Strategic Management Ch. 6 & 7

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

Private synergy:

is not easy for competitors to understand and imitate.

Contract manufacturers who manage their customers' entire product line, and offer services ranging from inventory management to delivery and after-sales services are prime examples of vertical integration.

False

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

False

All of Krispy Kreme's revenues come from its one main product, doughnuts. It can be considered a classic example of a firm following a related constrained strategy.

False

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

False

Companies creating financial economies through restructuring typically focus on high- technology businesses primarily because these firms are dependent on human-resources.

False

Corporate tax laws, rather than tax laws affecting individuals, have had the most impact on the firm's use of free cash flows for investment in acquisitions.

False

Corporate-level strategies are strategies a firm uses to diversify its operations from a single business competing in a single market into several product markets and, most commonly, into several businesses.

False

Decisions to expand a firm's portfolio of businesses to reduce managerial risk can have a positive effect on the firm's value.

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

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

Firms seeking to create value through corporate relatedness use the related constrained strategy.

False

Firms with both operational and corporate relatedness are favorites of investment analysts because the transparency and clarity of their financial statements clearly show the value-creation resulting from the combination of multiple businesses.

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 Chapter 6 Opening Case, Disney achieved growth and diversification through mergers and acquisitions.

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

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

False

A related acquisition involves two firms in the same industry.

False

Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of__________diversification.

unrelated

The term "conglomerates" refers to firms using the ____ diversification strategy.

unrelated

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.

unrelated diversification

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

20

Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately _______ percent of innovations are imitated within 4 years after patents are obtained.

60

Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent.

95

Which of the following firms would be the most likely to be a successful candidate for acquisition and restructuring?

A tire manufacturer established in 1910

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:

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

Which acquisition would be considered the LEAST related?

An upscale "white-tablecloth" restaurant chain acquires a travel agency.

_________ refers to a divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core business.

Downscoping

___________ is often used when the acquiring firm paid too high a premium to acquire the target firm.

Downsizing

___________ may be necessary because acquisitions create a situation in which the newly formed form has duplicate organizational functions such as sales, manufacturing, distribution, and human resource management.

Downsizing

In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value- creating reason to diversify?

Economies of scope

Which of the following is a value-reducing reason for diversification?

Expanding the business portfolio in order to diversify managerial employment risk

A firm uses a corporate-level diversification strategy for a variety of reasons, all of which have to do with ways to create value.

False

A major advantage of diversification is that overall monitoring costs are reduced because each separate business comes under the control of corporate headquarters.

False

One advantage of an unrelated diversification strategy in a developed economy is that competitors cannot easily imitate the financial economies, whereas they can easily replicate the value gained through the use of a related diversification strategy.

False

Performance continues to increase as diversification increases from single business to unrelated diversification.

False

Related linked firms share more resources and assets between their businesses than do related constrained firms.

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

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

False

Revenues for United Parcel Service (UPS) are derived from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. The best description of the corporate level strategy of UPS is unrelated diversification.

False

Since the 1950s, U.S. government policy regarding antitrust concerns has remained constant.

False

Successful product diversification is expected to increase the variability in the firm's profitability because the earnings are generated from several different business units.

False

The current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in branded products.

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 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.

False

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

False

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

False

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

False

The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies.

False

The use of poison pills increases the chance that a poorly performing firm will be taken over.

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

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.

False

Without strict governance mechanisms, the majority of executives will act in their own self- interest rather than acting as positive stewards of firm resources.

False

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

Managers emphasize strategic controls rather than financial controls.

____ typically result(s) in the acquiring firm being able to prevent valuable human resources in the acquired firm from leaving.

Friendly acquisitions

Which of the following is NOT a limitation directly relating to vertical integration?

Imitation of core technology by potential competitors

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

Investments in advertising and image building are made quickly.

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

Junk bonds

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:

Pappelbon's management was overly focused on acquisitions.

Which of the following statements is FALSE?

Private synergy is easy for competitors to understand and imitate.

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

Realigning

Which of the following reasons for diversification is most likely to increase the firm's value?

Reducing costs through business restructuring

Which of the following is TRUE?

Related constrained firms share more tangible resources and activities between businesses than do related linked firms.

What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates?

They are dependent on human resources.

Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel owns one of these brick plants and buys all of its production. The other brick manufacturer has recently developed an inexpensive new technology whereby ordinary clay can be used to make this fire brick. This significantly reduces the production cost of this type of brick.

Specialty Steel has less flexibility now than if it were not vertically integrated.

Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify?

Surveillance technologies

Which of the following resources are more likely to create value in the diversification process?

