MIE 480 Ch 10

10.A diversifying company might enter an attractive market by way of an acquisition instead of by internally developing a new business because a.it can do an end-run around the barriers to entry. b.it can avoid the costs and uncertainty inherent in building a new business. c.an acquisition gets the company into the market much more quickly. d.All of the above favor an acquisition over internal development.

All of the above favor an acquisition over internal development.

1.________ strategy involves the types of decisions made and direction created for a company that operates multiple lines of business. a.Business b.Acquisition c.Corporate d.Structuring

Corporate

6.High-yield debt that is rated below investment grade at the time of purchase and, beginning in the 1980s, has often been used in mergers and acquisitions is called a.speculative paper. b.a junk bond. c.submarine debt. d.investment-derivative debt.

a junk bond

22.One of the factors on which a successful acquisition depends is the ability to capture synergies. Which of the following makes this a difficult task? a.The acquirer tends to "overcommunicate" during the process. b.The synergies dissipate over the time that it takes to complete the deal. c.It is very hard to integrate the cultures of the companies involved. d.Synergies don't want to be captured; they wish to remain free.

c.It is very hard to integrate the cultures of the companies involved.

21.A factor that is critical to engineering a successful acquisition is to a.select a target in an attractive industry. b.perform thorough due diligence on the acquisition target. c.avoid paying too high of an acquisition premium. d.All of the above are critical to engineering a successful acquisition.

d.All of the above are critical to engineering a successful acquisition.

2.A typical decision made within the context of corporate strategy is a.which industries to enter and exit. b.establishing business unit investment priorities. c.effecting resource and management transfers. d.All of the above decisions occur within the context of corporate strategy.

d.All of the above decisions occur within the context of corporate strategy.

20.A variety of studies over the years conclude that diversification is nearly as likely to ________ shareholder value as it is to ________ shareholder value. a.divide; unite b.dramatically increase; minimally increase c.maximize; optimize d.destroy; create

destroy; create

4.A company in which 70-95 percent of revenues comes from a single business is known as a(n) a.dominant business. b.conglomerate. c.integrated producer. d.related constrained business.

dominant business

24.When a corporation reduces its level of diversification and strategically refocuses on core businesses it is a.downscoping. b."trimming the fat." c.downsizing d.re-synergizing

downscoping

18.Many of the merger and acquisition deals announced in the newspapers claim that synergies from the combined companies will come from ________ and this has become a prevalent justification for mergers and acquisitions. a.economizing b.shared information c.international presence d.the CEO

economizing

A motive for diversification is that managers are aware that diversified firms always outperform undiversified firms.

false

A strategic business unit is that part of a company charged with developing both business and corporate strategy.

false

Drawbacks of portfolio techniques include the dynamic view that they present and the overly precise recommendations for businesses in different areas of the matrices.

false

Horizontal diversification occurs when a merger or acquisition combines two companies that are in different industries but share the same customers.

false

In a restructuring process one may decide what businesses to divest by looking at the same criteria that were used in making an acquisition decision.

false

In the 1960s and 1970s conglomerates were waning in number since many industries had de-matured and were now ripe for organic growth.

false

One of the benefits of market power (a reason for diversification) is that a firm can have more influence with the EPA and other government agencies.

false

Operational fit occurs when an acquiring corporation can take advantage of synergies stemming from the support activities of the value chain, such as in human resource management or research and development.

false

The strong performance of a company subsequent to an acquisition depends on managers who are pressed to make up for having paid a high acquisition premium; without that incentive performance is likely to be low.

false

The three vignettes that open the chapter show that all merger and acquisition activity involves companies buying businesses that are related to what they already do.

false

Vertical diversification results from two companies combining to share supply chains.

