Question 1

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

Accepted Answer

This is the correct definition of restructuring.

Question 2

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

Accepted Answer

Engaging in a strategic alliance can help the firms to test their compatibility and potential for collaboration, which can provide valuable information for a future merger or acquisition.

Question 3

During the recent financial crisis, M&A activity ______ whereas in 2011, M&A activity __________.
A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Accepted Answer

During the financial crisis, M&A activity declined due to the economic uncertainty and lack of available financing. However, in 2011, M&A activity began to increase as the economy stabilized and companies looked for opportunities to grow and expand.

Question 4

All of the following statements are correct EXCEPT
A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines.
B) shareholders of acquired firms often earn above-average returns from an acquisition.
C) the majority of acquisitions increase long-term value for the acquiring firm.
D) shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

Accepted Answer

Studies have shown that the majority of acquisitions actually do not increase long-term value for the acquiring firm. The other statements are generally true, with minor exceptions. For example, sometimes shareholders of acquiring firms can earn significant returns from an acquisition if the firm is able to acquire the target at a bargain price.

Question 5

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.

Accepted Answer

Downsizing is often necessary after acquisitions because there may be duplicate organizational functions in the newly formed firm.

Question 6

Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rtaher than those of the shareholders.

Accepted Answer

This is a correct statement about traditional leveraged buyouts.

Question 7

Researchers have found that shareholders of acquired firms often
A) earn above-average returns.
B) earn below-average returns.
C) earn close to zero as a result of the acquisition.
D) are not affected by the acquisition.

Accepted Answer

The answer of Researchers have found that shareholders of acquired...

Question 8

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in five to eight years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose.

Accepted Answer

The answer of The intent of the owners in a...

Question 9

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

Accepted Answer

Downscoping involves divesting or spinning off businesses that are no longer part of the company's core operations. This can help streamline and simplify the remaining businesses, making it easier for top management to oversee and manage them effectively. By focusing on a smaller set of core businesses, management can gain a deeper understanding of the company's strengths and weaknesses, and allocate resources more strategically to achieve its goals.

Question 10

Firms often use the downscoping and downsizing strategies simultameously as did Citigroup in its restructuring ( Chapter 7 Strategic Focus).

Accepted Answer

Citigroup used both downscoping and downsizing as part of its restructuring strategy. Downscoping involved divesting from non-core businesses, while downsizing involved reducing the size of its workforce.

Question 11

Some research findings have shown that acquisitions typically ____ for shareholders in the acquiring firm.
A) result in above-average returns
B) provide approximately average returns
C) result in returns near zero
D) take some time to achieve private synergy, but eventually result in above-average returns

Accepted Answer

Studies have shown that acquisitions tend to result in returns near zero, meaning that the value of the acquiring firm does not increase significantly as a result of the acquisition.

Question 12

When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies.

Accepted Answer

When the actual results of an acquisition strategy fall short of the projected results, firms often consider using restructuring strategies such as downsizing, divestiture, or reorganization.

Question 13

Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms.

Accepted Answer

The answer of Hostile acquisitions provide greater financial returns to...

Question 14

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Since both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Accepted Answer

The passage states that both companies have a long, stable history in highly related industries and that they are both family-run businesses with unique cultures. These factors suggest that the acquisition has a high probability of success.

Question 15

According to the Chapter 7 Opening Case, the difference between Facebook's acquisition approach and the approaches of Microsoft and Google is that
A) Facebook tends to acquire earlier-stage companies whereas Microsoft and Google tend to acquire later-stage companies.
B) None of Facebook's acquisitions have survived as independent companies whereas those of Microsoft and Google have continued to operate as subsidiaries.
C) Facebook's approach is to acquire earlier-stage companies whereas Microsoft and Google tend to acquire later-stage companies.
D) Microsoft's and Google's acquisitions have all been friendly whereas Facebook's have all been hostile.

Accepted Answer

The answer of According to the Chapter 7 Opening Case,...

Question 16

One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power.

Accepted Answer

Acquisitions can lead to increased costs associated with integrating and managing the new company, and if these costs outweigh the expected benefits of economies of scale and market power, the acquisition may not be successful.

Question 17

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

Accepted Answer

The answer of Research has shown that maintaining a low...

Question 18

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 corporation's portfolio.

Accepted Answer

The answer of Downscoping represents a reduction in the number...

Question 19

The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.

Accepted Answer

The answer of The outcome of downsizing, downscoping, and leveraged...

Question 20

According to the Chapter 7 Opening Case, the difference between Google's and Microsoft's acquisition approaches is that
A) Microsoft tends to acquire earlier-stage companies whereas Google tends to acquire later-stage companies.
B) None of Google's acquisitions have survived as independent companies whereas Microsoft's have continued to operate as subsidiaries.
C) Google's approach is to acquire earlier-stage companies whereas Microsoft tends to acquire later-stage companies.
D) Google's acquisitions have all been friendly whereas Microsoft's have all been hostile.

Accepted Answer

According to the Chapter 7 Opening Case, Google tends to acquire earlier-stage companies while Microsoft tends to acquire later-stage companies, which is the main difference in their acquisition approaches. Option A is incorrect as it is the opposite of the correct statement. Option B is incorrect because there is no mention of the survival of the acquired companies in the case. Option D is incorrect as there is no indication that all of Microsoft's acquisitions have been hostile.

Quiz 7: Merger and Acquisition Strategies

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

During the recent financial crisis, M&A activity whereas in 2011, M&A activity ____.

All of the following statements are correct EXCEPT