chapter12

1 Multiple Choice A firm engages in a(n) when it purchases a second firm. A) acquisition, B) joint venture, C) strategic alliance, D) equity alliance

A

2 Multiple Choice When one firm acquires a(n) of another firm, it has acquired enough of that firm's assets so that the acquiring firm is able to make all the management and strategic decisions in the target firm. A) market stake, B) equity share, C) controlling share, D) equity stake

C

3 Multiple Choice A(n) acquisition occurs when the management of a target firm wants to be acquired. A) hostile, B) admirable, C) strategic, D) friendly

D

4 Multiple Choice When a firm has not sold shares on the public stock market, it is known as A) closely held., B) privately held., C) publicly traded., D) a small cap stock.

B

5 Multiple Choice The difference between the current market price of a target firm's shares and the price a potential acquirer offers to pay for those shares is known as an A) acquisition premium., B) acquisition discount., C) acquisition margin., D) acquisition price.

A

6 Multiple Choice When Sears and Kmart, two retail firms of relatively equal size in the United States, agreed to combine their assets, this was an example of a(n) P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars. A) joint venture., B) acquisition., C) merger., D) equity agreement.

C

7 Multiple Choice If P&G's bid for Gillette was invited by Gillette's management, this would be an example of a A) hostile acquisition., B) joint venture., C) friendly acquisition., D) merger.

C

8 Multiple Choice If Gillette's total market value on the day the deal was announced was $48.30 billion, P&G's $57 billion offer would represent an A) 18% acquisition premium., B) 82% acquisition discount., C) 82% acquisition premium., D) 18% acquisition discount.

A

9 Multiple Choice Since both P&G and Gillette are consumer products firms, this acquisition is best described as a A) vertical merger., B) horizontal merger., C) market extension merger., D) conglomerate merger.

B

10 Multiple Choice P&G is a leading consumer goods company in the United States that has grown its business through a combination of international growth, alliances, acquisitions and mergers. In 2003, P&G acquired the beauty care company Wella to acquire products that would complement its current product. In 2004, P&G acquired AG-Hutchison Ltd to establish a stronger presence in the Chinese consumer goods products market. In 2005, P&G acquired Gillette, another consumer goods company, in a deal worth approximately $57 billion dollars. P&G's acquisition of Wella in 2003 is an example of a A) market extension merger., B) conglomerate merger., C) vertical merger., D) product extension merger.

D

11 Multiple Choice P&G's purchase of AG-Hutchison Ltd in 2004 is an example of a A) conglomerate merger., B) vertical merger., C) market extension merger., D) conglomerate acquisition.

C

12 True/False A firm engages in an acquisition when it purchases a second firm.

TRUE

13 True/False For a firm to gain a controlling share in an acquisition, it must purchase more than 51% of the acquired firm's assets.

FALSE

14 True/False When the management of a target firm wants the firm to be acquired, this is known as a hostile takeover.

FALSE

15 True/False A privately held firm has not sold any shares on the public stock market.

TRUE

16 True/False In an acquisition a tender offer can only be made with the support of the management of the acquired firm.

FALSE

17 True/False When the assets of two similar-sized firms are combined, this is known as a merger.

TRUE

18 True/False While mergers typically begin as a transaction between equals, that is, between firms of equal size and profitability, they often evolve after a merger such that one firm is more dominant in the management of the merged firm than the other.

TRUE

20 Multiple Choice In 2016, the total value of announced merger and acquisition activities worldwide was $ trillion. A) 2.8, B) 4.5, C) 3.2, D) 5.4

B

21 Multiple Choice In 2015, there were over acquisitions worldwide. A) 8,000, B) 17,000, C) 45,000, D) 61,000

C

22 Multiple Choice The price of each of a firm's shares multiplied by the number of shares outstanding represents the firm's A) total equity base., B) current market value., C) total market share., D) current market share.

