Ch 6 Quiz

Acquisitions, according to research, usually result in value destruction rather than value creation for acquiring firms.

Answer: True Explanation Research shows that the vast majority of acquisitions result in value destruction rather than value creation.

Business level strategy addresses two related issues: what businesses should a corporation compete in and how can these businesses be managed so that they create synergy.

Answer: False Explanation Corporate-level strategy addresses two related issues: what businesses should a corporation compete in and how can these businesses be managed so they create synergy. Portfolio management matrices can be used to improve understanding of the competitive position of a portfolio (or family) of businesses, to suggest strategic alternatives, and to identify priorities for the allocation of resources.

Diversification initiatives must be justified by the creation of value for employees.

Answer: False Explanation Diversification initiatives, whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development, must be justified by the creation of value for shareholders. They typically are successful when they introduce synergy.

A disadvantage of mergers and acquisitions is that they can enable a firm to rapidly enter new product markets.

Answer: False Explanation Growth through mergers and acquisitions has been critical to many corporations in a wide variety of high-technology and knowledge-intensive industries. Speed (speed to market, speed to positioning, and speed to becoming a viable company) is critical in such industries. For example, in 2010, Apple acquired Siri Inc. so that they could quickly fully integrate the Siri natural language voice recognition software into iOS, the Apple proprietary operating system.

Related diversification enables a firm to benefit from economies of scope, which are cost increases that are derived from leveraging core competencies.

Answer: False Explanation Related diversification enables a firm to benefit from economies of scope, which are cost savings that are derived from leveraging core competencies or sharing related activities among businesses in a corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently.

Related diversification enables a firm to benefit from vertical relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities.

Answer: False Explanation Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities (e.g., production and distribution facilities). This enables a corporation to benefit from economies of scope.

Restructuring requires the corporate office to find either poorly performing firms with unrealized potential or firms in industries on the threshold of negative change.

Answer: False Explanation Restructuring is a means by which the corporate office can add value to a business. Here, the corporate office tries to find either poorly performing firms with unrealized potential or firms in industries on the threshold of significant, positive change. The parent intervenes, often selling off parts of the business; changing the management; reducing payroll and unnecessary sources of expenses; changing strategies; and infusing the company with new technologies, processes, reward systems, and so forth.

Among the disadvantages of acquisitions are the inexpensive premiums that are frequently paid to acquire a business.

Answer: False Explanation There are many potential drawbacks or limitations to merger activity. For example, the takeover premium that is paid for an acquisition typically is very high. Two times out of three, the stock price of the acquiring company falls once the deal is made public. Since the acquiring firm often pays a 30 percent or higher premium for the target company, the acquirer must create synergies and scale economies that result in sales and market gains exceeding the premium price.

For a core competence to be a viable basis for the corporation strengthening a new business unit, there are three requirements. Which one of the following is not one of these requirements?

Answer: The competence must help the business change its market position relative to its competition. Explanation For a core competence to create value and provide a viable basis for synergy among the businesses in a corporation, it must meet three criteria: the core competence must enhance competitive advantage by creating superior customer value; different businesses in the corporation must be similar in at least one important way related to the core competence; and the core competencies must be difficult for competitors to imitate or find substitutes for.

Which of the following is a reason for merger and acquisition failures?

Answer: Top executives act in their best interests rather than those of the shareholders. Explanation Research shows that the vast majority of acquisitions result in value destruction rather than value creation. Many large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the target company, or were unable to understand how the assets of the acquired firm would fit with their own lines of business. At times, top executives may not have acted in the best interests of shareholders. The motive for the acquisition may have been to enhance the power and prestige of the executive rather than to improve shareholder returns.

When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it. This is known as greenmail.

Answer: True Explanation Greenmail is an effort by the target firm to prevent an impending takeover. When a hostile firm buys a large block of outstanding target company stock and the target company management feels that a tender offer is impending, they offer to buy the stock back from the hostile company at a higher price than the unfriendly company paid for it.

In 2012, Hewlett-Packard wrote off 9 billion USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. This is an example of a failed merger.

Answer: True Explanation In 2012, Hewlett-Packard wrote off 9 billion USD of the 11 billion USD it paid for Autonomy, a software company that it purchased one year earlier. After they purchased it, HP realized that the Autonomy accounting statements were not accurate. This resulted in a nearly 80 percent drop in the value of Autonomy once those accounting irregularities were corrected.

Coca-Cola acquired its bottlers and created a national vertically integrated business operation in 2010. After spending 12.3 billion USD to acquire Coca-Cola Enterprises, its largest bottling partner, it reversed course in 2015 and sold off all its bottling operations. This is an example of a failed diversification effort.

Answer: True Explanation The Coca-Cola experience with its purchase of its bottlers is more the rule than the exception. Research shows that a majority of acquisitions of public corporations result in value destruction rather than value creation. Many other large multinational firms have also failed to effectively integrate their acquisitions, paid too high a premium for the common stock of the target, or were unable to understand how the acquired firm assets would fit with their own lines of business.

With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships—the creation of synergies from the interaction of the corporate office with the individual business units.

Answer: True Explanation With unrelated diversification, potential benefits can be gained from vertical or hierarchical relationships—the creation of synergies from the interaction of the corporate office with the individual business units.

Casio, a giant electronic products producer, synthesizes it abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. It uses the same skills to produce other non-related products. This skillset is a/an

Answer: core competency. Explanation Core competencies reflect the collective learning in organizations, which is how to coordinate diverse production skills, integrate multiple streams of technologies, and market diverse products and services. In some circumstances, a core competence can create value and provide a viable basis for synergy among the businesses in a corporation. Casio, a giant electronic products producer, synthesizes its abilities in miniaturization, microprocessor design, material science, and ultrathin precision castings to produce digital watches. These are the same skills it applies to design and production of its miniature card calculators, digital cameras, pocket electronic dictionaries, and other small electronics.

Diversification initiatives include all of the following except

Answer: employee rewards.

Corporate restructuring includes capital and asset restructuring as well as

Answer: management restructuring. Explanation Restructuring can involve changes in assets, capital structure, or management.

These kinds of companies create value through management expertise in areas such as budgeting, planning, procurement, and human resource management.

Answer: parent Explanation Parent companies create value through management expertise. They improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, and procurement. They also help subsidiaries make wise choices in their own acquisitions, divestitures, and new internal development decisions.

Companies use the tactic of ________ to give shareholders certain rights in the event of a takeover by another firm.

Answer: poison pill Explanation Poison pills are an antitakeover tactic used by a company to give shareholders certain rights in the event of a takeover by another firm. They are also known as shareholder rights plans.

The downsides or limitations of mergers and acquisitions include all the following except

Answer: premiums that are paid to acquire a business are too small. Explanation There are several limitations of mergers and acquisitions including that takeover premiums paid for acquisitions are typically very high, competing firms often can imitate any advantages or copy synergies that result from the merger or acquisition, manager egos sometimes get in the way of sound business decisions, and cultural issues may doom the intended benefits from M&A endeavors.