false

5.For the period beginning in 1949 and through 1974 the percent of Fortune 500 firms that operated in a single business ________, while the percent that were diversified ________. a.remained constant; fell b.fell; rose c.fell; remained constant d.rose; fell

fell; rose

19.A ________ is a corporation that owns the majority of voting shares of other companies, but that allows the other companies to operate as independent entities. a.conglomerate b.holding company c.passive LLC d.multiple proprietor

holding company

14.Which of the following is a variation of related diversification in which both the acquirer and the acquired are in the same industry and have essentially the same value chains. a.horizontal b.vertical c.cross-sector d.oblique

horizontal

16.Which of the following is not a potential source of synergy between two companies that are proposing to merge? a.market fit b.operational fit c.legal fit d.management fit

legal fit

17.When a corporation believes it can take synergistic advantage of administrative and support activities of the value chain in making an acquisition it is envisioning ________ fit. a.management b.market c.agency d.structural

management

9.Gains in pricing authority, increased bargaining power, and mutual forbearance all underlie the ________ reason for diversification. a.market power b.market entry c.risk reduction d.shareholder

market power

12.What type of diversification results when there is some similarity of industry or value chain between a business and the company that it wishes to acquire? a.congruent b.related c.matching d.attractive

related

11.The two major types of diversification are ________ and ________ diversification. a.market; industry b.related; unrelated c.corporate; business d.resource; capability

related; unrelated

25.Should a company choose to divest a business unit it can create a new company from the business unit with its own shares of stock and its own board of directors. This is called a(n) a.satellite company. b.asset sale. c.spin-off. d.re-liquidation.

spin-off

3.Within a diversified company a set of businesses that share identical or very similar strategies or strategic challenges is called a(n) a.strategic business unit. b.related group. c.intra-company planning group. d.common threat subunit.

strategic business unit

8.The impetus for growth as a reason to diversify comes from ________ among other things. a.a desire to reduce the complexity of operations b.the need to placate governmental agencies c.the benefits to management and employees d.concerns about the natural environment

the benefits to management and employees

23.One of the important, if not the most important, uses of portfolio management tools is a.to identify strategic linkages between the businesses in the portfolio. b.to effectively allocate capital to the different businesses in the portfolio. c.to shame the managers of underperforming businesses into higher levels of performance. d.to show analysts the structure of the conglomerate in a way that could be easily understood.

to identify strategic linkages between the businesses in the portfolio

7.Companies diversify for a number of general reasons. Which of the following is not one of those reasons? a.seeking growth b.to increase the number of shareholders c.to gain market power d.to reduce financial risk

to increase the number of shareholders

A variety of studies over the years conclude that diversification is nearly as likely to destroy shareholder value as it is to create shareholder value.

true

Corporate strategy answers the question "What businesses should we be in?" while business strategy answers the question "How should we compete in this business?"

true

Diversified corporations are a significant part of the business landscape in the United States; indeed, they comprise most of the Fortune 500 companies.

true

General Electric is an example of a conglomerate while Warren Buffet's company, Berkshire Hathaway, is an example of a holding company.

true

In the 1980s conglomerates began to shed unrelated businesses and leveraged buyouts (LBOs) were one tool used to accomplish this. An LBO is when a company is bought primarily using debt and often it is the managers of the company who buy it with the help of this financial tool.

true

Post-acquisition efforts likely to improve the chances for a successful combination include the immediate establishment of an integration team, the visible involvement of senior managers, and early and frequent communication.

true

Related diversification results from a merger or acquisition in which there is some similarity of industry and/or value chain between the corporation and the company it seeks to acquire.

true

Risk spreading as a reason for diversification involves attempts to reduce the unsystematic risk that a firm experiences.

true

The GE Business Development Matrix and the BCG Growth Share Matrix are both examples of a portfolio management tool used to direct investment among businesses in a diversified firm.

true

The growth motivation for diversification is driven, in part, by the desire of managers to preside over a larger firm.

true

The kinds of decisions typically made by those engaged in corporate strategy include establishing business unit investment priorities, deciding which industries to enter and exit, and making resource and management transfers.

true

The process of due diligence requires managers to examine closely all of the operating, financial, and other aspects of a company that they propose to acquire

true

There are three kinds of "fit" that offer the opportunity for synergistic gains from an acquisition: Market fit, management fit, and operational fit.

true

When a corporation can take advantage of synergies from relationships with suppliers and/or customers in an acquisition this is known as market fit.

true

13.When a company enters a new business in a different industry from that in which it currently operates and does not expect to achieve any value chain synergies, this is ________ diversification. a.financial b.capital-driven c.unrelated d.opportunistic

unrelated

15.Which of the following is a variation of related diversification in which the acquirer and the acquired are in the same industry and the combined companies perform more of the activities in the industry value chain than either did separately before the acquisition? a.horizontal b.cross-sector c.aggregated d.vertical

vertical