Question 1

According to the chapter Opening Case, cross-border M&A activity ______ in the 1990s and ___________ in 2008 and 2009.
A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Accepted Answer

The chapter Opening Case states that cross-border M&A activity increased in the 1990s and declined in 2008 and 2009.

Question 2

All of the following statements are correct EXCEPT
A) immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines.
B) shareholders of acquired firms often earn above-average returns from an acquisition.
C) the majority of acquisitions increase long-term value for the acquiring firm.
D) shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

Accepted Answer

The statement "the majority of acquisitions increase long-term value for the acquiring firm" is incorrect. Research shows that a significant portion of acquisitions do not create value for the acquiring firm in the long term. The other statements are generally true.

Question 3

In a merger
A) one firm buys controlling interest in another firm.
B) two firms agree to integrate their operations on a relatively coequal basis.
C) two firms combine to create a third separate entity.
D) one firm breaks into two firms.

Accepted Answer

The answer of In a merger
A) one firm buys controlling...

Question 4

There are few true mergers because
A) few firms have complementary resources.
B) integration problems are more severe than in outright acquisitions.
C) one firm usually dominates in terms of market share, size, or value of assets.
D) of managerial resistance. True mergers result in significant managerial-level layoffs.

Accepted Answer

One firm usually dominates in terms of market share, size, or value of assets. This means that one company is usually absorbing the other and the merger is not truly a merger of equals. Therefore, there are few true mergers.

Question 5

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

Accepted Answer

Downscoping involves divesting or spinning off certain business units or operations to focus on core competencies. This allows the top management team to have a clear understanding and better control over the remaining businesses, leading to more effective management.

Question 6

The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.

Accepted Answer

The answer of The outcome of downsizing, downscoping, and leveraged...

Question 7

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners
A) resisted selling at any price.
B) sold the company to the larger brewer.
C) designed a poison pill to discourage a takeover.
D) looked for smaller brewers to acquire instead of selling to the larger brewer.

Accepted Answer

Since Bayou Beauty is likely to be a takeover target, its value may increase significantly if acquired by a larger brewer. This would result in a significant gain for Claude who holds a large number of shares. Therefore, it would be in Claude's financial interest if Bayou Beauty's owners sold the company to the larger brewer.

Question 8

When a firm acquires its supplier, it is engaging in a(an)
A) merger.
B) unrelated acquisition.
C) hostile takeover.
D) vertical acquisition.

Accepted Answer

When a firm acquires its supplier, it is engaging in a vertical acquisition, which involves the acquisition of a company that operates in the same supply chain. The purpose of this type of acquisition is to improve operational efficiency and reduce costs by eliminating intermediaries in the supply chain.

Question 9

Market power is derived primarily from the
A) core competencies of the firm.
B) size of a firm and its resources and capabilities.
C) quality of a firm's top management team.
D) depth of a firm's strategy.

Accepted Answer

Market power is derived mainly from the size of the firm and its resources and capabilities. The larger the company, the more resources and capabilities it has to dominate the market, set prices, and influence customer demand. Core competencies, quality of top management, and depth of strategy may contribute to market power indirectly, but they are not the primary drivers of market power.

Question 10

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in five to eight years. This tends to make the managers of the bought-out firm high-risk takers, since they will probably not survive the resale and thus have little to lose.

Accepted Answer

The answer of The intent of the owners in a...

Question 11

A primary reason for a firm to pursue an acquisition is to
A) avoid increased government regulation.
B) achieve greater market power.
C) exit a hyper-competitive market.
D) achieve greater financial returns in the short run.

Accepted Answer

One of the primary reasons for a firm to pursue an acquisition is to achieve greater market power. By acquiring another company, the firm can increase its market share, reduce competition, and gain access to new markets or customer segments. While there may be other potential benefits, such as cost savings or strategic synergies, the pursuit of greater market power is often a key driver of mergers and acquisitions.

Question 12

A(an) ____ occurs when one firm buys a controlling, or 100% interest, in another firm.
A) merger
B) acquisition
C) spin-off
D) restructuring

Accepted Answer

An acquisition occurs when one firm buys a controlling, or 100% interest, in another firm. A merger, on the other hand, involves two firms joining together to form a new entity. A spin-off involves a company splitting into two separate entities, and restructuring involves making changes to a company's organization, operations, or debt structure.

