Management Chapter 7

Sales of watches among teenagers and twenty-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. a. unrelated diversification b. backward integration c. forward integration d. horizontal acquisition

A

Compared with downsizing, __________ has (have) a more positive effect on firm performance. a. reconfiguring b. downscoping c. leveraged buyouts d. acquisitions

B

Cross-border acquisitions are primarily made to: a. reshape the firm's competitive scope. b. reduce the cost of new product development. c. take advantage of higher education levels of labor in developed countries. d. overcome barriers to entry in another country.

D

Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the supplier's products are sold. This purchase is a(n): a. merger. b. unrelated acquisition. c. horizontal acquisition. d. vertical acquisition.

D

One problem with becoming too large is that large firms: a. tend to have less market power. b. have less potential for economies of scale. c. become attractive takeover targets. d. usually increase bureaucratic controls.

D

Problems associated with acquisitions include all of the following EXCEPT: a. managers overly focused on acquisitions. b. integration difficulties. c. large or extraordinary debt. d. excessive time spent on the due diligence process.

D

TableTop Industries just went through a restructuring and is experiencing reduced labor costs. It is most likely that TableTop just completed what? a. A downsizing b. A downscoping c. A management buyout d. An employee buyout

D

A merger is defined as a strategy in which one firm purchases controlling interest in another firm.

False

Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels.

False

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.

False

The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.

False

A leveraged buyout will often result in a short-term outcome of __________, which, in turn, leads to a long-term outcome of __________. a. high debt costs; higher risk b. high debt costs; higher performance c. high debt costs; lower performance d. Emphasis on strategic controls; higher risk

A

The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms: a. with insufficient diversification. b. having too much debt. c. being unable to achieve synergy. d. growing too large.

A

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. a. bureaucratic b. strategic c. tactical d. organic

A

What type of buyout is most likely to lead to greater entrepreneurial activity and growth? a. Management buyout b. Employee buyout c. Related buyout d. Whole-firm buyout

A

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.

B

A(n) __________ occurs when one firm buys a controlling, or 100 percent interest, in another firm. a. merger b. acquisition c. spin-off d. restructuring

B

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(n): a. vertical acquisition of a firm that uses technical translation products. b. acquisition of a highly related firm in the technical translation market. c. cross-border merger, preferably with an Indian or Chinese company. d. strategy of internally developing the technical translation products needed to compete in this market.

B

Acquisitions can take a lot of time for top level managers for all the following reasons EXCEPT: a. the integration process after acquisition requires managerial attention. b. they must prepare for acquisition negotiations. c. managers are involved in the search for viable acquisition candidates. d. only top managers can perform the required due diligence.

D

__________ are unsecured obligations that are not tied to specific assets for collateral. a. Bearer bonds b. No-load stocks c. Penny stocks d. Junk bonds

D

__________ refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core businesses. a. Downsizing b. Hostile takeovers c. Shakeouts d. Downscoping

D

A related acquisition involves two firms in the same industry.

False

An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review.

False

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.

False

Large or extraordinary debt is defined as overpaying for an acquired firm.

False

Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful.

False

The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself.

False

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.

False

United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy.

False

Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using a related diversification strategy.

False

A horizontal acquisition involves two firms in the same industry.

True

A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.

True

Acquisitions can become a substitute for innovation in some firms and can leave a firm vulnerable.

True

Among the challenges associated with integration processes is the need to link different financial and control systems.

True

An acquisition occurs when one firm buys a controlling, or 100 percent, interest in another firm and the acquired firm becomes a subsidiary business within its portfolio.

True

Company experiences show that 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.

True

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

True

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

True

Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company.

True

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

True

A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product, instead of adopting a strategy of developing new products in-house. All of the following arguments are correct EXCEPT: a. the acquisition of Taylor should be primarily for defensive rather than strategic reasons. b. research suggests that acquisition strategies are a common means of avoiding risky internal ventures. c. the outcomes of acquisitions can be estimated more easily and accurately than the outcomes for an internal product development process. d. acquisitions could become a substitute for innovation within your firm.

A

After a leveraged buyout, __________ typically occur(s). a. selling of assets b. further rounds of acquisitions c. due diligence d. private synergy

A

Failing to __________ appropriately will result in too many employees doing the same work and prevent the new firm from realizing the cost synergies it anticipated. a. downsize b. spin off c. downscope d. buy out

A

Horizontal, vertical, and related acquisitions to build market power: a. are likely to undergo regulatory review by various governmental entities. b. are rarely permitted to occur across international borders. c. typically involve a firm purchasing one of its suppliers or distributors. d. concentrate on capturing value at more than one stage in the value chain.

