Chapter 7

Question 1

Cross-border acquisitions involve

Answer 1

acquisitions made by firms both within and between developed and developing countries.

Question 2

Researchers have found that shareholders of acquired firms often

Answer 2

earn above-average returns.

Question 3

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

Answer 3

result in returns near zero

Question 4

All of the following statements are correct EXCEPT

Answer 4

the majority of acquisitions increase long-term value for the acquiring firm.

Question 5

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

Answer 5

to decrease taxes paid by shareholders.

Question 6

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

Answer 6

sold the company to the larger brewer.

Question 7

In a merger

Answer 7

two firms agree to integrate their operations on a relatively coequal basis.

Question 8

There are few true mergers because

Answer 8

one firm usually dominates in terms of market share or firm size.

Question 9

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

Answer 9

acquisition

Question 10

When the target firm’s managers oppose an acquisition, it is referred to as a(an)

Answer 10

hostile takeover.

Question 11

Market power is derived primarily from the

Answer 11

size of a firm and its resources and capabilities.

Question 12

Two existing U.S. airlines, American West Airlines and U.S. Airways, have merged. The purpose of this merger is most likely to ____ and constitutes ____ action.

Answer 12

increase market power; horizontal

Question 13

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

Answer 13

achieve greater market power.

Question 14

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

Answer 14

vertical acquisition.

Question 15

Mittal Steel, the world’s largest producer of steel, is headquartered in the Netherlands and has operations on four continents. It acquired U.S.-based ISG, a U.S.-owned steel company, in 2004. This is an example of both a cross-border acquisition and

Answer 15

horizontal acquisition.

Question 16

Related acquisitions to build market power

Answer 16

are likely to undergo regulatory review.

Question 17

Baby Doe’s, a designer and manufacturer of children’s clothing, has decided to purchase a retail chain specializing in children’s clothing. This purchase is a(an)

Answer 17

vertical acquisition.

Question 18

Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the suppliers’ products are sold. This purchase is a(an)

Answer 18

vertical acquisition.

Question 19

Cross-border acquisitions are typically made to

Answer 19

circumvent barriers to entry in another country.

Question 20

The presence of barriers to entry in a particular market will generally make acquisitions ____ as an entry strategy.

Answer 20

more likely

Question 21

SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market, SpeakEasy would be best served if it considers a/an

Answer 21

acquisition of a highly related firm in the technical translation market.

Question 22

Cross-border acquisitions are critical to U.S. firms competing internationally

Answer 22

if they wish to overcome entry barriers to international markets.

Question 23

The majority of new product innovations are copied by rivals within ____ years of introduction.

Answer 23

four

Question 24

Which of the following is NOT one of the primary reasons many pharmaceutical firms use acquisitions?

Answer 24

extending patent rights on developed pharmaceuticals

Question 25

Internal product development is often viewed as

Answer 25

carrying a high risk of failure.

Question 26

A manager in your company is proposing the acquisition of Taylor company, which has developed a new, innovative product. If you were to argue in favor of internal product development as opposed to acquisition, your argument could include all of the following EXCEPT

Answer 26

Taylor’s innovation could become a part of all of your firm’s products.

Question 27

Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for

Answer 27

innovation

Question 28

Compared to internal product development, acquisitions allow

Answer 28

more accurate prediction of return on investment.

Question 29

Research has shown that the more ____, the greater is the probability that an acquisition will be successful.

Answer 29

related the acquired and acquiring firms are

Question 30

When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to ____ by making an acquisition.

Answer 30

broaden its competitive scope

Question 31

The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because

Answer 31

it is difficult and time intensive for companies to develop products that differ from their current product line.

Question 32

Sales of watches among teenagers and 20-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group may wish to consider ____ in order to develop new products other than watches.

Answer 32

unrelated diversification.

Question 33

Each of the following is a rationale for acquisitions EXCEPT

Answer 33

positioning the firm for a tactical competitive move.

Question 34

Research shows that about ____ percent of mergers and acquisitions are successful.

Answer 34

20

Question 35

Problems associated with acquisitions include all of the following EXCEPT

Answer 35

excessive time spent on the due diligence process.

Question 36

The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms

Answer 36

with insufficient diversification.

Question 37

The ____ phase is probably the single most important determinant of shareholder value creation in mergers and acquisitions.

Answer 37

post-acquisition integration

Question 38

Without effective due diligence the

Answer 38

acquiring firm is likely to overpay for an acquisition.

Question 39

Due diligence includes all of the following activities EXCEPT assessing

Answer 39

the level of private synergy between the two firms.

Question 40

Pappelbon Enterprises recently acquired a chain of convenience stores offering both fuel and food. Pappelbon is now surprised and dismayed to find that the gas pumps have been poorly maintained and will need to be replaced at considerable expense. Each of the following statements accurately reflect this EXCEPT

Answer 40

Pappelbon’s management was overly focused on acquisitions.