B

23 Multiple Choice In an unrelated acquisition, if 5 firms are interested in acquiring a firm and each of the bidding firms had a current market value of $30,000 while the current market value of the target firm is $20,000, this acquisition is likely to generate economic profits of for the acquiring firm. A) $10,000, B) $20,000, C) $50,000, D) $0.00

D

24 Multiple Choice If an electronics manufacturer were to acquire a chain of retail electronic stores to sell its products, this would be an example of a merger. A) vertical, B) horizontal, C) market extension, D) product extension

A

25 Multiple Choice If eBay were to acquire a smaller online auction company, this would be an example of a merger. A) conglomerate, B) vertical, C) market extension, D) horizontal

D

26 Multiple Choice In a merger, firms acquire complementary products through their merger and acquisition activities. A) vertical, B) market extension, C) product extension, D) horizontal

C

27 Multiple Choice When eBay acquired Baaze.com, an Indian auction firm, in order to enter the Indian online auction market, this was an example of a merger. A) product extension, B) market extension, C) conglomerate, D) vertical

B

28 Multiple Choice If there are no vertical, horizontal, product extension, or market extension links between firms, the FTC defines the merger or acquisition activity between firms as a merger. A) conglomerate, B) vertical, C) horizontal, D) product extension

A

29 Multiple Choice economies are scale economies that occur when the physical processes inside a firm are altered so that the same amounts of input produce a higher quantity of outputs. A) Pecuniary, B) Diversification, C) Technical, D) Vertical

C

30 Multiple Choice Which of the following is a source of diversification economies? A) marketing, B) production, C) scheduling, D) portfolio management

D

31 Multiple Choice economies are achieved by the ability of firms to dictate prices by exerting market power. A) Pecuniary, B) Technical, C) Diversification, D) Production

A

32 Multiple Choice economies are achieved by improving a firm's performance relative to its risk attributes or lowering its risk attributes relative to its performance. A) Technical, B) Diversification, C) Pecuniary, D) Market

B

33 Multiple Choice Which of the following is a financial motivation for why bidding firms might want to engage in merger and acquisition strategies? A) to increase leverage opportunities, B) to capture economies of scale, C) to adopt more efficient production or organizational technology, D) to engage in vertical integration

A

34 Multiple Choice Which one of the following is not one of the reasons that Jensen and Ruback listed as to why bidding firms might want to engage in merger and acquisition strategies? A) to reduce production or distribution costs, B) to gain market power in product markets, C) to expand individual managers' power within an organization, D) to eliminate inefficient target management

C

35 Multiple Choice In a related acquisition, if there is one target firm and ten bidding firms, and the value of each of the bidding firms as a stand-alone entity is $50,000 and the value of the target firm as a stand-alone entity is $30,000, the market value of the combined entity will be A) $0.00., B) less than $80,000., C) $80,000., D) more than $80,000.

D

36 Multiple Choice The CEO and the top management team at Conglomerate, Inc. have the unrealistic belief that they should have an aggressive merger and acquisition strategy because they can manage the assets of a target firm better than the managers of the target firm. Conglomerate, Inc.'s CEO and the top management team suffer from . A) managerial hubris, B) the Icarus paradox, C) arbitrage fever, D) underconfidence

A

37 Multiple Choice firms typically raise money from numerous smaller investors, which they then invest in a portfolio of entrepreneurial firms. A) Business angel, B) Venture capital, C) Closely held, D) Private equity

B

38 Multiple Choice In a(n) , a firm, typically working with an investment banker, sells its equity to the public at large. A) FTC, B) merger, C) IPO, D) acquisition

C

39 Multiple Choice Entrepreneurs must rely on capital generated from their ongoing operations or and debt capital provided by banks. A) initial public offering, B) retained earnings, C) venture capital firms, D) operating budgets

B

40 Multiple Choice Managers of bidding firms continue to engage in merger or acquisition strategies even though they usually do not generate profits for bidding firms in order to

A) ensure survival.

B) improve firm reputation.

C) reduce agency problems.

D) reduce managerial hubris.

A

41 Multiple Choice If one of the reasons P&G acquired Gillette was to gain greater market power in key industries, this would be an example of economies. A) technical, B) pecuniary, C) diversification, D) vertical

B

42 True/False The number of firms that have used merger and acquisition strategies to become diversified over the past few years is minimal after the credit crunch crisis in 2008.