Tacit knowledge

Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Equator's plan to transfer competencies from itself to the Irish firm?

The St. Louis manager may quit Equator in order to remain in St. Louis.

Dragonfly, publishers of children's books, has purchased White Rabbit, another publisher of children's books. Both companies' books are sold to the same retail stores and schools. Their content is different because Dragonfly produces children's literature, whereas White Rabbit focuses on child- level nonfiction scientific and nature topics. Which of the following statements is probably TRUE about this acquisition?

This is a horizontal acquisition.

A company that tries to balance both operational and corporate relatedness and fails, risks incurring diseconomies of scope.

True

A horizontal acquisition involves two firms in the same industry.

True

A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate.

True

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

True

A significant benefit of an internal capital market is limiting competitors' access to information about the performance of the individual businesses within the corporation.

True

A significant benefit of an internal capital market is that corporate headquarters has access to detailed and accurate information regarding the performance of the company's portfolio and can thus make better capital allocation decisions.

True

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

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.

True

An effective corporate strategy creates aggregate returns across all businesses that exceed what those returns would be without the strategy and contributes to the firm's strategic competitiveness and ability to earn above-average returns.

True

An unrelated diversification strategy can create value through two types of financial economies: (1) efficient internal capital allocations, and (2) purchasing other firms, restructuring their assets, and selling them.

True

Antitrust regulation, tax laws, and low performance are all value-neutral reasons why firms engage in diversification.

True

Companies in emerging markets frequently use the unrelated diversification strategy because of the absence of a "soft infrastructure" in those markets.

True

Compared to diversification that is grounded in intangible resources, diversification based on financial resources only is more visible to competitors and thus more imitable and less likely to create value on a long-term basis.

True

Compared with related constrained firms, related linked firms share fewer resources and assets between their businesses, concentrating instead on transferring knowledge and core competencies between the businesses.

True

Different incentives to diversify sometimes exist, and the quality of a firm's resources may permit only diversification that is value neutral rather than value creating.

True

Disney (discussed in the Chapter 6 Opening Case) is an example of a company that was successful because its corporate strategy added value across its set of businesses above what the individual businesses could create individually.

True

Diversification strategies can be used with both value-creating and value-neutral objectives.

True

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

True

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.

True

Economies of scope are cost savings resulting from a firm successfully leveraging, either through sharing or transferring, some of its capabilities and competencies developed in one business to another business

True

Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to move one of its key managers from its plant in St. Louis to Ireland. This can be considered a method of transferring corporate-level core competencies.

True

Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.

True

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

True

Firms that sold off related units in which resource sharing was a possible source of economies of scope have been found to produce lower returns than those that sold off businesses unrelated to the firm's core businesses.

True

Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy.

True

Firms using the related constrained strategy share activities in order to create value.

True

GE is an example of a firm that has used internal capital market allocation as a means of creating value even though it competes using a related linked strategy rather than an unrelated diversification strategy.

True

Golden parachutes protect managers from the negative consequences of over-diversifying a firm.

True

Google's diversification could lead the firm toward a related linked strategy and give the firm advantages in multipoint competition with competitors such as Facebook and Microsoft.

True

If managers diversify a firm in a way that does not produce value, the firm risks capital market intervention.

True

If the businesses in the corporate portfolio are not worth more under the management of the corporation than they would be under any other ownership, then the corporate-level strategy has failed.

True

In a diversified firm, capital allocation can be adjusted according to more specific criteria than is possible with external market allocation of capital.

True

In a money-making effort, a small private university has decided to institute consulting services using its business faculty as consultants whose services would be sold to clients. This university is attempting to use its faculty to gain economies of scope.

True

In spite of the challenges associated with it, a number of firms continue to use the unrelated diversification strategy, especially in Europe and in emerging markets.

True

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

True

It can be difficult for investors to actually observe the value created by a firm as it shares activities and transfers core competencies.

True

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

True

Knowing that their firms could be acquired if they are not managed successfully encourages executives to use value-creating diversification strategies.

True

Low firm performance is associated with increased diversification.

True

Many manufacturing firms are reducing vertical integration and moving to independent supplier networks.

True

Market power exists when a firm is able to sell its products above the existing competitive level or decrease the costs of its primary and support activities below the competitive level, or both.

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 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.

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

Procter & Gamble (P&G) has a paper towel and baby diaper business that both use paper products. This is an example of value created through the sharing of activities.

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

Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for acquisitions and the long-run performance of the newly formed form suffers.

True

Research shows that increased firm size and greater levels of diversification are correlated with increased executive compensation.

True

Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border acquisitions.

