Deck 21: Mergers,Acquisitions,and Corporate Control

Question 1

Changing management is the only reason that firms make acquisitions.

Answer 1

False

Question 2

A conglomerate merger is defined as the merger of two or more Fortune 500 companies.

Answer 2

False

Question 3

Carve-outs and spin-offs both provide shares of the new firm to the divesting firm's shareholders.

Answer 3

False

Question 4

Evidence shows that investors will generally pay a premium for diversified firms.That is a good reason for firms to merge.

Question 5

Vertical integration makes sense when two firms are highly dependent upon each other.

Question 6

Target firms frequently deter potential bidders by devising poison pills,which make the company unappetizing.

Question 7

Takeovers are often described as part of a broader market for corporate control.

Question 8

A typical poison pill may give existing shareholders the right to buy the company's shares at half price as soon as a bidder acquires more than 15% of the shares.The bidder is not entitled to the discount.

Question 9

A merger must have the approval of at least 51% of the shareholders of each firm.

Question 10

It is always more efficient to integrate vertically than to outsource part of one's business.

Question 11

By offering to buy shares directly from a target's shareholders,the acquiring firm can bypass the target firm's management altogether.

Question 12

If a segment of a business is unrelated to the rest of the firm's activities,that segment is more likely to be spun off or carved out.

Question 13

Synergy is equal to the value of a combined firm minus the total value of the firms prior to merger.

Question 14

A vertical merger is one between firms at different levels of the production process.

Question 15

When a firm is taken over,its management is usually replaced.

Question 16

Strictly speaking,the purchase of the stock or assets of another firm is an acquisition.

Question 17

Firm A's shareholders will be better off with a stock offer than with a cash offer if A makes too generous of an offer for Firm B.

Question 18

Allergan's sale of its generic drug business to Teva Pharmaceutical was an example of a divestiture.

Question 19

The expected savings from merging two banks often come from consolidating operations and eliminating redundant costs.

Question 20

Instead of selling part of its operations,companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

Question 21

In a merger the acquiring firm buys only the debt of the target firm.

Question 22

The free-cash-flow theory supports the notion that the market gain from an LBO is basically the present value of the firm's future cash flows that would otherwise have been wasted.

Question 23

It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine their operations.

Question 24

The Williams Act in addition to state laws sets forth the rules for tender offers.

Question 25

One motive for acquiring a firm is to stop wastage of the target firm's cash reserves.

Question 26

In general,shareholders of the target firm benefit from takeovers.

Question 27

Leveraged buyouts are acquisitions where a large fraction of the purchase price is financed with debt.

Question 28

Management buyouts are generally all-equity financed by the new shareholders.

Question 29

Economies of vertical integration are one possible source of synergy in mergers.

Question 30

If investors believe a firm may be acquired,its market value is likely to be higher than its stand-alone value.

Question 31

An economic gain is derived from mergers when two firms are worth more combined than separate.

Question 32

Cross-border mergers are often motivated by tax considerations.

Question 33

Tax inversion refers to the fact that mergers often result in extra capital gains taxes for shareholders.

Question 34

In mergers financed by cash,the merger cost is not affected by the size of the merger gain.

Question 35

The value of the target firm's bonds tend to decrease when a leveraged buyout is announced.

Question 36

Contrary to logic,firms that enjoy complementary resources in the production process are rarely good candidates for merger.

Question 37

The 1980s were a time of little merger activity.

Question 38

On average,stockholders in target firms earn higher returns from mergers than the acquiring firm's stockholders.

Question 39

Only the U.S.has antitrust laws that can affect mergers and acquisitions.

Question 40

Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.

Question 41

The cost of a merger equals the:

A) cash paid for the target firm.
B) increase in total earnings minus the price paid.
C) premium paid over the target's value as a separate entity.
D) sum of cash and stock paid for the target firm.

Question 42

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:

A) proxy fights.
B) leveraged buyouts.
C) shark attractants.
D) poison pills.

Question 43

A conglomerate merger occurs when:

A) both partners are large in size.
B) large synergies are expected to develop.
C) firms from different industries merge.
D) both management teams remain intact after the merger.

