Question 1

A merger that allows a firm to access a cheaper way of financing its projects is an example of:

Accepted Answer

Financing synergy occurs when a merger allows a firm to access a cheaper way of financing its projects, often due to the combined entity having a stronger financial profile or greater assets, which can lead to lower interest rates or better terms on borrowed funds.

Question 2

Which one of the following is an example of economies of scope?

Accepted Answer

Economies of scope occur when producing a wider variety of goods or services together is more cost-effective than producing them separately. Acquiring a firm to reduce the overall cost of production is an example of achieving economies of scope, as it implies that the combined operations can produce a broader range of products more efficiently than if operated independently.

Question 3

Which of the following is NOT an example of economies of scale?

Accepted Answer

The answer of Which of the following is NOT an...

Question 4

Which of the following represent possible source(s)of increased value when a merger or acquisition takes place?

Accepted Answer

All of the options listed (improved management, tax considerations, and improved financing) are potential sources of increased value in a merger or acquisition. By combining resources and expertise, the newly merged company may be able to operate more efficiently and effectively, resulting in improved management. Additionally, the new entity may be able to take advantage of tax benefits or more favorable financing options that were not available as separate entities.

Question 5

Which of the following statements is true?

Accepted Answer

In an acquisition, both assets and liabilities are taken over by the new parent. Option A is incorrect because liabilities are not transferred to the vendor, but are assumed by the buyer. Option B is incorrect because the purchase of shares does not necessarily depend on whether the target company has contingent liabilities outstanding. Option D is incorrect because the purchase of shares can take place before or after the announcement of the intent to merge and the premium paid over current market price will depend on various factors such as the attractiveness of the target company and its current market value.

Question 6

Use the following statements to answer this question:
I.Managers may abuse their position and increase the size of the company through acquisitions.
II.It is usually good news for shareholders when their firm is targeted.

Accepted Answer

Both statements are correct. Statement I is true because managers, driven by personal incentives, might pursue acquisitions to grow the company size rather than shareholder value. Statement II is true because being targeted in an acquisition often leads to a premium on the company's current stock price, benefiting shareholders.

Question 7

When two firms in unrelated businesses combine this is referred to as?

Accepted Answer

When two firms in unrelated businesses combine, it is known as a conglomerate merger. This can occur when a company wants to diversify its business and enter into a new industry or when it wants to expand its operations into different regions or countries. Unlike horizontal and vertical mergers, which involve companies in a similar industry or supply chain, conglomerate mergers involve companies that do not have any direct connection in terms of products, services or production processes.

Question 8

Which of the following is a motivation for vertical integration?

Accepted Answer

Vertical integration involves acquiring or merging with suppliers or distributors to control the supply chain, which can lead to acquiring a cheaper source of raw materials.

Question 9

Which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may:
I.Sell attractive assets
II.Issue additional voting shares to dilute voting power
III.Assume a heavy debt burden

Accepted Answer

All three options are possible defenses against an unfriendly acquisition. Selling attractive assets can make the company less appealing to the acquirer. Issuing additional voting shares can dilute the voting power of the acquirer, making it harder to take control. Assuming a heavy debt burden can make the financials less attractive, deterring the acquisition.

Question 10

In Canada, which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may:
I.Sell the crown jewels.
II.Implement a white knight.
III.Implement a poison pill.
IV.Implement a no-shop clause.

Accepted Answer

I, II, and III are all recognized defensive strategies against hostile takeovers. Selling the crown jewels involves selling off key assets to make the company less attractive. Implementing a white knight strategy involves finding a more friendly company to acquire them instead. Implementing a poison pill makes the takeover less attractive or more difficult by diluting the shares or offering shares at a discount to everyone but the acquirer. A no-shop clause is typically part of merger agreements to prevent the target from seeking other buyers, which is not a defense against an unfriendly acquiring firm.

Question 11

Which one of the following is an example of complementary strengths?

Accepted Answer

Complementary strengths occur when two firms have different strengths that can work together to create a stronger overall organization. In this case, a marketing-oriented firm acquiring a production-oriented firm combines the strengths of both firms to create a more well-rounded organization.

Question 12

Use the following statements to answer this question:
I.The white knight is a strategy to avoid being acquired by another firm.
II.Selling the crown jewels can lead to a long-term decrease in the value of the firm.