True

Research suggests that government ownership of emerging economy firms leads to overpayment in cross-border acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders).

True

Research suggests that horizontal acquisitions result in higher performance when the firms have similar strategies, assets, and capabilities.

True

Restructuring refers to changes in the composition of a firm's 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

Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.

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 merged firm.

True

The "conglomerate discount" occurs in large, highly diversified businesses and results from analysts not knowing how to value the vast array of large businesses with complex financial reports.

True

The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.

True

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

True

The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011.

True

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.

True

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.

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 acquiring firms are close to zero.

True

United Technologies, Textron, Samsung, and Hutchison Whampoa Limited are examples of diversified firms that have no relationships between their businesses. These firms all use the strategy of unrelated diversification.

True

Vertical integration allows the firm to gain market power as the firm develops the ability to save on its operations, avoid market costs, improve product quality, and possibly protect its technology from rivals.

True

Vertical integration exists when a company produces its own inputs (forward integration) or owns its source of output distribution (backward integration).

True

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

True

When firms share activities across units, they are often able to achieve increased value.

True

When implementing a restructuring strategy, a company would do best by focusing on mature, low-technology businesses rather than high-technology or service businesses.

True

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

True

Which type of diversification is most likely to create value through financial economies?

Unrelated

A leveraged buyout refers to:

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

An office management firm has developed a system for efficiently organizing small medical and dental practices both through proprietary software and through unique training programs for staff. It has recently acquired a firm specializing in providing management services for veterinary practices. The office management firm is hoping to:

achieve economies of scope.

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

achieve greater market power.

Without effective due diligence the:

acquiring firm is likely to overpay for an acquisition.

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

acquisition

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):

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

The term "leverage" in leveraged buyouts refers to the:

amount of new debt incurred in buying the firm.

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

an increased risk of bankruptcy for acquiring firms.

Research has shown that horizontal acquisitions

are able to use activity sharing to successfully create economies of scope.

Horizontal, vertical, and related acquisitions to build market power:

are likely to undergo regulatory review and analysis by financial markets.

Certain regulatory changes (such as antitrust regulation and tax laws) create incentives or disincentives for diversification that:

are value-neutral.

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

innovation.

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.

broaden its competitive scope

Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of:

backward integration.

Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors:

believe that the value of conglomerates is less than the value of the sum of their parts.

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.

bureaucratic

The ultimate test of the value of a corporate-level strategy is whether the:

businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership

Internal product development is often viewed as:

carrying a high risk of failure.

Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include:

changes in antitrust regulations and tax laws.

The risk for firms that follow the unrelated diversification strategy in developed economies is that:

competitors can imitate financial economies more easily than they imitate economies of scope.

Large diversified businesses often face a _______________, which results from analysts not knowing how to value a vast array of large businesses with complex financial reports.

conglomerate discount

The more sharing of resources and activities among businesses, the more ____ is the relatedness of the diversification.

constrained

Firms seek to create value from economies of scope through all of the following EXCEPT:

de-integration.

During the recent financial crisis, M&A activity ______, whereas in 2011, M&A activity ______.

declined; increased

The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be:

discounted by investors.

Multipoint competition occurs when:

diversified firms compete against each other in several markets.

As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to:

diversify into less risky environments.

Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS?

dominant business

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

downscoping

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:

downscoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing on the firm's core businesses.

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.

downsize

Researchers have found that shareholders of acquired firms often:

earn above-average returns.

Firms that have selected a related diversification corporate-level strategy seek to exploit:

economies of scope between business units.

Problems associated with acquisitions include all of the following EXCEPT:

excessive time spent on the due diligence process.

A friendly acquisition:

facilitates the integration of the acquired and acquiring firms.

Successful unrelated diversification through restructuring is typically accomplished by:

focusing on mature, low-technology businesses.

During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they:

have golden parachutes.

Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the Board of Directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because:

higher CEO pay is related to larger organization size.

The purchasing of firms in the same industry is called:

horizontal acquisition.

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

if they wish to overcome entry barriers to international markets.

A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT:

improved adjustment to technological changes.

Managerial motives to seek diversification include a desire to:

increase their compensation.

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

inefficient operations.

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

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

When a firm simultaneously practices operational relatedness and corporate relatedness:

it is difficult for investors to observe the value created by the firm.

Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations:

keep free cash flows for investment in acquisitions.

Caterpillar's payment of a 32 percent premium for the acquisition of Bucyrus in 2011 and subsequent need to issue more stock illustrates the acquisition problem of:

large or extraordinary debt.

Free cash flows are

liquid financial assets for which investments in current businesses are no longer economically viable.