Question 13

Researchers have found that shareholders of acquired firms often
A) earn above-average returns.
B) earn below-average returns.
C) earn close to zero as a result of the acquisition.
D) are not affected by the acquisition.

Accepted Answer

The answer of Researchers have found that shareholders of acquired...

Question 14

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(an)
A) stealth raid.
B) adversarial acquisition.
C) hostile takeover.
D) leveraged buyout.

Accepted Answer

A hostile takeover occurs when the target company does not solicit or welcome the acquisition bid from the acquiring company. In contrast, a friendly takeover occurs when the management of the target company is open and cooperative with the acquisition bid. A leveraged buyout (LBO) involves a financial sponsor or private equity firm acquiring a company using a significant amount of debt, while an adversarial acquisition and stealth raid are not commonly used terminology in the mergers and acquisitions field.

Question 15

Currently, the rationale for making an acquisition includes each of the following EXCEPT
A) To increase market power.
B) To decrease taxes paid by shareholders.
C) To overcome entry barriers.
D) To increase diversification.

Accepted Answer

While reducing taxes paid by shareholders may indirectly benefit the acquiring company, it is not typically considered a primary rationale for making an acquisition. Other reasons, such as increasing market power, overcoming entry barriers, and increasing diversification, have more direct and strategic benefits for the acquiring company.

Question 16

Toys "R" Us Inc. recently acquired specialty toy retailer FAO Schwarz. This is a _________ acquisition and is most likely intended to _________ .
A) vertical; increase diversification
B) horizontal; increase market power
C) vertical; overcome entry barriers
D) related; increase speed to market

Accepted Answer

This is a horizontal acquisition as Toys "R" Us Inc. is acquiring a similar business in the same industry. This type of acquisition is most likely intended to increase market power by expanding their reach and customer base.

Question 17

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.

Accepted Answer

When two companies merge or are acquired, there may be a duplication of functions and roles. Downsizing may be necessary to streamline operations and reduce costs.

Question 18

According to the chapter Opening Case, despite recent declines both globally and domestically, M&A opportunities seem strong in sectors such as ________and ________.
A) automobiles; hotels
B) health care; software
C) energy; health care
D) energy; biotechnology

Accepted Answer

According to the chapter Opening Case, despite recent declines both globally and domestically, M&A opportunities seem strong in sectors such as energy and healthcare.

Question 19

A leveraged buyout by a third party is often the result of managerial mistakes or management that has operated in its own self-interest rather than the firm's interest.

Accepted Answer

A leveraged buyout by a third party is often sought when investors or shareholders believe that the current management team is not managing the company effectively or in the best interest of the firm. This may include mismanagement, poor financial performance, or other factors that have led to a decrease in the company's value. In such cases, a third party may see an opportunity to take control of the company, improve its operations, and profit from its future growth potential.

Question 20

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.
A) result in above-average returns
B) provide approximately average returns
C) result in returns near zero
D) take some time to achieve private synergy, but eventually result in above-average returns

Accepted Answer

Studies have shown that acquisitions generally do not result in significant returns for the acquiring firm. In fact, many acquisitions fail to create any value for the acquirer and may even lead to a decline in performance. While there may be some exceptions where an acquisition leads to above-average returns, this is not the typical outcome.

Quiz 7: Merger and Acquisition Strategies

According to the chapter Opening Case, cross-border M&A activity in the 1990s and _____ in 2008 and 2009.

All of the following statements are correct EXCEPT

In a merger

There are few true mergers because

Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses.

The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.

Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners

When a firm acquires its supplier, it is engaging in a(an)

Market power is derived primarily from the

A primary reason for a firm to pursue an acquisition is to

A(an) ____ occurs when one firm buys a controlling, or 100% interest, in another firm.

Researchers have found that shareholders of acquired firms often

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(an)

Currently, the rationale for making an acquisition includes each of the following EXCEPT

Toys "R" Us Inc. recently acquired specialty toy retailer FAO Schwarz. This is a _ acquisition and is most likely intended to _ .

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.

According to the chapter Opening Case, despite recent declines both globally and domestically, M&A opportunities seem strong in sectors such as and .

A leveraged buyout by a third party is often the result of managerial mistakes or management that has operated in its own self-interest rather than the firm's interest.

Company experience and research findings have shown acquisitions typically ____ for the acquiring firm.