellphone maker. Furthermore, when the deal was announced, some regulators expressed concern about Google’s growing influence in its served markets. Finally, Google’s and Motorola’s growth and profitability differ significantly, with Motorola’s revenue growth rate less than one-third of Google’s and its operating profit margin near zero.

Samsung, HTC, Sony Ericsson, and LG are now both partners and competitors of Google. It is difficult for a firm such as Google to both license its products (Android operating system software) and compete with those licensees by selling Motorola handsets at the same time. Nokia has already aligned with Microsoft and abandoned its own mobile operating system. Others may try to create their own operating systems rather than become dependent on Google. Samsung released phones in 2011 that run on a system called Bada; HTC has a team of engineers dedicated to customizing the version of Android that it uses on its phones, called HTC Sense.

Motorola Mobility’s shares soared by almost 57% on the day of the announcement. Led by Nokia, shares of other phone makers also surged. In contrast, Google’s share price fell by 1.2%, despite an almost 2% rise in the S&P 500 stock index that same day.
-Using the motives for mergers and acquisitions described in Chapter 1, which do you thing apply to Google's acquisition of Motorola Mobility? Be specific.

Accepted Answer

The answer of Google Acquires Motorola Mobility in a Growth-Oriented...

Question 12