Accepted Answer

The answer of Use the following statements to answer this...

Question 13

Empirical evidence regarding merger gains shows that, on average:

Accepted Answer

Empirical evidence generally shows that target firm shareholders experience significant gains from mergers, often due to the premium paid by the acquiring firm to purchase the target firm's shares.

Question 14

Notre Dame Alliance Inc.(NDA)is worth $3 billion and wants to take over Vancouver Company Inc.(VC), which is worth $1.5 billion.NDA expects the deal to result in $0.5 billion in synergies.Supposing a bidding war arises and NDA ends up paying $2 billion in cash for VC, and then finds there are no synergies, how much has NDA gained or lost on the deal?

Accepted Answer

The answer of Notre Dame Alliance Inc.(NDA)is worth $3 billion...

Question 15

What is the main difference between the U.S.and Canada in terms of the use of poison pills?

Accepted Answer

The main difference between the U.S. and Canada in terms of the use of poison pills is that in Canada, poison pills are used to delay the acquisition in case of the existence of another bidder; they cannot be used to frustrate a bid the way they are in the U.S. This means that poison pills are legal in Canada as long as they are used in a certain way, while in the U.S., there is no such limitation on how poison pills can be used.

Question 16

Which of the following is NOT true?

Accepted Answer

Mergers tend to increase during periods of soaring stock prices, as companies will use their inflated stock prices as currency to make acquisitions. Therefore, statement (D) is not true.

Question 17

When conducting shareholder value at risk (SVAR)analysis for acquisitions, it is found that:

Accepted Answer

When conducting SVAR analysis for acquisitions, it is found that acquiring firms that use cash bear all of the risk of the acquisition, while the risk in acquisitions using share swaps is borne by both sets of shareholders. This is because in cash purchases, the acquiring firm is using its own money to pay for the target company, while in share swaps, the acquiring firm is giving its own shares to the target company's shareholders. If the acquiring firm's share price drops, then the target company's shareholders will bear some of the risk, as they will have received shares that are worth less than they were when the deal was announced.

Question 18

If the target firm and acquirer have initial values of $100 million and $150 million, respectively, and the combined firm is worth $400 million, then the synergy value is:

Accepted Answer

The initial value of the target firm is not relevant in calculating the synergy value. The combined firm is worth $400 million and the acquirer's initial value is $150 million, which means that the initial value of the target firm was $250 million ($400 million - $150 million). Therefore, the synergy value is $150 million ($250 million - $100 million).

Question 19

Synergies, which are due to capturing increased value as a result of a merger, could occur due to which of the following?

Accepted Answer

All of the listed options can lead to synergies in a merger. Access to more and better debt financing can reduce the cost of capital for the merged entity, leading to increased value. Reduction in costs due to overlap of job functions or layoffs can lead to cost savings and improved operational efficiency, which can increase the value of the merged entity. Increased tax losses transferred from the target firm can result in tax savings for the merged entity, leading to increased value. Therefore, all these factors can contribute to capturing increased value and achieving synergies in a merger.

Question 20

If an automobile manufacturer and a steelworks producer decided to merge, it would be an example of a:

Accepted Answer

A merger between an automobile manufacturer and a steelworks producer would be a vertical merger because the two companies are in different stages of the production process but are still in the same industry. The automobile manufacturer would be considered a downstream company while the steelworks producer would be considered an upstream company in the supply chain.

Quiz 15: Mergers and Acquisitions

A merger that allows a firm to access a cheaper way of financing its projects is an example of:

Which one of the following is an example of economies of scope?

Which of the following is NOT an example of economies of scale?

Which of the following represent possible source(s) of increased value when a merger or acquisition takes place?

Which of the following statements is true?

Use the following statements to answer this question: I.Managers may abuse their position and increase the size of the company through acquisitions. II.It is usually good news for shareholders when their firm is targeted.

When two firms in unrelated businesses combine this is referred to as?

Which of the following is a motivation for vertical integration?

Which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may: I.Sell attractive assets II.Issue additional voting shares to dilute voting power III.Assume a heavy debt burden

In Canada, which of the following are possible defenses that a target firm can use against an unfriendly acquiring firm? The target firm may: I.Sell the crown jewels. II.Implement a white knight. III.Implement a poison pill. IV.Implement a no-shop clause.