A

Internal product development is often viewed as: a. carrying a high risk of failure. b. the only reliable method of generating new products for the firm. c. a quicker method of product launch than acquisition of another firm. d. critical to the success of biotech and pharmaceutical firms.

A

Research has shown that the more __________, the greater is the probability that an acquisition will be successful. a. related the acquired and acquiring firms are b. diverse the resulting portfolio of competencies c. disparate the corporate cultures d. involved investment banking firms are in the due diligence process

A

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.

A

The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n): a. vertical acquisition. b. unrelated acquisition. c. horizontal acquisition. d. merger of equals

A

Which of the following is NOT one of the three main restructuring strategies? a. Realigning b. Downsizing c. Downscoping d. Leveraged buyouts

A

Without effective due diligence, the: a. acquiring firm is likely to overpay for an acquisition. b. firm may miss its opportunity to buy a well-matched company. c. acquisition may deteriorate into a hostile takeover, reducing the value-creating potential of the action. d. firm may be unable to act quickly and decisively in purchasing the target firm.

A

An investor is analyzing two firms in the same industry which are basically identical. She is looking for long-term performance from her investment. Both firms are undergoing restructuring. One firm is involved in substantial downsizing, and the other firm is undertaking aggressive downscoping. The investor should invest in the: a. downscoping firm because the higher debt load will discipline managers to act in shareholders' best interests. b. downscoping firm because this will cause the firm to refocus on its core business. c. downsizing firm because it will be making decisions based on tactical strategies. d. downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability.

B

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.

B

Compared to internal product development, acquisitions allow: a. immediate access to innovations in mature product markets. b. more accurate prediction of return on investment. c. slower market entry. d. more effective use of company core competencies.

B

Currently, the rationale for making an acquisition includes all of the following EXCEPT to: a. increase market power. b. decrease taxes paid by shareholders. c. overcome entry barriers. d. increase diversification.

B

Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for: a. market discipline. b. innovation. c. risk analysis. d. international diversification.

B

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.

B

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.

B

The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because: a. of barriers to entry in many industries. b. it is difficult and time intensive for companies to develop products that differ from their current product line. c. innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting from acquisition. d. unrelated acquisitions are usually uncomplicated since the acquired firm is allowed to continue to function independently as it did before acquisition.

B

The presence of barriers to entry in a particular market will generally make acquisitions __________ as an entry strategy. a. less likely b. more likely c. prohibitive d. illegal

B

The term "leveraged" in leveraged buyouts refers to the: a. firm's increased concentration on the firm's core competencies. b. amount of new debt incurred in buying the firm. c. fact that the employees are purchasing the firm for which they work. d. process of removing the firm's stock from public trading.

B

The use of high levels of debt in acquisitions has contributed to: a. the increase in above-average returns earned by acquiring firms. b. an increased risk of bankruptcy for acquiring firms. c. the confidence of the stock market in firms issuing junk bonds. d. an increase in investments that have long-term payoffs.

B

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. a. increase new product speed to market b. broaden its competitive scope c. increase its economies of scale d. overcome entry barriers

B

Which of the following is NOT a result of overdiversification? a. Executives do not have a rich understanding of all of the firm's business units. b. Managers emphasize strategic controls rather than financial controls. c. Firms use acquisition as a substitute for innovation. d. Managers become short-term in their orientation.

B

A friendly acquisition: a. raises the price that has to be paid for a firm. b. enhances the complementarity of the two firms' assets. c. facilitates the integration of the acquired and acquiring firms. d. allows joint ventures to be developed.

C

A leveraged buyout refers to a(n): a. firm restructuring itself by selling off unrelated units of the company's portfolio. b. firm pursuing its core competencies by seeking to build a top management team that comes from a similar background. c. restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private. d. action where the management of the firm and/or an external party buys all of the assets of a business financed largely with equity.

C

BradyHawk found itself in a bidding war and paid a 32 percent premium to acquire LasLuces in 2017 and issued more stock to raise capital This illustrates what problem associated with acquisitions? a. Integration difficulties b. Inadequate evaluation of the target c. Large or extraordinary debt d. Too much diversification

C

Due diligence includes all of the following activities EXCEPT assessing: a. differences in firm cultures. b. tax consequences of the acquisition. c. the level of private synergy between the two firms. d. financing for the intended transaction.

C

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: a. go public through an IPO. b. review the due diligence information collected before the acquisition. c. restructure. d. review its tactical-level strategies.

