Chapter 7

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

60

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

88

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.

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

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

An employee buyout

__________ is most often used when the short-term goal is to reduce debt costs. a. Management buyout b. Leveraged buyout c. Downscoping d. Downsizing

Downscoping

__________ 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

Downscoping

__________ 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

Downsizing

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.

Investments in advertising and image building are made quickly.

__________ 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

Junk bonds

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

Large or extraordinary debt

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

Management buyout

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.

Managers emphasize strategic controls rather than financial controls.

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.

Pappelbon's management was overly focused on acquisitions.

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.

Private synergy is easy for competitors to understand and imitate.

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

Realigning

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

To increase speed to market

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.

achieve greater market power.

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.

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. a. merger b. acquisition c. spin-off d. restructuring

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(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.

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

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.

amount of new debt incurred in buying the firm.

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.

an increased risk of bankruptcy for acquiring firms.

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.

are likely to undergo regulatory review by various governmental entities.

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

broaden its competitive scope

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

bureaucratic

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.

carrying a high risk of failure.

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

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.

decrease taxes paid by shareholders.

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

downscoping

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.

downscoping firm because this will cause the firm to refocus on its core business.

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

downsize

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.

earn above-average returns.

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.

excessive time spent on the due diligence process.

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.

facilitates the integration of the acquired and acquiring firms.

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

high debt costs - higher risk

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.

if they wish to overcome entry barriers to international markets.

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.

inefficient operations.

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.

innovation.

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.

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

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.

more accurate prediction of return on investment.

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

more likely

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.

only top managers can perform the required due diligence.

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.

overcome barriers to entry in another country.

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

post-acquisition integration.

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.

reduce the debt quickly.

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

related the acquired and acquiring firms are

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.

restructure.

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.

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

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

selling of assets

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.

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: 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.

sold the company to the larger brewer.

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.

takeover or unfriendly acquisition.

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.

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

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.

the level of private synergy between the two firms.

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.

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

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

transaction

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.

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

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

unrelated diversification

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.

usually increase bureaucratic controls.

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.

vertical acquisition.

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.

vertical acquisition.

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

vertical acquisition.

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.

with insufficient diversification.