Question 44

A spinoff is an action in which:

A) the management bids for and acquires the firm.
B) one firm issues stock to acquire another firm.
C) successful product lines are sold to competitors.
D) a portion of the firm's assets is sold off to form a new company.

Question 45

An increase in earnings per share may be increased by a merger if the:

A) number of shares has increased.
B) price of the acquirer's stock increases.
C) acquirer's P/E ratio is higher than that of the target.
D) firm's additional earnings are spent on legal expenses of the merger.

Question 46

Mergers may provide reductions in average production cost as a result of:

A) increased market price.
B) increased financing.
C) economies of scale.
D) diversification.

Question 47

If an automobile manufacturer were to acquire one of the firms listed below,which acquisition would be called a horizontal merger?

A) A steel mill
B) A rival manufacturer
C) A tire producer
D) A bank

Question 48

The cost of a merger may outweigh the potential gain if the:

A) present value of the acquired firm exceeds the price paid for it.
B) present value of the merged firms is greater than the sum of their individual values.
C) merger allows cost savings to occur.
D) acquired firm's shareholders receive more than the value of their firm.

Question 49

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines),the merger would be classified as a:

A) conglomerate.
B) leveraged buyout.
C) horizontal merger.
D) vertical merger.

Question 50

Which one of the following might you recommend to a firm with excessive free cash flow?

A) Acquire a firm to diversify
B) Acquire a firm to bootstrap earnings
C) A leveraged buyout
D) A repurchase of shares

Question 51

ABC Corp.has offered 1 million shares having a total market value of $8 million for XYZ.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,then the cost of the merger:

A) increased by $1 million.
B) decreased by $1 million.
C) increased by $9 million.
D) remained constant.

Question 52

A tender offer is one in which the firm's:

A) management offers to sell the company to an acquirer.
B) board of directors offers to sell the company to the public.
C) shareholders are given the opportunity to sell their shares to a would-be acquirer.
D) management offers to buy all outstanding shares of the corporation.

Question 53

Diversification is often a poor motive for mergers because:

A) vertical integration is rarely successful.
B) investors can diversify on their own account.
C) it does not produce economies of scale.
D) the increase in taxes overcomes any gains in earnings.

Question 54

In the case of a merger that is stock financed,the merger cost may change if the:

A) value of the target firm's shares changes after the merger announcement.
B) value of the acquiring firm's shares changes after the merger announcement.
C) long-term interest rates increase.
D) merger is either horizontal or vertical.

Question 55

When an outside group acquires a firm,primarily through the use of borrowed funds,the acquisition is known as a:

A) management buyout.
B) tender offer.
C) leveraged buyout.
D) successful proxy fight.

Question 56

When one firm merges with another,the:

A) boards of directors will merge also.
B) merger must be approved by 75% of the shareholders of the target firm.
C) assets will be merged but the liabilities will not.
D) target firm will cease to exist as a separate public company.

Question 57

One indication that investors expect no synergy from a merger would be that the:

A) total market value of the merged firms does not change.
B) P/E ratio of the merged firms' changes.
C) acquiring firm financed the merger with cash.
D) merged firms are from different industries.

Question 58

Firm B's 1 million shares of stock currently sell for $12 each,but firm A is preparing a tender offer of $18 per share.Firm A estimates the NPV of the merger to be $5 million.What percentage of the merger gains will be captured by firm B's stockholders?

A) 33.33%
B) 50.00%
C) 66.67%
D) 54.55%

Question 59

When a firm's management takes the firm private with the aid of substantial debt,it is known as a management:

A) tender offer.
B) greenmail offer.
C) buyout.
D) hostile takeover.

Question 60

When shareholders attempt to garner additional votes in an attempt to oust management,it is called a:

A) management buyout.
B) tender offer.
C) proxy contest.
D) poison pill.

Question 61

One of the reasons why proxy fights are often unsuccessful is that:

A) management is always viewed as performing its job well.
B) management can use corporate resources to defend against the fight.
C) mergers are a cheaper form of changing management.
D) shareholders are unconcerned with corporate management.