C

Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately __________ percent of innovations fail to achieve adequate returns. a. 48 b. 68 c. 88 d. 98

C

Research has shown that approximately what percent of mergers and acquisitions, while not clear failures, produce disappointing results? a. 20 b. 35 c. 60 d. 75

C

Research results indicate all of the following EXCEPT: a. immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines in the majority of cases. 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.

C

The __________ phase is probably the single most important determinant of shareholder value creation in mergers and acquisitions. a. pre-acquisition negotiations b. pre-acquisition due diligence c. post-acquisition integration. d. post-acquisition restructuring

C

The expenses incurred by firms trying to create synergy through acquisition are called __________ costs. a. differentiation b. diversification c. transaction d. interaction

C

When substantial debt is used to finance acquisitions, firms with successful acquisitions: a. seek financial slack. b. avoid long-term investments c. reduce the debt quickly. d. restrict managerial discretion in the use of cash flow.

C

When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n): a. stealth raid. b. adversarial acquisition. c. takeover or unfriendly acquisition. d. leveraged buyout.

C

Which of the following statements is false? a. Synergy resulting from an acquisition generates gains in shareholder wealth beyond what they could achieve through diversification of their own portfolios. b. Private synergy results when the combination of two firms yields competencies and capabilities that could not be achieved by combining with any other firm. c. Private synergy is easy for competitors to understand and imitate. d. Private synergy is more likely when the two firms in an acquisition have complementary assets.

C

__________ is most often used when the goal is to refocus on the company's business. a. Management buyout b. Leveraged buyout c. Downscoping d. Downsizing

C

__________ may be necessary because acquisitions create a situation in which the newly formed firm has excess capacity in organizational functions such as sales, manufacturing, distribution, and human resource management. a. Management buyout b. Leveraged buyout c. Downsizing d. Downscoping

C

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 MOST likely be secure if: a. Ambrose's research is in a non-core activity. b. the acquisition has been financed by junk bonds. c. Ambrose is in a position to take a poison pill. d. Ambrose is a key employee in the firm's primary business.

D

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(n): a. merger. b. unrelated acquisition. c. horizontal acquisition. d. vertical acquisition.

D

Cross-border acquisitions are critical to U.S. firms competing internationally: a. if they are to develop differentiated products for markets served. b. when market share growth is the focus. c. where consolidated operations are beneficial. d. if they wish to overcome entry barriers to international markets.

D

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. All of the following statements accurately reflect this EXCEPT: a. Pappelbon did not fully evaluate the target. b. Pappelbon overpaid. c. Pappelbon's due diligence was not fully effective. d. Pappelbon's management was overly focused on acquisitions.

D

When a firm acquires its supplier, it is engaging in a(n): a. merger. b. unrelated acquisition. c. hostile takeover. d. vertical acquisition.

D

Which of the following is NOT a characteristic of a successful acquisition? a. The acquiring firm has a large amount of financial slack. b. The acquired and acquiring firms have complementary assets and/or resources. c. Innovation and R&D investments continue as part of the firm's strategy. d. Investments in advertising and image building are made quickly.

D

Which of the following is a reason to pursue an acquisition? a. To limit diversification b. To strengthen existing capabilities c. To reduce debt d. To increase speed to market

D

Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT: a. large debt and increased financial risk. b. failure to invest in R&D. c. risk-averse management. d. inefficient operations.

D

Downsizing tends to be of more long-term, or tactical, value than short-term, or strategic, value, making it an optimal restructuring option for managers with a vision for the future.

False

Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm.

False

Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy.

False

Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions.

False

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

False

In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations.

False

It is relatively common for a firm to develop new products internally to diversify its product lines.

False

Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers.

False

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 of these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

False

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, and human resources management.

True

Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.

True

In a horizontal acquisition, similarity in characteristics support efforts to integrate the two firms.

True

In terms of results, one attribute of a successful acquisition is that a firm with strong complementaries is acquired and overpayment is avoided

True

In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders.

True

Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders.

True

Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.

True

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry.

True

One attribute of a successful acquisition is that financing is easier and less costly to obtain

True

One of the attributes of a successful acquisition is that the acquiring firm conducts effective due diligence to select target firms and evaluate the target firm's health.

True

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.

True

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

True

Restructuring is a strategy through which a firm changes its set of businesses or its financial structure.

True

Restructuring strategies are commonly used to correct or deal with the results of ineffective mergers and acquisitions.

True

Royalware, based in New England, wanted to establish a foothold in the Midwest, so it made an unsolicited bid to purchase TrueBlue, a similar firm based in Indiana. This is an example of a takeover.

True

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the newly created firm's portfolio.

True

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

True

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

True

Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies.

True

Typical returns on acquisitions for the shareholders of the acquiring firms are close to zero.

True

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls.

True