Deck 7: Acquisition and Restructuring Strategies

Question 1

Horizontal acquisitions increase a firm's market power by exploiting cost-based and revenue-based synergies.

Answer 1

True

Question 2

Most acquisitions are friendly transactions, whereas mergers include hostile unfriendly deals.

Answer 2

False

Question 3

Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels.

Answer 3

False

Question 4

Acquisitions between companies with headquarters in different countries are called cross-border acquisitions.

Question 5

Evidence suggests that acquisitions usually lead to favourable financial outcomes, especially for the acquiring firm.

Question 6

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor or a business in a highly related industry.

Question 7

Because of additional information processing, firms using an unrelated diversification strategy often become overdiversified compared to firms adopting a related diversification strategy.

Question 8

Acquisitions are a risk-free alternative to entering new markets through internally developed products.

Question 9

Some finance scholars believe that high levels of debt always have a positive effect on a firm's management.

Question 10

An acquisition of a firm in a highly related industry is referred to as a horizontal acquisition.

Question 11

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, except when substantial leverage was used to finance the acquisition itself.

Question 12

A takeover is a special type of acquisition wherein the target firm does not solicit the acquiring firm's bid; thus, takeovers are friendly acquisitions.

Question 13

Junk bonds are a financial option through which acquiring and acquired firms can increase the likelihood of creating private synergy of acquisition.

Question 14

Despite relaxed regulations, the amount of cross-border acquisition activity between nations within the European Union is on the decline.

Question 15

A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.

Question 16

The higher the barriers to market entry, the greater the probability that a firm will acquire an existing firm to overcome those barriers.

Question 17

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than on strategic controls.

Question 18

Less than 20 per cent of all mergers and acquisitions are successful.

Question 19

Firms often use downsizing as a responsive management strategy to attain better economies of scale.

Question 20

Acquisitions intended to increase market power are not subject to regulatory review, but they are subject to analysis by financial markets.

Question 21

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the firm's portfolio.

Question 22

Synergies can involve the ________ assets of the firm.

A)direct and indirect
B)capital-intensive and technology-intensive
C)internal and external
D)physical and non-physical

Question 23

Evidence suggests that firms using acquisitions as a substitute for internally developed innovations:

A)usually generate more innovation for each research and development dollar spent
B)outperform those that do not
C)eventually encounter performance problems
D)can leverage their core competencies across a broader range of products

Question 24

According to recent research, acquisitions remain the quickest route companies have to:

A)new markets and new capabilities
B)synergy within a portfolio of businesses
C)financial economies of scale
D)expanded economies of scope

Question 25

Which one of the following is not a challenge in relations to post-acquisition integration?

A)Exercising good financial control
B)Melding two disparate corporate cultures
C)Building effective working relationships
D)Linking different financial and control systems

Question 26

Downscoping generally leads to more positive outcomes than downsizing in the long term but not in the short term.

Question 27

Junk bonds are characterised by the:

A)small firms for which they are typically issued
B)high-technology firms for which they are typically issued
C)potential high returns offered to the bondholders
D)low risk to the bondholders

Question 28

In the long run, entering new markets with internally developed products can be less risky than entering through acquisition, especially if the latter becomes a substitute for:

A)innovation
B)risk analysis
C)international diversification
D)strategic planning

Question 29

Private synergy refers to:

A)synergy that takes place in a firm that is taken private through the use of junk bonds
B)a benefit from merging the acquiring and target firms that only one or two individuals in a firm may recognise
C)benefits resulting from a unique set of resources that are complementary between the acquiring and target firms in a merger
D)benefits resulting from commonly found resources that both the acquiring and target firm have

Question 30

________ are more frequent than internal product development processes in high-technology industries, as returns are more predictable.

A)Mergers and leveraged buyouts
B)Acquisitions and bidding wars
C)Leveraged buyouts and alliances
D)Acquisition and alliances

Question 31

Downscoping generally leads to more positive outcomes than leveraged buyouts both in the long term and the short term.

