Question 1

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

Accepted Answer

The outcome of downsizing, downscoping, and leveraged buyouts can vary; they may lead to higher performance in some cases, but they can also result in negative consequences such as reduced employee morale, loss of valuable resources, or increased debt, which can hinder performance.

Question 2

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

Downsizing may be necessary in order to eliminate redundant positions and functions after an acquisition.

Question 3

Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms.

Accepted Answer

Hostile acquisitions generally result in conflicts and resistance from the target company, making it difficult for managers to integrate the firms smoothly. This can lead to higher costs and lower financial returns compared to friendly acquisitions, where both companies work together to merge seamlessly.

Question 4

One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power.

Accepted Answer

Acquisitions can involve high costs related to the integration of the two firms and the management of the combined entity. If these costs exceed the benefits of economies of scale and increased market power, the acquisition may not be successful in generating long-term value for the acquiring company. This is a well-known risk associated with mergers and acquisitions.

Question 5

Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.

Accepted Answer

Some firms may rely on acquisitions to drive growth instead of focusing on developing new innovative products or services. This can lead to a cycle of acquiring other companies to continue growing instead of investing in their own research and development.

Question 6

Top manager participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success.

Accepted Answer

This statement is true. Top managers' involvement in acquisition activities can shift their focus from other important matters that are essential for achieving long-term competitive success.

Question 7

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 selling or divesting certain businesses or operations of a company to focus on its core competencies. This can lead to a more streamlined and focused company, making it easier for top management to understand and manage the remaining businesses more effectively. Therefore, the statement is true.

Question 8

Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure.

Accepted Answer

Restructuring can involve changes to a company's business units, subsidiaries, product lines, or even its ownership structure. It can also involve changes to the way a company finances its operations, such as selling off assets, taking on debt, or raising equity capital.

Question 9

When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies.

Accepted Answer

When the expected results of an acquisition strategy are not achieved, firms often turn to restructuring strategies to improve the efficiency and profitability of the newly acquired company.

Question 10

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 11

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 Claude holds a large number of shares of Bayou Beauty, it would probably be in his financial interest if the company is sold to the major international brewer, as this would likely result in a higher purchase price for the shares compared to if the company remained independent or was acquired by a smaller brewer. Therefore, option B is the best choice.

Question 12

During the recent financial crisis, M&A activity ______, whereas in 2011, M&A activity ______.
A) declined; increased
B) declined; declined
C) increased; increased
D) increased; declined

Accepted Answer

During the financial crisis, M&A activity declined as companies were struggling to stay afloat and had less liquidity to invest in acquisitions. In 2011, the economy was recovering and M&A activity picked up as companies felt more confident in the market and had more access to capital.

Question 13

Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of the shareholders.

Accepted Answer

Leveraged buyouts have historically been used as a means to correct managerial mistakes or address conflicts of interest between managers and shareholders.

Question 14

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 5-8 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

In a leveraged buyout, managers often have incentives to improve firm performance to increase its resale value, which can lead to risk-averse behavior to ensure stability and profitability rather than high-risk taking.

Question 15

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Because both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

Accepted Answer

The answer of Wilberforce Press is a small book publishing...

Question 16

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

Accepted Answer

The answer of Downscoping represents a reduction in the number...

Question 17

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself.

Accepted Answer

Maintaining a low or moderate level of firm debt after an acquisition is important for its success, according to research. This suggests that even when substantial leverage was used to finance the acquisition, any additional debt should be managed carefully to avoid financial distress.

Question 18

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm.

Accepted Answer

The answer of Top managers typically become overly focused on...

Question 19

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance.

Accepted Answer

Engaging in a strategic alliance can help the firms evaluate their compatibility, assess their strengths and weaknesses, and test the potential benefits of a closer relationship before committing to a full merger or acquisition.

Question 20

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

Studies have shown that the majority of acquisitions actually decrease long-term value for the acquiring firm, making statement C incorrect.

Quiz 7: Merger and Acquisition Strategies