The drawbacks to transferring competencies by moving key people into new management positions include all of these EXCEPT:

managerial competencies are not easily transferable to different organizational cultures.

The Mars acquisition of the Wrigley assets was part of its related constrained diversification and added market share to the Mars/Wrigley integrated firm. It allowed Mars to gain _______because it could sell its products above the market level or reduce its costs below the market level.

market power

Compared to internal product development, acquisitions allow:

more accurate prediction of return on investment.

Compared with diversification based on intangible resources, diversification based on financial resources is:

more imitable and less likely to create value on a long-term basis.

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

more likely

When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called ____ competition.

multipoint

There are few true mergers because:

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

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

only top managers can perform the required due diligence.

A noted professional art academy has founded an "artists and friends" travel company specializing in tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to make frames for academy art works, and to sell museum-quality framing services to the public. The art academy is engaging in diversification based on ____ relatedness.

operational

Cross-border acquisitions are primarily made to:

overcome barriers to entry in another country.

Each of the following is a rationale for acquisitions EXCEPT:

positioning the firm for a tactical competitive move.

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

post-acquisition integration

Backward integration occurs when a company:

produces its own inputs.

Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy.

related

A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification.

related constrained

The Publicis Groupe has three major groups of business (advertising, media, and digital) that share resources and capabilities. Publicis Groupe is using a _____________ diversification strategy.

related constrained

The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the _____________ diversification strategy.

related constrained

Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the _____________ diversification strategy to create ___________.

related constrained; operational relatedness

The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in:

related diversification projects.

The _________________diversification strategy creates value in two ways. First, because the core competency has already been developed in one business, the firm does not have to allocate resources to develop it. Second, because the resource is intangible, competitors cannot easily imitate it.

related linked

Virgin Group successfully transfers its marketing core competence across airlines, cosmetics, music, drinks, mobile phones, health clubs, and a number of other businesses. Virgin follows a(n) ____ diversification corporate strategy.

related linked

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

related the acquired and acquiring firms are

The announcement that P&G was acquiring premium dog and cat food manufacturer Iams was a _________ acquisition and is intended to ________.

related; increase speed to market

Magma, Inc., acquired Vulcan, Inc., 3 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:

restructure.

Typically, in a failed acquisition, the organization will:

restructure.

Of the value-neutral incentives to diversify, all of the following are internal firm incentives EXCEPT:

stricter interpretation of antitrust laws.

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

takeover or unfriendly acquisition.

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

selling of assets

The Walt Disney Company has successfully used related diversification to create value by:

sharing activities and transferring core competencies.

Operational relatedness is created by ___________ of ___________.

sharing; activities

The lowest level of diversification is the ____ level.

single-business

Market power is derived primarily from the:

size of a firm and its resources and capabilities.

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:

sold the company to the larger brewer.

A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product instead of a strategy of developing new products in-house. All of the following arguments are correct EXCEPT:

the acquisition of Taylor should be primarily for defensive rather than strategic reasons.

A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT:

the firm can acquire other firms with innovative products instead of allocating capital to research and development.

The curvilinear relationship of corporate performance and diversification indicates that:

the highest performing business strategy is related constrained diversification.

Due diligence includes all of the following activities EXCEPT assessing:

the level of private synergy between the two firms.

The main difference between the related constrained level of diversification and the related linked level of diversification is:

the level of resources and activities shared among the businesses.

The downside of synergy in a diversified firm is:

the loss of flexibility.

All of the following statements are correct EXCEPT:

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

The more "constrained" the relatedness of diversification:

the more links there are among the businesses owned by an organization.

The basic types of operational economies through which firms seek value from economies of scope are:

the sharing of value chain activities and support functions.

Synergy exists when:

the value created by business units working together exceeds the value the units create when working independently.

An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops:

through reduced disclosure to outside parties.

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

to decrease taxes paid by shareholders.

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

transaction

One method of facilitating the transfer of competencies between firms is to:

transfer key people into new management positions.

In a merger:

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

Research suggests that _______________has decreased while ___________has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century.

unrelated diversification; related diversification

One problem with becoming too large is that large firms:

usually increase bureaucratic controls.

Firms use corporate-level diversification strategies for all the following reasons EXCEPT:

value-diversifying.

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):

vertical acquisition.

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(n):

vertical acquisition.

The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n):

vertical acquisition.

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

vertical acquisition.

PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business that is:

vertically integrated.

Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley:

was moving away from its traditional single-business strategy toward a dominant strategy.

Corporate-level strategy is concerned with ____ and how to manage these businesses.

what product markets and businesses the firm should be in

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

with insufficient diversification.