Question 32

The expenses incurred by firms trying to create private synergy through acquisition are called:

A)acquisition costs
B)participation costs
C)transaction costs
D)interaction costs

Question 33

Cross-border acquisitions are becoming more popular because they allow an acquiring firm to:

A)market a broader range of products and negotiate better contracts with distributors
B)increase profits, better serve customers and gain market control
C)overcome barriers to entering a new market while gaining more control over foreign operations relative to the control offered by alliances
D)exploit resources in the acquired firm, gain new technical knowledge and access new sources of capital

Question 34

A merger occurs when:

A)one firm buys controlling interest in another firm
B)two firms agree to integrate their operations on a relatively coequal basis
C)two firms combine to create a third separate entity that conducts one given function
D)two firms agree to share certain information, but their operations remain independent

Question 35

A primary reason for a firm to pursue an acquisition is to:

A)rationalise all upper and middle management
B)achieve greater financial returns in the short run
C)avoid the risks of new product development
D)avoid competition

Question 36

Overdiversification varies with:

A)a firm's general capabilities
B)a firm's general resources
C)a firm's capabilities to manage diversification
D)a firm's resources to manage diversification

Question 37

One problem with firms becoming too large is that they:

A)become too easy to manage
B)often adopt a decentralised decision-making philosophy
C)gain increasing efficiencies
D)usually increase bureaucratic controls

Question 38

Market power is derived primarily from the:

A)creativity of a firm
B)quality of a firm's top management team
C)size of a firm and its resources and capabilities
D)depth of a firm's strategy

Question 39

Barriers to entry represent factors associated with:

A)a market and/or firms currently operating in the market that make it more expensive and difficult to enter that market
B)a market and/or firms currently operating in the market that make it more expensive and difficult to leave that market
C)differentiation strategies in which a firm maximises its returns by emphasising products of a lower quality than those found in markets without barriers to entry
D)the presence of above-average returns for a firm

Question 40

In acquisitions, managers do not become involved in:

A)preparing for negotiations
B)managing the integration process after the acquisition is completed
C)searching for viable acquisition candidates
D)monitoring the movements of competitors

Question 41

Why are acquisitions seen as an alternative to new product development? What impediments exist in undertaking internal product development?

Question 42

What is a leveraged buyout (LBO) and what have been the results of such activities?

Question 43

A firm's restructuring strategy is often driven by:

A)acquisition strategy failure
B)the firm's strategic plan
C)prevailing industry fads
D)supplier demands

Question 44

Discuss the outcome potential of the various restructuring strategies.

Question 45

Which one of the following is not a restructuring strategy?

A)Downsizing
B)Leveraged buyouts
C)Alliances
D)Downscoping

Question 46

Describe the seven problems in achieving a successful acquisition.

Question 47

What are the differences between downscoping and downsizing?

Question 48

A friendly acquisition:

A)raises the price that has to be paid for a firm
B)ensures that the top management of the acquired firm will be welcome in the newly combined firm
C)facilitates the integration of the acquired and acquiring firms
D)allows joint ventures to be developed

Question 49

The short-term outcome of downsizing is:

A)reduced debt costs
B)an emphasis on strategic controls
C)organisational learning
D)reduced labour costs

Question 50

What are the attributes of a successful acquisition program?

Question 51

What is restructuring and what are its common forms?

Question 52

Identify and explain the seven reasons firms engage in an acquisition strategy.

Question 53

A leveraged buyout refers to:

A)a firm restructuring itself by selling off unrelated units of the company's portfolio
B)a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background
C)a restructuring action whereby the managers of a firm, its employees and/or an external party buy all of the assets of a business, financed largely with debt, and take the firm private
D)an action where the management of a firm and/or an external party buy all of the assets of a business, financed largely with equity

Question 54

Discuss the pitfalls of too much diversification and, more specifically, overdiversification.

Question 55

As an attribute of a successful acquisition, a friendly acquisition usually results in:

A)effective integration
B)easily obtained financing
C)a long-term competitive advantage
D)animosity between the management teams

Question 56

The best long-term outcomes are typically associated with which restructuring activity?

A)Downsizing
B)Downscoping
C)Leveraged buyout
D)Acquisitions

Question 57

Define vertical acquisition.How does vertical acquisition lead to increased market power?