Question 1

A(n) __________ occurs when one firm buys a controlling, or 100 percent interest, in another firm.
A) merger
B) acquisition
C) spin-off
D) restructuring

Accepted Answer

An acquisition occurs when one firm buys a controlling or 100 percent interest in another firm, effectively taking over its operations and assets.

Question 2

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

Accepted Answer

Firms often use restructuring strategies to address underperformance and realign resources to improve outcomes when acquisition strategies do not meet expectations.

Question 3

Currently, the rationale for making an acquisition includes all of the following EXCEPT to:
A) increase market power.
B) decrease taxes paid by shareholders.
C) overcome entry barriers.
D) increase diversification.

Accepted Answer

Decreasing taxes paid by shareholders is not a typical rationale for making an acquisition. Acquisitions are usually aimed at increasing market power, overcoming entry barriers, or increasing diversification.

Question 4

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

In a leveraged buyout, managers often become more risk-averse because they may have equity stakes or incentives tied to the firm's performance, aligning their interests with the firm's success to ensure their own job security and financial benefits.

Question 5

Downsizing tends to be of more long-term, or tactical, value than short-term, or strategic, value, making it an optimal restructuring option for managers with a vision for the future.

Accepted Answer

Downsizing is typically a short-term, tactical measure aimed at reducing costs quickly, rather than a long-term strategic approach for future growth.

Question 6

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

Accepted Answer

Acquisitions can lead to increased complexity and costs in managing a larger organization, which may outweigh the benefits of economies of scale and market power if not managed effectively.

Question 7

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

Downscoping refers to the divestiture, spin-off, or elimination of businesses that are not aligned with the firm's core operations, focusing on reducing diversification, not necessarily reducing employees or operating units.

Question 8

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n):
A) stealth raid.
B) adversarial acquisition.
C) takeover or unfriendly acquisition.
D) leveraged buyout.

Accepted Answer

An unfriendly acquisition, also known as a hostile takeover, occurs when the target firm does not solicit or welcome the acquiring firm's bid.

Question 9

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

Accepted Answer

Leveraged buyouts (LBOs) were often employed to address agency problems where managers were not acting in the best interests of shareholders, by replacing management or altering the firm's capital structure to improve efficiency and accountability.

Question 10

In a merger:
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.
D) one firm breaks into two firms.

Accepted Answer

In a merger, two firms agree to integrate their operations on a relatively coequal basis, combining their resources and operations to form a single entity.

Question 11

Research results indicate all of the following EXCEPT:
A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines in the majority of cases.
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

Research generally shows that while acquisitions can create value, the majority do not significantly increase long-term value for the acquiring firm.

Question 12

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

Accepted Answer

Downscoping involves reducing the complexity of a firm's operations by divesting non-core businesses, which allows management to focus on and better understand the core areas, leading to more effective management.

Question 13

Restructuring is a strategy through which a firm changes its set of businesses or its financial structure.

Accepted Answer

Restructuring involves altering a company's business portfolio or financial arrangements to improve efficiency or adapt to market changes.

Question 14

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer.It would probably be in Claude's financial interest if Bayou Beauty's owners:
A) resisted selling at any price.
B) sold the company to the larger brewer.
C) designed a poison pill to discourage a takeover.
D) looked for smaller brewers to acquire instead of selling to the larger brewer.

Accepted Answer

If Bayou Beauty is taken over by a larger brewer, the share price is likely to increase, benefiting Claude financially.

Question 15

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

A strategic alliance allows companies to collaborate and understand each other's operations, culture, and synergies, providing valuable insights into the potential success of a merger or acquisition.

Question 16

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

Accepted Answer

Hostile acquisitions often face resistance from the target company's management and employees, making integration more challenging and potentially reducing financial returns.

Question 17

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, and human resources management.

Accepted Answer

Acquisitions can lead to overlapping roles and functions, making downsizing a strategy to eliminate redundancies and improve efficiency.

Question 18

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

Shareholders of acquired firms often earn above-average returns because acquiring companies typically pay a premium over the market price to gain control of the target company.

Question 19

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

Maintaining a low or moderate level of firm debt post-acquisition helps ensure financial stability and flexibility, which are crucial for the long-term success of the acquisition.

Question 20

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.Because both of these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Accepted Answer

The answer of Wilberforce Press is a small book publishing...

Quiz 7: Merger and Acquisition Strategies

A(n) __________ occurs when one firm buys a controlling, or 100 percent interest, in another firm.

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

Currently, the rationale for making an acquisition includes all of the following EXCEPT to:

Downsizing tends to be of more long-term, or tactical, value than short-term, or strategic, value, making it an optimal restructuring option for managers with a vision for the future.

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

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.

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n) :

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

In a merger:

Research results indicate all of the following EXCEPT: