Question 1

Desilas and Levanti found that focus-increasing spinoffs had a more positive impact of shareholder wealth than those spinoffs which increased geographical focus.

Accepted Answer

Desilas and Levanti's research suggests that spinoffs which increase operational focus tend to have a more positive impact on shareholder wealth compared to those that increase geographical focus, as operational focus can lead to more efficient management and resource allocation.

Question 2

With respect to diversification programs, Berger and Ofek found:
A) Reduced Tobin q values
B) Evidence of higher premiums
C) No significant shareholder wealth effects
D) None of the above

Accepted Answer

Berger and Ofek found that diversification programs are associated with reduced Tobin's q values, indicating that diversified firms tend to have lower market valuations compared to their focused counterparts. This suggests that the market may view diversification negatively, possibly due to inefficiencies or the dilution of focus.

Question 3

Haywood and Hambrick found:
A) Horizontal integration yields positive shareholder wealth effects
B) Horizontal deals yield negative shareholder wealth effects
C) Hubris-related deals have higher premiums
D) There is a diversification discount

Accepted Answer

C

Question 4

Wachovia's acquisition of Golden West Financial provided significant economies of scope which enabled the bank to show steady profits even during the subprime crisis.

Accepted Answer

Wachovia's acquisition of Golden West Financial, which was heavily involved in option adjustable-rate mortgages, significantly exposed Wachovia to the housing market downturn and subprime mortgage crisis, leading to substantial losses and its eventual sale to Wells Fargo.

Question 5

Both Eckbo and Stillman found:
A) No negative shareholder responses from competitors to horizontal deals
B) Significant negative effects
C) The shareholder wealth effects were delayed and occurred one to two years later
D) None of the above

Accepted Answer

Eckbo and Stillman found that there were no negative shareholder responses from competitors to horizontal deals, indicating that such deals did not harm competitors' shareholder value.

Question 6

Which motives are often cited as reasons for M&As?
A) Growth
B) Synergy
C) Improved R&D
D) Improved distribution
E) All the above

Accepted Answer

All the options listed (Growth, Synergy, Improved R&D, and Improved distribution) are common motives for companies to engage in mergers and acquisitions (M&As). These strategic moves are often aimed at achieving faster growth, realizing synergies (such as cost savings or increased revenue opportunities), enhancing research and development capabilities, and improving distribution networks.

Question 7

Doukas and Travlos found that, unlike many domestic acquisitions, acquirers enjoyed positive (although not statistically significant) returns when they acquired targets in countries in which they did not previously have operations.

Accepted Answer

Doukas and Travlos did find that acquirers experienced positive returns from international acquisitions in countries where they had not previously operated, indicating the potential for value creation in entering new markets through acquisitions.

Question 8

Bradley, Desai, and Kim found:
A) Horizontal deals yield greater gains than vertical deals
B) Evidence of the winner's curse
C) Tender offers yield gains for target shareholders
D) Bad bidders make good targets True or False

Accepted Answer

Tender offers typically result in gains for the shareholders of the target company, as the offer price often includes a premium over the market price to incentivize shareholders to sell their shares.

Question 9

The Merck-Medco deal is an example of related diversification.

Accepted Answer

The Merck-Medco deal is an example of related diversification because it involved Merck, a pharmaceutical company, acquiring Medco Containment Services Inc., a mail-order pharmacy and pharmacy benefits manager, thereby expanding its business into a related field that complements its core pharmaceutical operations.

Question 10

United Airlines was finally able to realize synergies when they acquired travel-related businesses such as hotels and car rental companies.

Accepted Answer

United Airlines primarily focuses on its core airline operations and has not significantly expanded into owning hotels or car rental companies as part of its business model.

Question 11

Schipper and Thompson found positive stock market announcement effects from diversification acquisition programs in the 1960s.

Accepted Answer

Schipper and Thompson's research indicated that diversification acquisition programs in the 1960s generally led to positive stock market reactions, suggesting that investors viewed these acquisitions favorably during that period.

Question 12

Answer: Mitchell and Lehn found that bad bidders are more likely to become takeover targets.