Question 62

If Georgia Pacific (lumber products)were to acquire a national homebuilding firm,the combination would be termed a:

A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) spin-off by the national homebuilding firm.

Question 63

If two merged firms are shown to have a higher combined market value than the sum of their individual market values,then:

A) there are economic gains.
B) the firms were previously underpriced.
C) the merger provides diversification to investors.
D) there is no cost involved in the merger.

Question 64

A public offer to purchase the shares of existing stockholders in order to take the firm over is called a:

A) tender offer.
B) carve-out.
C) spin-off.
D) divestiture.

Question 65

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

A) provides immediate benefit through improved management.
B) does not offer a positive NPV from the merger.
C) stays in effect only until EPS are increased.
D) does not require the approval of a majority of shareholders.

Question 66

Which one of the following is least likely to provide a motivation for vertical integration?

A) A continuous source of raw materials
B) A desire to spread fixed costs across more output
C) Access to an efficient distribution channel
D) Acquisition of an established customer base

Question 67

Why is it not sufficient to state that a merger should occur simply because the economic gains are positive?

A) Gains are typically of an accounting nature.
B) Shareholders of the target firm may capture all of the gains.
C) Merger costs should be negative after discounting.
D) The merger's gain must also exceed its NPV.

Question 68

Other things equal,which one of the following groups of stakeholders often lose value as a result of an LBO?

A) Selling stockholders
B) Buying stockholders
C) Pre-LBO bondholders
D) Investment bankers

Question 69

Which one of the following is false concerning a proposed merger of firms?

A) The acquired firm will cease to exist.
B) Shareholders of the acquired firm may receive securities in the acquiring firm.
C) Mergers are sometimes combinations of equals.
D) Shareholder approval to merge is not required.

Question 70

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt,it is known as a:

A) management buyout.
B) spin-off.
C) successful greenmail attempt.
D) corporate breakup.

Question 71

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

A) a higher price-earnings ratio.
B) higher total combined market value.
C) reduced future growth prospects.
D) increased free cash flow.

Question 72

Firms with substantial amounts of free cash flow often discover that:

A) conglomerate mergers are the best use for the funds.
B) accounting profits are what truly matter.
C) they have become takeover targets.
D) their capital budgets have been too low.

Question 73

Cash-rich firms often make questionable acquisitions,rather than pay out the cash to shareholders.This:

A) is because diversification is too costly for individuals.
B) is an example of an agency problem.
C) is because diversification eliminates inefficiencies.
D) is an example of the bootstrap game.

Question 74

Firms A and B were each currently worth $50 million but generated a $20 million gain when merged.If the cost of the merger was $5 million,how much did firm A pay for firm B?

A) $50 million
B) $55 million
C) $60 million
D) $65 million

Question 75

A change to the corporate charter that requires that any merger must be approved by a supermajority of shareholders is known as:

A) an LBO.
B) a proxy contest.
C) a carve-out.
D) a shark-repellent.

Question 76

Which of the following is not a mechanism for changing a firm's management?

A) A proxy contest
B) A leveraged buyout
C) A poison pill
D) A takeover

Question 77

The free-cash-flow theory of takeovers predicts that firms:

A) without free cash flow will become the most common LBOs.
B) with free cash flow will continue to be the acquirers.
C) with excess cash do not have a tendency to use it wisely.
D) with excess cash tend to have the most carve-outs.

Question 78

Proxy fights generally occur when a group is trying to:

A) rewrite the corporate charter.
B) bring about economies of scale.
C) replace the current board and management team.
D) pursue a public tender offer.

Question 79

If the shareholders of an acquired firm capture all of the merger's gain,then the:

A) cost of the merger is zero.
B) NPV of the merger is zero.
C) EPS will increase.
D) acquiring firm retains all merger benefits.

Question 80

Firms that are acquired to take advantage of bootstrapping often have:

A) a lower price-earnings ratio than the acquirer.
B) a higher price-earnings ratio than the acquirer.
C) more outstanding shares than the acquirer.
D) a higher market valuation than the acquirer.