FALSE

43 True/False In 2016, the total value of mergers and acquisition deals in the United States was $10 trillion.

FALSE

44 True/False The price of each of a firm's shares multiplied by the number of shares outstanding is known as the firm's current market value.

TRUE

45 True/False In all acquisitions bidding, firms will be willing to pay a price for a target up to the value that the firm adds to the bidder once it is acquired.

TRUE

46 True/False The acquisition of strategically unrelated targets will generate substantial economic profits for both the bidding and the target firms.

FALSE

47 True/False If there is any hope that mergers and acquisitions will be a source of superior performance for bidding firms, it must be because of some sort of strategic relatedness between bidding and target firms.

TRUE

48 True/False In principle, the Federal Trade Commission will allow any acquisition involving firms with headquarters in the United States that could have the potential for generating monopoly or oligopoly profits in an industry.

FALSE

49 True/False According to the Federal Trade Commission, a firm engages in a horizontal merger when it acquires former suppliers or customers.

FALSE

50 True/False In a product extension merger, a firm acquires complementary products through merger and acquisition activities.

TRUE

51 True/False It is clear that mergers and acquisitions create value for firms implementing these strategies.

FALSE

52 True/False Diversification economies are achieved by the ability of firms to dictate prices by exerting market power.

FALSE

53 True/False To be economically valuable, links between bidding and target firms must meet the same criteria as diversification strategies.

TRUE

54 True/False If bidding and target firms are strategically related, then the economic value of these two firms combined is greater than their economic value as separate entities.

TRUE

55 True/False Firms should pursue merger and acquisition strategies only to obtain valuable economies of scope that outside investors find too costly to create on their own.

TRUE

56 True/False The existence of strategic relatedness between bidding and target firms is sufficient for the equity holders of bidding firms to earn economic profits from their acquisition strategies.

FALSE

57 True/False The number of firms that have used merger and acquisition strategies over the past few years is staggering.

TRUE

58 True/False One study that reviewed 40 empirical merger and acquisition studies in the finance literature concluded that acquisitions, on average, increased the market value of bidding firms by about 25 percent and left the market value of the target firms unchanged.

FALSE

59 True/False Strategy researchers have found that in mergers and acquisitions, the more strategically related bidding and target firms are, the more economic value these mergers and acquisitions create.

TRUE

60 True/False In mergers and acquisitions, the owners of the bidding firm appropriate the economic value created by the transaction.

FALSE

61 True/False The cumulative abnormal return for a merger or acquisition can be positive or negative depending on whether the stock in question performs better or worse than what was expected without an acquisition.

TRUE

62 True/False Free cash flow is simply the amount of cash a firm has to invest after all positive net present-value investments in its ongoing businesses have been funded.

TRUE

63 True/False Managerial hubris is the well-founded belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management.

FALSE

64 True/False The difference between the unexpected value of an acquisition actually obtained by a bidder and the price the bidder paid for the acquisition is a profit for the equity holders of the target firm.

FALSE

70 Multiple Choice Which of the following actions should bidding firm managers take to help earn superior performance in an acquisition strategy? A) Share information with other bidders., B) Delay the closing of the deal., C) Avoid winning bidding wars., D) Operate in competitive acquisition markets.

C

71 Multiple Choice A thinly traded market is a market where A) there are only a small number of buyers and sellers,where information about opportunities in this market is not widely know, and where interests besides purely maximizing the value of a firm can be important., B) many firms are implementing acquisition strategies., C) information about opportunities in this market is widely known., D) the only important interest is to maximize the value of a firm.

A

72 Multiple Choice To ensure that the owners of target firms appropriate whatever value is created by a merger or acquisition, managers in these target firms should A) create a thinly traded market for their firm., B) seek information from bidders., C) close the acquisition deal quickly., D) limit the number of bidders involved in the bidding competition.

