Question 1

Because of hubris, managers of acquiring firms sometimes believe their valuation of a target firm is superior to the market's valuation. Under these circumstances, they often end up overpaying for the firm. True and False

Accepted Answer

This statement is true. Hubris can lead managers to believe that they know better than the market and overvalue the target company, resulting in overpayment.

Question 2

Takeover attempts are likely to increase when the market value of a firm's assets is more than their replacement value.

Accepted Answer

Takeover attempts are likely to increase when the market value of a firm's assets is less than their replacement value, as this indicates the firm may be undervalued, making it an attractive target for acquisition.

Question 3

Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered the primary reason for the acquisition of that firm.

Accepted Answer

While tax benefits, such as tax credits and net operating loss carry-forwards, can be attractive reasons for an acquisition, they are often not the primary reason. Acquisitions are typically driven by strategic goals such as expanding market share, acquiring new technologies, entering new markets, or achieving economies of scale.

Question 4

An acquisition is the purchase of an entire company or a controlling interest in a company.

Accepted Answer

An acquisition involves buying a company in whole or gaining a controlling interest in it.

Question 5

Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed.

Accepted Answer

This is true because deregulation often leads to a more competitive market where companies seek to increase market share and efficiency through mergers and acquisitions. Additionally, with fewer regulatory hurdles, it can be easier for companies to obtain approval for M&A deals.

Question 6

Overpayment is the leading factor contributing to the failure of M&As to meet expectations.

Accepted Answer

Overpayment occurs when the acquiring company pays too much for the target company, often based on overly optimistic projections or a desire to outbid competitors. This can lead to a poor return on investment and difficulties integrating the two companies, ultimately contributing to the failure of the M&A to meet expectations.

Question 7

A statutory merger is a combination of two corporations in which only one corporation survives with the merged corporation goes out of existence.

Accepted Answer

In a statutory merger, only one corporation survives while the other corporation goes out of existence, making the statement true.

Question 8

Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring firm shareholders.

Accepted Answer

Typically, mergers and acquisitions are seen as more beneficial for the shareholders of the target firm, often resulting in a premium on their shares, while the acquiring firm's shareholders may not see immediate benefits and can face risks associated with the costs and integration challenges of the acquisition.

Question 9

Post-merger returns to shareholders often do not meet expectations. However, this is also true of such alternatives to M&As as joint ventures, alliances, and new product introductions.

Accepted Answer

Studies have shown that post-merger returns to shareholders are often lower than expected, but this is also true for other strategic alternatives like joint ventures, alliances, and new product introductions.

Question 10

Consolidation occurs when two or more companies join to form a new company.

Accepted Answer

Consolidation refers to the merging of two or more companies to create a new entity.

Question 11

Operating synergy consists of economies of scale and scope. Economies of scale refer to the spreading of variable costs over increasing production levels, while economies of scope refer to the use of a specific asset to produce multiple related products or services.

Accepted Answer

Economies of scale refer to the spreading of fixed costs over increasing production levels, not variable costs. Economies of scope involve using a specific asset to produce multiple related products or services.

Question 12

Although there is substantial evidence that mergers pay off for target firm shareholders around the time the takeover is announced, shareholder wealth creation in the 3-5 years following a takeover is often limited.

Accepted Answer

This statement is true based on the evidence.

Question 13

Growth is often cited as an important factor in acquisitions. The underlying assumption is that that bigger is
better to achieve scale, critical mass, globalization, and integration.

Accepted Answer

Growth is often seen as a key motivation for acquisitions as it can help companies achieve economies of scale, expand their customer base and geographic reach, and integrate products and services.

Question 14

Market power is a theory that suggests that firms merge to improve their ability to set product and service selling prices.

Accepted Answer

Market power refers to the ability of a firm to control the price and quantity of goods or services in a given market. A firm with market power can charge higher prices and limit the supply of goods or services. Mergers can increase a firm's market power, allowing it to set higher prices and reduce competition.

Question 15

A leveraged buyout is the purchase of a company financed primarily by debt. This is a term commonly applied to a firm going private financed primarily by debt.

Accepted Answer

A leveraged buyout (LBO) involves using a significant amount of debt to acquire a company, with the aim of generating high returns for investors by improving the company's operations and profitability. This term is typically used when a publicly traded company is taken private using a large amount of debt financing.

Question 16

Pre-merger returns to target firm shareholders can exceed 30% around the announcement date of the transaction.

Accepted Answer

It is possible for pre-merger returns to target firm shareholders to exceed 30% around the announcement date of the transaction, particularly if the market perceives the merger as beneficial for the target firm. However, this is not always the case and returns can vary widely depending on various factors such as the strategic fit of the merger, industry trends, and market conditions.

Question 17

A subsidiary merger is a merger of two companies where the target company becomes a subsidiary of the parent.

Accepted Answer

In a subsidiary merger, the target company becomes a subsidiary of the parent company, making it a true statement.

Question 18

During periods of high inflation, the market value of assets is often less than their book value. This often creates an attractive M&A opportunity.

Accepted Answer

During periods of high inflation, the market value of assets often increases due to the rising replacement costs and general price levels, potentially making them more expensive than their book value, which is based on historical cost. This situation might not necessarily create attractive M&A opportunities based on asset values alone.

Question 19

Most empirical studies support the conclusion that unrelated diversification benefits a firm's shareholders.

Accepted Answer

While this statement was widely accepted in the past, recent empirical studies have shown mixed results on the benefits of unrelated diversification. Some studies suggest that related diversification may be more beneficial for shareholders. Additionally, the success of diversification strategies may depend on various factors such as the industry, the competitive environment, and the firm's resources and capabilities.

Question 20

Synergy is the notion that the combination of two or more firms will create value exceeding what either firm could have achieved if they had remained independent.

Accepted Answer

This is the definition of synergy.

Quiz 1: Introduction to Mergers, Acquisitions, and Other Restructuring Activities