Deck 16: Mergers, Acquisitions, Takeovers, and Buyouts

Question 1

Contract devices explicitly designed to thwart a hostile takeover attempt are called poison pills or shark repellents.Examples include all of the following EXCEPT:

A)a shareholder rights plan that can be issued as dividends at management's discretion.
B)an event-triggered put provision in one of the firm's debt contracts.
C)a provision in the firm's charter that gives incumbent management their positions for life.

Answer 1

a provision in the firm's charter that gives incumbent management their positions for life.

Question 2

The literature emphasizes three motives for a buyout, including all of the following EXCEPT:

A)to increase access to capital markets.
B)to increase managerial incentives.
C)to avert a takeover.
D)to realize tax-reduction benefits.

Answer 2

to increase access to capital markets.

Question 3

The bidder in a takeover generally should take advantage of temporary anonymity to purchase shares of the target before its intentions are publicly known and the target firm's price rises.Such initial purchases establish a _______.

A)foothold
B)leghold
C)armhold
D)toehold

Answer 3

toehold

Question 4

______obtains if a merger results in improvements in any business function, including: (i) management; (vii) labor costs; (ii) production or distribution; etc.

A)Operating synergy
B)Financial synergy
C)Business synchronization
D)Economies of scope

Question 5

In a ______, a diversified firm is taken over and assets or divisions are sold, so that the remaining firm is more focused and efficient.

A)spin-off
B)equity carve-out
C)bustup takeover
D)dispersal

Question 6

A __________merger involves the combination of two firms in unrelated industries.

A)conglomerate
B)vertical
C)diagonal
D)horizontal

Question 7

______obtains in a merger if some aspect of the financial configuration of the merged firm causes its market value to be greater than the sum of the market values of the separate firms.

A)Operating synergy
B)Financial synergy
C)Business synchronization
D)Economies of scope

Question 8

In a _____the bidder's intention is to acquire the target and replace the target's incumbent management, who vigorously resist the attempt.

A)merger
B)acquisition
C)buyout
D)hostile takeover

Question 9

A ___is an agreement among the few dominant firms in an industry to coordinate production and, as alleged, to cut prices temporarily in order to drive out or acquire smaller competitors, after which they could raise prices substantially.

A)syndicate
B)trust
C)non-compete clause
D)cut-throat accord

Question 10

A problem with the tender offer mechanism in a takeover is the ______.The term refers to a situation in which rational behavior by each individual shareholder results in shareholders as a group being worse off.If individual target shareholders (correctly) foresee that the value of their shares will be worth more after the takeover than they will receive in the tender offer, they will choose not to tender their shares.

A)holdover problem
B)free rider problem
C)holdout problem
D)non-tender problem

Question 11

A ____merger occurs between two firms that had been doing business in different stages of the production process in a given industry.

A)conglomerate
B)vertical
C)diagonal
D)horizontal

Question 12

State legislation designed to thwart takeovers has been enacted in recent years, including _______, which restrict the voting power of a controlling shareholder.

A)business combination laws
B)voting share reprisal laws
C)takeover postponement laws
D)control share laws

Question 13

In a ________, both firms cease to exist, and a new corporation is established with a new name, a new board, and/or a new management team.

A)merger
B)acquisition
C)consolidation
D)buyout

Question 14

In a ____merger, two firms that heretofore have been competitors in the same line of business combine.

A)conglomerate
B)vertical
C)diagonal
D)horizontal

Question 15

State legislation designed to thwart takeovers has been enacted in recent years, including _______, which can delay the consummation of business combinations for years.

A)business combination laws
B)voting share reprisal laws
C)takeover postponement laws
D)control share laws

Question 16

A _____occurs when a group of individuals uses cash to purchase the shares of a firm and takes ownership and control of the firm.

A)buyout
B)acquisition
C)consolidation
D)merger

Question 17

The original creditors of both firms in a merger would benefit from the overall decrease in the probability of bankruptcy that attends the merger, which in turn results from the ______ associated with creditors now having a claim against a larger combined firm.

A)tax reduction
B)increased interest payments
C)decreased principle
D)co-insurance

Question 18

According to the ___hypothesis, in an acquisition or a takeover the bidder's management overvalues the target because they overestimate their ability to create value once they wrest control of the target's assets.

A)humidor
B)hubris
C)humungous ego
D)haughty headquarters

Question 19

If the bidder in a hostile takeover faces target management resistance, as an alternative to either bidding higher or terminating the tender offer process, bidders sometimes offer target management compensation to end its resistance.This compensation is called:

A)a golden parachute.
B)a silver bullet.
C)a gold watch.
D)removal remuneration.

Question 20

A legitimate means of averting an unintended transfer of wealth to creditors in a merger is to:

A)decrease leverage.
B)reduce the volatility of operating profits.
C)offer a guarantee to the separate firms' creditors.
D)increase leverage.

Question 21

The purchasers in a buyout often obtain financial and strategic assistance from a ____who, as a sponsor, usually finances the transaction with equity contributed by a number of investors and debt borrowed from several sources.

A)buyout specialist.
B)LBO intermediary
C)finance company
D)venture capital firm

Question 22

In many cases a firm that has gone private via an LBO subsequently re-emerges as a publicly traded firm (via another IPO).This transaction is called a

A)reprise IPO.
B)resumption.
C)reverse LBO.
D)rollover.