B

73 Multiple Choice is (are) a maneuver in which a target firm's management purchases any of the target firm's stock owned by a bidder and does so for a price that is greater than the current market value of that stock. A) Standstill agreements, B) Poison pills, C) Shark repellents, D) Greenmail

D

74 Multiple Choice Firms using fend off an acquisition by taking over the firm or firms bidding for them. A) shark repellents, B) a crown jewel sale, C) the Pac Man defense, D) a golden parachute

C

75 Multiple Choice A is a compensation arrangement between a firm and its senior management team that promises these individuals substantial cash payment if their firm is acquired and they lose their jobs in the process. A) white knight agreement, B) greenmail agreement, C) shark repellent, D) golden parachute

D

76 Multiple Choice A is another bidding firm that agrees to acquire a particular target in the place of the original bidding firm. A) golden parachute, B) greenmail, C) white knight, D) crown jewel

C

77 Multiple Choice include a variety of relatively minor corporate governance changes that, in principle, are supposed to make it more difficult to acquire a target firm. A) Shark repellents, B) White knights, C) Greenmail, D) Poison pills

A

78 Multiple Choice Supermajority voting rules are an example of a A) poison pill., B) white knight., C) golden parachute., D) shark repellent.

D

79 Multiple Choice does not affect the wealth of target firm equity holders. A) Blue Man defense, B) Pac Man defense, C) Golden parachute, D) Silver parachute

B

80 Multiple Choice is an example of an ineffective and inconsequential response with the idea that sometimes a bidding firm is interested in just a few of the businesses currently being operated by the target firm.A) A Pac Man defense, B) A Blue Man defense, C) A crown jewel sale, D) A golden parachute defense

C

81 Multiple Choice If P&G wanted to increase the probability that it would be able to earn superior economic performance from its acquisition of Gillette, P&G should A) share information about Gillette with other potential bidders., B) share information about strategic fit potential between P&G and Gillette with Gillette., C) wait to submit its bid for Gillette until there are multiple interested bidders., D) close the acquisition deal as quickly as possible.

D

82 Multiple Choice If Gillette's managers wanted to maximize the value that Gillette received from its acquisition by P&G, they should A) seek information from P&G about the value that P&G will receive from its acquisition of Gillette., B) not engage in negotiations with any bidder but P&G., C) close the acquisition as quickly as possible., D) stop the acquisition.

A

83 Multiple Choice If P&G's acquisition of Wella had been delayed because it had to overcome a stipulation in Wella's corporate bylaws requiring that more than 50% of Wella's board of directors had to approve the takeover, this would be an example of A) the Pac Man defense., B) a poison pill., C) greenmail., D) a shark repellent.

D

84 True/False The market for corporate control is the market that is created when multiple firms actively seek to acquire one or several firms.

TRUE

85 True/False One of the main reasons why bidding firms do not obtain competitive advantages from acquiring strategically related target firms is that several other bidding firms value the target firm the same way.

TRUE

86 True/False One of the keys for a bidding firm to earn superior performance in an acquisition strategy is to make sure that multiple bidders are pursuing the same target.

FALSE

87 True/False When acquiring a publicly traded firm a bidder has to release all the information it has about the potential value of that target in combination with itself.

FALSE

88 True/False A thinly traded market is a market where there are only a small number of buyers and sellers, where information about the opportunities in this market is not widely known, and where interests besides purely maximizing the value of a firm can be important.

TRUE

93 Multiple Choice Mergers and acquisitions used to create diversification strategies should be managed through the A) M-form structure., B) functional structure., C) U-form structure., D) matrix structure.

A

94 Multiple Choice The most significant challenge in integrating bidding and target firms has to do with

A) accounting differences.

B) cultural differences.

C) operational differences.

D) logistic differences.

B

95 Multiple Choice The most significant challenge P&G is likely to face in integrating each of the acquired companies into P&G's operations is likely to be differences between P&G and each of the companies. A) logistical, B) cultural, C) operational, D) distribution

B

96 True/False Mergers and acquisitions designed to create vertical integration should be managed through the M-form structure.

FALSE

97 True/False Perhaps the most significant challenge in integrating bidding and target firms has to do with cultural differences.

TRUE

98 True/False Operational, functional, strategic, and cultural differences between bidding and target firms can all be compounded by the merger and acquisition process especially if that process was unfriendly.

TRUE

99 True/False Unfriendly takeovers can generate anger and animosity among the target firm management that is directed toward the management of the bidding firm.

TRUE

100 True/False The value that a bidding firm brings to a target firm through an acquisition should be discounted by the cost of strategizing to implement an acquisition.

FALSE/