Accepted Answer

Mitchell and Lehn's research suggests that companies with poor management or performance are more likely to be targeted for takeovers as they present opportunities for improvement and value creation by new management.

Question 13

Revenue enhancing synergies are more difficult to achieve than cost economies.

Accepted Answer

Revenue enhancing synergies often involve more complex strategies such as cross-selling, entering new markets, or developing new products, which are generally harder to achieve and predict than cost-saving measures like combining operations or reducing redundancies.

Question 14

The process of consolidation of fragmented industries is referred to as:
A) Synergistic deals
B) Roll-ups
C) Vertical integration
D) None of the above

Accepted Answer

Roll-ups refer to the process where a company buys up its smaller competitors and consolidates them into a larger entity. This strategy is often used in fragmented industries where there are many small players, and consolidation can lead to economies of scale and increased market share.

Question 15

Research shows that for companies that often acquire other companies there is:
A) No relationship between size and executive compensation
B) There is a good relationship between size and executive competition
C) Their shares trade at a diversification discount
D) Their acquisition prowess is unrelated to how often they do deals

Accepted Answer

The answer of Research shows that for companies that often...

Question 16

United Airlines' merger with Continental Airlines is an example of:
A) Vertical integration
B) Conglomerate formation
C) Horizontal integration
D) None of the above

Accepted Answer

The merger between United Airlines and Continental Airlines is an example of horizontal integration because it involved two companies in the same industry (air travel) combining operations.

Question 17

Improved R&D is a common motive for deals in the airline industry.

Accepted Answer

Improved R&D is not typically a primary motive for deals in the airline industry; instead, motives often include expanding market reach, increasing operational efficiency, or acquiring new technology or routes.

Question 18

Markides and Oyon found positive announcement effects for acquisitions by U.S. firms of:
A) Continental European targets
B) British or Canadian target firms
C) South and Central American firms
D) Asian companies

Accepted Answer

Markides and Oyon found that acquisitions by U.S. firms of Continental European targets resulted in positive announcement effects, indicating favorable market reactions to such acquisitions.

Question 19

Cybo-Ottone and Murgia found positive abnormal returns for European bank merger announcements.

Accepted Answer

Cybo-Ottone and Murgia found that European bank merger announcements were associated with positive abnormal returns, indicating that the market generally reacted favorably to the news of these mergers.

Question 20

Answer: Varaiya found:
A) Higher premiums in horizontal deals
B) Evidence of a winner's curse
C) Related diversification generates positive gains
D) Vertical deals decrease shareholder value

Accepted Answer

Evidence of a winner's curse means that the winning bidder in an auction tends to overpay for the asset being auctioned. This is because the winning bidder is the one who is most optimistic about the value of the asset, and this optimism can lead to overpaying.

Quiz 4: Merger Strategy

Desilas and Levanti found that focus-increasing spinoffs had a more positive impact of shareholder wealth than those spinoffs which increased geographical focus.

With respect to diversification programs, Berger and Ofek found:

Haywood and Hambrick found:

Wachovia's acquisition of Golden West Financial provided significant economies of scope which enabled the bank to show steady profits even during the subprime crisis.

Both Eckbo and Stillman found:

Which motives are often cited as reasons for M&As?

Doukas and Travlos found that, unlike many domestic acquisitions, acquirers enjoyed positive (although not statistically significant) returns when they acquired targets in countries in which they did not previously have operations.

Bradley, Desai, and Kim found:

The Merck-Medco deal is an example of related diversification.

United Airlines was finally able to realize synergies when they acquired travel-related businesses such as hotels and car rental companies.

Schipper and Thompson found positive stock market announcement effects from diversification acquisition programs in the 1960s.

Answer: Mitchell and Lehn found that bad bidders are more likely to become takeover targets.

Revenue enhancing synergies are more difficult to achieve than cost economies.

The process of consolidation of fragmented industries is referred to as:

Research shows that for companies that often acquire other companies there is:

United Airlines' merger with Continental Airlines is an example of:

Improved R&D is a common motive for deals in the airline industry.

Markides and Oyon found positive announcement effects for acquisitions by U.S. firms of:

Cybo-Ottone and Murgia found positive abnormal returns for European bank merger announcements.

Answer: Varaiya found: