Question 1

Among the advantages of acquisitions are the expensive premiums that are frequently paid to acquire a business.

Accepted Answer

There are many potential drawbacks or limitations to merger activity. For example, the takeover premium that is paid for an acquisition typically is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30 percent or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price.

Question 2

The potential advantages of strategic alliances and joint ventures include entering new markets as well as developing and diffusing new technologies.

Accepted Answer

Strategic alliances and joint ventures have many potential advantages. Among these are entering new markets, reducing manufacturing (or other) costs in the value chain, and developing and diffusing new technologies.

Question 3

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package.

Accepted Answer

A golden parachute is a prearranged contract with managers specifying that, in the event of a hostile takeover, the target company managers will be paid a significant severance package. Although top managers lose their jobs, the golden parachute provisions protect their income.

Question 4

Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities by not having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

Accepted Answer

Compared to mergers and acquisitions, firms that engage in internal development capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

Question 5

When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better financial reward for PeopleSoft shareholders.

Accepted Answer

In December 2004, Oracle struck a deal to buy PeopleSoft, ending a bitter 18-month hostile takeover battle. The Oracle 10.3 billion USD acquisition valued the firm at 26.50 USD a share, which was an increase of 66 percent over its initial offer of 16 USD a share.

Question 6

Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced price to a third party.

Accepted Answer

Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

Question 7

One of the obligatory aspects of strategic alliances is the dependence on written contracts to delimit responsibilities and enforce compliance.

Accepted Answer

A strategic alliance is a cooperative relationship between two (or more) firms. Alliances may be either informal or formal, one involving a written contract.

Question 8

Antitakeover defenses are always a management ploy to protect their own self interests.

Accepted Answer

Antitakeover defenses represent a gray area, because management can often legitimately argue that such actions are not there solely to benefit themselves. Rather, they can benefit other stakeholders, such as employees, customers, and the community.

Question 9

Divestment is useful to help a firm reverse an earlier acquisition that did not result in successful growth.

Accepted Answer

Divestments, the exit of a business from the company portfolio, are quite common. One study found that large, prestigious U.S. companies divested more acquisitions than they kept. Divesting a business can accomplish many different objectives. It can be used to help a firm reverse an earlier acquisition that did not work out as planned.

Question 10

Poison pills always are used to protect the best interests of management.

Accepted Answer

On moral grounds, some antitakeover defenses are not undertaken to entrench and protect management, but often they are. When such defenses are used simply to keep management in power, they are wrong. However, when they are used to defend the long-term financial health of the company and to protect broader stakeholder interests, they will be morally permissible.

Question 11

Unfriendly or hostile takeovers always occur when the stock of the company becomes undervalued.

Accepted Answer

Unfriendly or hostile takeovers can occur when the stock of the company becomes undervalued. The risk is that leadership engages in antitakeover tactics to preserve their wealth or power.

Question 12

Through joint ventures, firms can directly acquire the assets and competencies of other firms.

Accepted Answer

Joint ventures represent a special case of alliances, wherein two (or more) firms contribute equity to form a new legal entity.

Question 13

In recent years, many high tech firms such as Priceline.com have suffered from the negative impact of uncontrolled growth.

Accepted Answer

In recent years many high-tech firms have suffered from the negative impact of their uncontrolled growth. Consider, for example, Priceline.com made an ill-fated venture into an online service to offer groceries and gasoline. A myriad of problems, perhaps most importantly a lack of participation by manufacturers, caused the firm to lose more than 5 million USD a week prior to abandoning these ventures.

Question 14

Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end bonuses just before the company was rescued by Bank of America. This practice demonstrates managerial greed.

Accepted Answer

A healthy ego helps make a leader confident, clearheaded, and able to cope with change. CEOs, by their very nature, are intensely competitive people in the office as well as on the tennis court or golf course. But sometimes when pride is at stake, individuals will go to great lengths to win. Few executives are exempt from the potential downside of excessive egos and greed.

Question 15

Poison pills are used by a company to take away shareholder rights in the event of a takeover by another firm.

Accepted Answer

Poison pills are used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans.

Question 16

An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Accepted Answer

Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system.

Question 17

An advantage of internal development is that firms do not have to combine activities across the value chains of many companies and merge company cultures.

Accepted Answer

Firms that engage in internal development (like corporate entrepreneurship) capture the value created by their own innovative activities without having to share the wealth with alliance partners or face the difficulties associated with combining activities across the value chains of several firms or merging corporate cultures.

Question 18

Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and controlled growth.

Accepted Answer

Some managerial behaviors may serve to erode shareholder returns. Among these are growth for the sake of growth, egotism, and antitakeover tactics.

Question 19

Zara, a Spanish clothing company, operates stores in over 70 countries. When entering markets very distant from its home markets, Zara rarely uses local alliance partners to help it negotiate the different cultural and regulatory environments.

Accepted Answer

Zara, a Spanish clothing company, operates stores in over 70 countries. Still, when entering markets very distant from its home markets, Zara often uses local alliance partners to help it negotiate the different cultural and regulatory environments. Entering new markets requires financial resources, requisite market expertise to understand local customer needs, know how to promote the product, and access to the proper distribution channels. These are reasons that a company is likely to use local alliance partners when it first enters a new market distant from its own.

Question 20

An advantage of a firm entering into a strategic alliance is that it does not have to share the wealth with its partners.

Accepted Answer