Deck 10: Corporate Strategy

Question 1

The three vignettes that open the chapter show that merger and acquisition activity has become rare in the U.S.

Answer 1

False

Question 2

The kinds of decisions typically made by those engaged in corporate strategy include establishing business unit investment priorities, deciding which industries to enter and exit, and making resource and management transfers.

Answer 2

True

Question 3

Diversified corporations are a significant part of the business landscape in the United States; indeed, they comprise most of the Fortune 500 companies.

Answer 3

True

Question 4

In the 1960s and 1970s conglomerates were waning in number since many industries had de-matured and were now ripe for organic growth.

Question 5

In the 1980s conglomerates began to shed unrelated businesses and leveraged buyouts (LBOs) were one tool used to accomplish this. An LBO is when a company is bought primarily using debt and often it is the managers of the company who buy it with the help of this financial tool.

Question 6

A motive for diversification is that managers are aware that diversified firms always outperform undiversified firms.

Question 7

One of the benefits of market power (a reason for diversification) is that a firm can have more influence with the EPA and other government agencies.

Question 8

Risk spreading as a reason for diversification involves attempts to reduce the unsystematic risk that a firm experiences.

Question 9

Related diversification results from a merger or acquisition in which there is some similarity of industry and/or value chain between the corporation and the company it seeks to acquire.

Question 10

There are three kinds of "fit" that offer the opportunity for synergistic gains from an acquisition: Market fit, management fit, and operational fit.

Question 11

When a corporation can take advantage of synergies from relationships with suppliers and/or customers in an acquisition this is known as market fit.

Question 12

Operational fit occurs when an acquiring corporation can take advantage of synergies stemming from the support activities of the value chain, such as in human resource management or research and development.

Question 13

General Electric is an example of a conglomerate while Warren Buffet's company, Berkshire Hathaway, is an example of a holding company.

Question 14

The high performance of a company subsequent to an acquisition depends on managers who are pressed to make up for having paid a high acquisition premium; without that incentive performance is likely to be low.

Question 15

The process of due diligence requires managers to examine closely all of the operating, financial, and other aspects of a company that they propose to acquire.

Question 16

Post-acquisition efforts likely to improve the chances for a successful combination include the immediate establishment of an integration team, the visible involvement of senior managers, and early and frequent communication.

Question 17

The GE Business Development Matrix and the BCG Growth Share Matrix are both examples of a portfolio management tool used to direct investment among businesses in a diversified firm.

Question 18

Drawbacks of portfolio techniques include the dynamic view that they present and the overly precise recommendations for businesses in different areas of the matrices.

Question 19

In a restructuring process one may decide what businesses to divest by looking at the same criteria that were used in making an acquisition decision.

Question 20

________ strategy involves the types of decisions made and direction created for a company that operates multiple lines of business.

A) Business
B) Acquisition
C) Corporate
D) Structuring

Question 21

A company in which 70-95 percent of revenues comes from a single business is known as a(n)

A) dominant business.
B) conglomerate.
C) integrated producer.
D) related constrained business.

Question 22

For the period beginning in 1949 and through 1974 the percent of Fortune 500 firms that operated in a single business ________, while the percent that were diversified ________.

A) remained constant; fell
B) fell; rose
C) fell; remained constant
D) rose; fell

Question 23

High-yield debt that is rated below investment grade at the time of purchase and, beginning in the 1980s, has often been used in mergers and acquisitions is called

A) speculative paper.
B) a junk bond.
C) submarine debt.
D) investment-derivative debt.

Question 24

Companies diversify for a number of general reasons. Which of the following is not one of those reasons?

A) seeking growth
B) to increase the number of shareholders
C) to gain market power
D) to reduce financial risk

Question 25

The impetus for growth as a reason to diversify comes from ________ among other things.

A) a desire to reduce the complexity of operations
B) the need to placate governmental agencies
C) the benefits to management and employees
D) concerns about the natural environment

Question 26

Gains in pricing authority, increased bargaining power, and mutual forbearance all underlie the ________ reason for diversification.

A) market power
B) market entry
C) risk reduction
D) shareholder

Question 27

A diversifying company might enter an attractive market by way of an acquisition instead of by internally developing a new business because

A) it can do an end-run around the barriers to entry.
B) it can avoid the costs and uncertainty inherent in building a new business.
C) an acquisition gets the company into the market much more quickly.
D) All of the above favor an acquisition over internal development.

Question 28

The two major types of diversification are ________ and ________ diversification.

A) market; industry
B) related; unrelated
C) corporate; business
D) resource; capability

Question 29

What type of diversification results when there is some similarity of industry or value chain between a business and the company that it wishes to acquire?

A) congruent
B) related
C) matching
D) attractive

Question 30

Which of the following is a variation of related diversification in which both the acquirer and the acquired are in the same industry and have essentially the same value chains.

A) horizontal
B) vertical
C) cross-sector
D) oblique

Question 31

Which of the following is a variation of related diversification in which the acquirer and the acquired are in the same industry and the combined companies perform more of the activities in the industry value chain than either did separately before the acquisition?

A) horizontal
B) cross-sector
C) aggregated
D) vertical

Question 32

Which of the following is not a potential source of synergy between two companies that are proposing to merge?

A) market fit
B) operational fit
C) legal fit
D) management fit

Question 33

When a corporation believes it can take synergistic advantage of administrative and support activities of the value chain in making an acquisition it is envisioning ________ fit.

A) management
B) market
C) agency
D) structural

Question 34

Many of the merger and acquisition deals announced in the newspapers claim that synergies from the combined companies will come from ________ and this has become a prevalent justification for mergers and acquisitions.

A) economizing
B) shared information
C) international presence
D) the CEO

Question 35

A ________ is a corporation that owns the majority of voting shares of other companies, but that allows the other companies to operate as independent entities.

A) conglomerate
B) holding company
C) passive LLC
D) multiple proprietor

Question 36

A variety of studies over the years conclude that diversification is nearly as likely to ________ shareholder value as it is to ________ shareholder value.

A) divide; unite
B) dramatically increase; minimally increase
C) maximize; optimize
D) destroy; create

Question 37

A factor that is critical to engineering a successful acquisition is to

A) select a target in an attractive industry.
B) perform thorough due diligence on the acquisition target.
C) avoid paying too high of an acquisition premium.
D) All of the above are critical to engineering a successful acquisition.

Question 38

One of the important, if not the most important, uses of portfolio management tools is

A) to identify strategic linkages between the businesses in the portfolio.
B) to effectively allocate capital to the different businesses in the portfolio.
C) to shame the managers of underperforming businesses into higher levels of performance.
D) to show analysts the structure of the conglomerate in a way that could be easily understood.

Question 39

When a corporation reduces its level of diversification and strategically refocuses on core businesses it is

A) downscoping.
B) "trimming the fat."
C) downsizing
D) re-synergizing

Question 40

How would you describe the evolution of merger and acquisition activity in the U.S. since about 1960?

Question 41

What are the four primary motives for diversification? You need not describe all of the reasons that underlie each motive but do point out one or two for each.

Question 42

Briefly describe the criteria on which a successful acquisition depends.

Question 43

Describe the restructuring process for a company. If businesses are to be divested, how should they be chosen and how will the divestment be accomplished?