Chapter 18: Mergers, LBOs, Divestitures, and Business Failure (T/F)

source: https://quizlet.com/user/kukuninah/sets

FALSE

A merger occurs when two or more firms are combined to form a completely new corporation.

TRUE

The overriding goal for merging is the maximization of the owners' wealth as reflected in the acquirer's share price.

TRUE

Firms' motives to merge include growth or diversification, synergy, fundraising, tax considerations, and defense against takeover.

TRUE

A conglomerate merger is a merger combining firms in unrelated businesses.

FALSE

A congeneric merger is a merger combining firms in unrelated businesses.

FALSE

Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.

FALSE

Vertical merger may result in expansion of operations in an existing product line and elimination of a competitor.

FALSE

Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.

TRUE

The companies controlled by a holding company are normally referred to as its subsidiaries.

FALSE

The takeover target's management may not support a proposed takeover due to a very high tender offer.

FALSE

A vertical merger is a merger of two firms in the same line of business.

FALSE

A horizontal merger is a merger in which one firm acquires another firm in the same general industry but neither in the same line of business nor a supplier or customer.

FALSE

A congeneric merger is a merger in which a firm acquires a supplier or a customer.

TRUE

Tender offer is a formal offer to purchase a given number of shares of a firm's stock at a specified price.

TRUE

Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

FALSE

An operating merger occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm.

FALSE

A holding company is a corporation which is controlled by one or more other corporations.

FALSE

Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

FALSE

A consolidation is a corporation that has voting control of one or more other corporations.

FALSE

Financial merger is a merger transaction undertaken to achieve economies of scale.

FALSE

Strategic merger is a merger transaction undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

TRUE

The synergy of mergers is the economies of scale resulting from the merged firms' lower overhead.

TRUE

The tax loss carryforward benefits can be used in mergers but cannot be used in the formation of holding companies.

TRUE

LBOs are an example of a financial merger undertaken to create a high-debt private corporation with improved cash flow and value.

TRUE

An attractive candidate for acquisition through leveraged buyout must have a good position in its industry with a solid profit history and reasonable expectation for growth.

FALSE

An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of debt and a low level of "bankable" assets.

TRUE

The motive for divestiture is often to get rid of a product line in order to generate cash for expansion of other product lines.

TRUE

The selling of some of a firm's assets for various strategic motives is called divestiture.

TRUE

A spin-off is a form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent company's shareholders.

TRUE

The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.

TRUE

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

FALSE

The basic difficulty in applying the capital budgeting approach to the acquisition of a going concern is the estimation of initial cash flows and certain risk consideration.

TRUE

Stock swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

TRUE

Ratio of exchange in market price indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.

TRUE

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

TRUE

The earnings per share of the merged firm are generally above the premerger earnings per share of one firm and below the premerger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.

TRUE

If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firm's EPS increases and the acquiring firm's EPS decreases.

TRUE

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.

TRUE

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.

TRUE

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

TRUE

Two-tier offer is a tender offer in which the terms offered are more attractive to those who tender shares early.

FALSE

White knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

FALSE

Poison pill is a takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.

TRUE

Greenmail is a takeover defense under which the target firm repurchases a large block of stock at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

TRUE

Pyramiding is an arrangement among holding companies wherein one company controls others, thereby causing an even greater magnification of earnings and losses.

FALSE

Technical insolvency occurs when a firm's liabilities exceed the fair market value of its assets.

FALSE

In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the firm's operating management and operates the firm until all claims have been settled.

FALSE

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily.

TRUE

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

FALSE

One of the responsibilities of the Debtor in Possession (DIP) is the liquidation of the firm's assets.

TRUE

In the broadest sense, activities involving expansion or contraction of a firm's operations or changes in its assets or ownership structure are called corporate restructuring.

FALSE

In the broadest sense, activities involving expansion or contraction of a firm's operations or changes in its assets or ownership structure are called corporate maneuvering.

TRUE

Holding companies simply are corporations that have voting control of one or more other corporations and the companies they control are often referred to as subsidiaries.

FALSE

Subsidiary companies simply are corporations that have voting control of one or more other corporations and the companies they control are often referred to as holding companies.

TRUE

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeovers.

FALSE

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and acquiring new upper-level management personnel.

TRUE

It is not unusual for acquirers in LBOs to be members of the firm's existing management team.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively low level of debt and a high level of relatively liquid assets that could be used as loan collateral.

FALSE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a relatively high level of debt and a low level of relatively liquid assets that could be used as loan collateral.

TRUE

One of the key attributes that makes a firm a good candidate for an LBO is that it has a solid position in the industry with reasonable expectations for future growth.

TRUE

Unlike business bankruptcy and business failure, divestiture is often undertaken for positive motives such as to generate cash for the expansion of product lines, to get rid of poorly performing operations, to streamline the company, or to restructure the business that is consistent with the firm's strategic goals.

FALSE

Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm's relatively high debt levels.

TRUE

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, spin-offs, and the liquidation of assets.

FALSE

Methods of divestiture include the sale of a product line to another firm, the sale of a unit to existing management, the donation of a unit to a charity, and the liquidation of assets.

FALSE

The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firm's part and parcel value.

TRUE

The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firm's breakup value.

TRUE

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a stock swap transaction.

FALSE

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a leveraged buyout.

FALSE

Acquisitions are especially attractive when the acquired firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

TRUE

Acquisitions are especially attractive when the acquiring firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

TRUE

Popular takeover defense methods include white knights, poison pills, greenmail, golden parachutes, and shark repellents.

FALSE

Popular takeover defense methods include white knights, poison pills, greenmail, financial sabotage, and shark repellents.

FALSE

The U.S. approaches used in hostile takeovers is an affective method of changing corporate control and used in many areas of the world including Great Britain, China, and Japan.

TRUE

The U.S. approaches used in hostile takeovers is practically nonexistent in most other countries throughout the world including continental Europe and Asia.

TRUE

The primary causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

FALSE

The primary causes of business failure are inventory mismanagement, poor marketing campaigns, and corporate theft.

TRUE

The debtor in possession in a Chapter 11 bankruptcy proceeding is responsible for valuing the firm both in terms of its liquidation value and as a going concern.

FALSE

The creditor in possession in a Chapter 12 bankruptcy proceeding is responsible for valuing the firm both in terms of its liquidation value and as a going concern.

TRUE

In a Chapter 7 liquidation bankruptcy proceeding, the order of priority of satisfying claims is secured creditors, unsecured creditors, and then equity holders.