Question 1

A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a:

Accepted Answer

A supermajority amendment is a change in a company's charter that requires a larger-than-normal majority (often 70% to 90%) of shareholders to approve certain actions, such as mergers or acquisitions, making it harder for the firm to be taken over.

Question 2

Synergy is defined as the:

Accepted Answer

Synergy refers to the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. This means that when two firms merge, the new entity can potentially generate more value than the two individual firms could on their own, due to efficiencies, new capabilities, or market power gained through the combination.

Question 3

Eat M Up is considering a hostile takeover of the Everyday Company. To prevent such an event, the Everyday Company scrambles to get the Good Guys Network to buy them. The Good Guys Network is referred to as the:

Accepted Answer

The Good Guys Network is referred to as the "White Knight" because it is a friendly company that comes to the rescue of a company facing a hostile takeover, like the Everyday Company in this scenario.

Question 4

A new company financed with funds from two existing firms for the purpose of working together on a project is called a(n):

Accepted Answer

A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. Each of the participants is responsible for profits, losses, and costs associated with it.

Question 5

Corporate charter provisions allowing existing shareholders to purchase stock at some fixed price in the event of a hostile outside takeover attempt are called ___________________.

Accepted Answer

Share rights plans, also known as "poison pills," are designed to dilute the holdings of a potential acquirer by allowing existing shareholders to purchase additional shares at a discount, making a takeover more expensive and less attractive.

Question 6

The distribution of shares in a subsidiary to existing parent company stockholders is called a(n):

Accepted Answer

A spin-off occurs when a parent company distributes shares of a subsidiary to its current shareholders, effectively creating a separate, independent company.

Question 7

Schottenheimer Industries has a great deal of cash but few investment opportunities. Montana, Inc., on the other hand, has many investment opportunities but finds it difficult to obtain financing. The acquisition of Montana by Schottenheimer would be made in order to ________.

Accepted Answer

The acquisition of Montana by Schottenheimer would be made to exploit synergies. Schottenheimer's excess cash can be used to finance Montana's investment opportunities, creating value that neither company could achieve independently.

Question 8

Suppose General Motors buys up auto dealerships in all the major cities in Canada. This is an example of a _________________ acquisition.

Accepted Answer

This is an example of a vertical acquisition because General Motors, an automobile manufacturer, is acquiring auto dealerships, which are part of its supply chain but operate at a different level of production or distribution. Vertical acquisitions involve a company acquiring another company that operates in the production process of the same industry but at a different stage.

Question 9

A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called (a):

Accepted Answer

A poison pill is a strategy used by companies to deter or discourage hostile takeovers by making the company less attractive to the acquirer. This can be done through various means, such as allowing existing shareholders to buy more shares at a discount, which would dilute the ownership interest of a new, hostile party trying to take over.

Question 10

A deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group is called a:

Accepted Answer

A going-private transaction is a deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group.

Question 11

An attempt to gain control of a firm by soliciting a sufficient number of shareholder votes to replace the current board of directors is called a:

Accepted Answer

A proxy contest is a strategy used by shareholders and outside parties attempting to gain control of a company by convincing other shareholders to vote in a way that is contrary to the current management's wishes, often to replace the board of directors.

Question 12

If a firm makes an acquisition to exploit perceived opportunities in a new industry, it is expecting ____________________ as a result of the purchase.

Accepted Answer

When a firm makes an acquisition to exploit perceived opportunities in a new industry, it is primarily seeking strategic benefits. This includes entering new markets, accessing new customer bases, or acquiring new technologies or competencies that complement the firm's existing operations.

Question 13

If the average cost per unit decreases when a horizontal merger occurs then the combined firm is benefiting from synergy arising from:

Accepted Answer

Economies of scale occur when increasing production leads to a lower cost per unit, which can happen after a horizontal merger as the combined firm can operate more efficiently.

Question 14

When Firm A acquired Firm B, no incremental value was created but earnings per share increased. If the financial markets are astute, the price-earnings ratio of Firm A should ____ and the stock price of Firm A should _____.

Accepted Answer

If no incremental value is created by the acquisition, the market might view the earnings increase skeptically, leading to a decrease in the price-earnings ratio as earnings increase without a corresponding increase in stock price. However, the stock price might not change if the market had already anticipated the effects of the acquisition.

Question 15

The amount paid by an acquirer to the shareholders of the acquired firm that exceeds the stand-alone value is called the:

Accepted Answer

The amount paid by an acquirer to the shareholders of the acquired firm that exceeds the stand-alone value of the firm is known as the merger premium. This reflects the additional value the acquirer sees in the firm beyond its current market value, often due to synergies, strategic advantages, or other factors that the acquirer believes will make the combined entity more valuable.

Question 16

A targeted stock repurchase of the firm directed at a potential bidder to discourage an unfriendly takeover attempt is called (a):

Accepted Answer

Greenmail refers to the strategy where a company buys back its own shares at a premium from a potential bidder to prevent an unfriendly takeover, often with the agreement that the bidder will not seek to purchase any more shares for a certain period of time.

Question 17

When a building supply store acquires a lumber mill they are doing a ______ acquisition.

Accepted Answer

When a building supply store acquires a lumber mill, it is engaging in a vertical acquisition because it is acquiring a company that operates earlier in the supply chain. This type of acquisition aims to control more stages of the production or supply process.

Question 18

A contract that limits the holdings of a bidder to a minority stake in the target firm is called a:

Accepted Answer

A standstill agreement is a contract that limits the holdings of a bidder to a minority stake in the target firm, often used to prevent hostile takeovers by ensuring that the bidder cannot acquire a controlling interest without the consent of the target company's board.

Question 19

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n):

Accepted Answer

An equity carve-out occurs when a parent company sells a portion of the equity of a wholly owned subsidiary to the public through an initial public offering (IPO). This allows the parent company to capitalize on the subsidiary while still maintaining control if it does not sell the entire stake.

Question 20

In the early 1900s, the Standard Oil Company purchased many of its competitors in order to reduce competition and increase its share of the domestic oil market. The firm's actions are consistent with a strategy of making acquisitions to ________.

Accepted Answer

The strategy of purchasing competitors to reduce competition and increase market share is aimed at enhancing revenues by eliminating competition and potentially increasing pricing power, leading to higher sales and profits.

Quiz 23: Mergers and Acquisitions