Question 1

Some merger partners anticipate reduced earnings risk as a result of the merger.One reason for this may be that the merger opens up new markets with different economic characteristics.

Accepted Answer

By opening up new markets with different economic characteristics, the merged company can diversify its revenue streams and potentially reduce its reliance on any one market or segment. This can lead to reduced earnings risk overall.

Question 2

The 2007-2009 credit crunch resulted in numerous banks experiencing financial distress for which mergers and acquisitions were often the only option.

Accepted Answer

During the credit crunch, many banks did experience financial distress and mergers and acquisitions were often used as a way to address this issue.

Question 3

Bank regulators may challenge a merger between two institutions but can never require banks to divest themselves of some of their offices in order to secure regulators' approval.

Accepted Answer

Bank regulators have the authority to require banks to divest themselves of some branches or offices in order to secure approval for a merger or acquisition. This is known as a divestiture, and it is a commonly used tool to address antitrust concerns and ensure that the resulting bank or financial institution does not have undue market power or concentration in certain regions or segments.

Question 4

There is little evidence for cost savings resulting from large financial institution mergers.

Accepted Answer

Studies have shown that most large bank mergers do not result in significant cost savings, and in some cases, can even increase costs in the short term.

Question 5

According to the textbook,the lackadaisical profit performance surrounding a merger may be explained by the:

Accepted Answer

The lackadaisical profit performance surrounding a merger may be explained by the managerial hubris and sizeable merger premium that acquirers have to pay to shareholders of the acquired firms. This can lead to overpayment and an inability to generate significant profits due to the inflated cost of the acquisition. The other options, such as tax inefficiencies, credit line cuts, and accounting irregularities, may be contributing factors but are not the primary explanation for lackluster profit performance.

Question 6

The agency problem described in the textbook is referred to the idea of bank managers driven primarily by their own interest to increase salaries and benefits at the expense of company stockholders.

Accepted Answer

The agency problem described in the textbook is commonly referred to as the conflict between the interests of company managers and the interests of company stockholders, where managers may prioritize their own interests, such as maximizing their own salaries and benefits, over those of the stockholders.

Question 7

Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless the banks can show that the combined bank would have significant public benefits.

Accepted Answer

This statement is consistent with the guidelines set forth by the Antitrust Division of the Department of Justice and the Federal Trade Commission for evaluating the potential anticompetitive effects of mergers and acquisitions. Under these guidelines, mergers that are likely to substantially lessen competition are subject to scrutiny and may be challenged by federal authorities, unless the merging parties can demonstrate that the merger would result in significant public benefits that outweigh any potential harm to competition.

Question 8

The federal law that requires each U.S.merging bank to notify its principal federal regulatory agency and request for an approval before a merger can take place is the:

Accepted Answer

The Bank Merger Act, also known as the Bank Holding Company Act, is a federal law that requires banks to notify their principal federal regulatory agency and request approval before a merger can take place. This law aims to promote competition and prevent the formation of monopolies in the banking industry. The other options listed are banking laws, but they do not specifically address the requirement for approval of bank mergers.

Question 9

The ratio of an acquired bank's current stock price per share plus the additional amount paid by the acquirer for each share of the acquired bank's stock,divided by the acquired bank's current stock price is the:

Accepted Answer

The ratio described in the question is known as the merger premium. It is the additional amount paid by the acquirer for each share of the acquired bank's stock, compared to the acquired bank's current stock price. Dividing this by the acquired bank's current stock price gives the merger premium as a percentage.

Question 10

One of the most common motives for large banks to acquire smaller banks is to gain access to capable new management which is always in short supply at larger institutions.

Accepted Answer

While access to capable new management can be a motive for banks to acquire smaller banks, it is not the most common motive. The most common motives include gaining market share, expanding product offerings, and achieving economies of scale.

Question 11

A study by the Federal Reserve Board indicates that there are economies of scale (cost savings)resulting from mergers among relatively smaller banks and insurance companies.

Accepted Answer

The study by the Federal Reserve Board found that there are cost savings resulting from mergers among relatively smaller banks and insurance companies, indicating economies of scale.

Question 12

_________________ is a danger faced by the stockholders of an acquiring firm in a merger if excessive numbers of new shares are issued relative to the value of their old shares.

Accepted Answer

Dilution of ownership occurs when an acquiring firm's new shares are issued in such large numbers that the original stockholders' proportionate ownership in the firm declines. This can happen if the value of the old shares is higher than the value of the new shares, which reduces the stockholders' overall value and may negatively affect their control over the merged company.

Question 13

According to FASB,goodwill must now be amortized over its useful life.

Accepted Answer

Goodwill must not be amortized over its useful life under current U.S. GAAP (Generally Accepted Accounting Principles), as it is considered to have an indefinite life. Instead, it must be tested annually for impairment. However, international financial reporting standards (IFRS) do require goodwill to be amortized over its useful life.

Question 14

According to the textbook,bank mergers are often motivated by:

Accepted Answer

Bank mergers can be motivated by a variety of factors including profit potential, tax benefits, risk reduction, and market-positioning strategies. Therefore, all of the options provided are correct.

Question 15

If one of the banks is in financial stress,a merger is not allowed to take place.

Accepted Answer

Mergers can be a strategic solution for banks in financial stress, allowing them to combine resources with a healthier institution to stabilize their operations and protect depositors' interests.

Question 16

According to the textbook,the principal beneficiaries of most bank mergers appear to be:

Accepted Answer

The stockholders of the acquired bank often benefit from bank mergers because the acquisition typically involves a purchase price that is higher than the market value of the bank's shares prior to the merger announcement. This premium paid over the market price is a direct benefit to the stockholders of the acquired bank.

Question 17

The most important goal of any merger should be to increase the market value of the surviving firm.

Accepted Answer

The primary goal of any merger is to create value for shareholders, and one of the most common ways to achieve this is by increasing the market value of the surviving firm. However, it is important to note that there may be other goals, such as achieving cost synergies or expanding into new markets, that can also be important considerations in a merger.

Question 18

In order to get regulatory approval for a merger,many a times banks have been required to open up a number of new branch offices.

Accepted Answer

Regulatory approval for a merger often involves considerations of market competition and consumer impact, rather than mandating the opening of new branch offices. Regulators may require divestitures or other conditions to prevent monopolistic practices, but not specifically the opening of new branches.

Question 19

Recent research indicates that some merger activity may actually stimulate "de novo" bank entry into the marketplace.

Accepted Answer

According to recent research, some merger activity may lead to the creation of new banks or "de novo" bank entry into the market. Therefore, the statement is true.

Question 20

As a result of many bank mergers in the last few decades,research indicates that goodwill as an asset on many bank's balance sheets has grown exponentially.

Accepted Answer

Bank mergers often involve the acquisition of other banks at a premium, which creates goodwill as an asset on the balance sheet. Over time, as more mergers occur, the amount of goodwill on banks' balance sheets can grow exponentially.

Quiz 19: Acquisitions and Mergers in Financial-Services Management