Question 41

The use of high levels of debt in acquisitions has contributed to

Answer 41

an increased risk of bankruptcy for acquiring firms.

Question 42

____ are unsecured obligations that are not tied to specific assets for collateral.

Answer 42

Junk bonds

Question 43

A high level of debt can be a positive force because it allows firms to

Answer 43

take advantage of expansion opportunities.

Question 44

Which of the following statements is FALSE?

Answer 44

Although private synergy is easy to analyze, it is difficult to create.

Question 45

Private synergy

Answer 45

is not easy to understand and imitate.

Question 46

The expenses incurred by firms trying to create synergy through acquisition are called ____ costs.

Answer 46

transaction

Question 47

Transaction costs include all of the following EXCEPT

Answer 47

managers’ time spent planning the diversification strategy of the firm.

Question 48

Which of the following is NOT a result of over-diversification?

Answer 48

Managers emphasize strategic controls rather than financial controls.

Question 49

Evidence suggests that firms using acquisitions as a substitute for internally developed innovations

Answer 49

eventually encounter performance problems.

Question 50

When managers become overly focused on making acquisitions, it is

Answer 50

because it is more fun to do deals than to run the company.

Question 51

Acquisitions can become a time sink for top level managers for all the following reasons EXCEPT

Answer 51

only top managers can perform the required due diligence.

Question 52

The leadership of apparel maker Liz Claiborne made a number of acquisitions which increased the size of the company from $800 million to $5 billion. The number of brands Claiborne controlled more than doubled, from 16 to 36. However, the acquisitions left Claiborne in a less attractive position, with retailers unwilling to be heavily reliant on one supplier. This situation was the result of

Answer 52

Claiborne managers focusing too much on acquisitions at the expense of managing their existing businesses.

Question 53

One problem with becoming too large is that large firms

Answer 53

usually increase bureaucratic controls.

Question 54

Thomas is an upper-middle level manager for a firm that has been actively involved in acquisitions over the last 10 years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial culture of the firm has been turning more and more to ____ controls.

Answer 54

bureaucratic

Question 55

A friendly acquisition

Answer 55

facilitates the integration of the acquired and acquiring firms.

Question 56

____ allows the acquiring firm to keep valuable human resources in the acquired firm from leaving.

Answer 56

Effective integration

Question 57

Which of the following is NOT an attribute of a successful acquisition?

Answer 57

Investments in advertising and image building are made quickly.

Question 58

Typically, in a failed acquisition, the organization will

Answer 58

restructure

Question 59

Soon after Daimler Benz acquired Chrysler and became DaimlerChrysler, it became apparent that expected cost savings would not be achieved. One could predict that, as in other failed acquisitions and mergers, the firm would engage in the following EXCEPT

Answer 59

enhanced due diligence.

Question 60

Ambrose is a scientist working for a pharmaceutical company. His company was acquired by a rival pharmaceutical company, and now it is involved in downsizing and downscoping. Ambrose is concerned about his job security, since he is actively involved in amateur sports in his community and does not wish to disrupt his current lifestyle. Ambrose’s job will be most likely to be secure if

Answer 60

Ambrose is a key employee in the firm’s primary business.

Question 61

Magma, Inc., acquired Vulcan, Inc., three years ago. Effective integration of the two companies’ culture was never achieved, and the two firms’ assets were not complementary. It is very likely that Magma will

Answer 61

restructure

Question 62

Which of the following is NOT one of the three main restructuring strategies?

Answer 62

realigning

Question 63

Among Fortune 1000 firms, downsizing is

Answer 63

very common, over 80% of firms have used it.

Question 64

____ occur when a single firm creates at least two firms in a nontaxable breakoff creating at least one new equity share offering.

Answer 64

Spin-offs

Question 65

Downsizing usually results in

Answer 65

an entrepreneurship boom.

Question 66

Firms use downsizing as a restructuring strategy for different reasons, but the major tactical reason is

Answer 66

the desire to lower labor costs.

Question 67

Downsizing may be of more ____ value than ____ value.

Answer 67

short-term, long-term

Question 68

An investor is analyzing two firms in the same industry. She is looking for long term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive downscoping. The investor should invest in the

Answer 68

downscoping firm because it will be focusing on the firm’s core businesses.

Question 69

Compared with downsizing, ____ has (have) a more positive effect on firm performance.

Answer 69

downscoping

Question 70

A leveraged buyout refers to

Answer 70

a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private.

Question 71

The term “leverage” in leveraged buyouts refers to the

Answer 71

amount of new debt incurred in buying the firm.

Question 72

Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT

Answer 72

inefficient operations.

Question 73

After a leveraged buyout, ____ typically occur(s).

Answer 73

selling off of assets