Chapter 7

mangers lean towards larger firms due to

-easier to hide poor performance - pay more to employees

Reasons for Mergers and Acquisitions

-market power: horizontal, vertical or related - overcoming entry barriers - access to new technologies/products - adopting a disruptive technology - reshaping competitive scope

downscoping

A divestiture, spin-off or other means of eliminating businesses unrelated to a firm's core businesses. A set of actions that causes a firm to strategically refocus on its core businesses

Which of the below statements if False? Answers: Acquisitions are more common than mergers and takeovers. Marker power is derived from the size of the firm, the quality of the resources, and its share of markets it competes. Cross-border acquisitions are acquisitions between firms with headquarters in different countries. Firms used to use junk bonds to make risky acquisitions. A firm that generates private synergy through acquisition cannot develop a competitive advantage.

A firm that generates private synergy through acquisition cannot develop a competitive advantage.

which of the following accurately describes a common difference between a merger and an acquisition?

A merger tends to be friendly; an acquisition can be friendly or unfriendly.

Leveraged Buyout (LBO)

A restructuring strategy whereby a party buys all of a firm's assets in order to take the firm private. Significant amounts of debt may be incurred to finance the buyout, followed by an immediate sale of non-core assets to pare down debt. Can correct for managerial mistakes Managers making decisions that serve their own interests rather than those of shareholders Can facilitate entrepreneurial efforts and strategic growth

tatement 1: Compared to downsizing, downscoping generally leads to more positive outcomes in both the short and long term . Statement 2: Private synergy is created when combining and integrating the acquiring and acquired firms' assets yields capabilities and core competencies that could not be developed by combining and integrating either firm's assets with another company. Answers: Only Statement 1 is correct Only Statement 2 is correct Both Statement 1 and Statement 2 are correct Neither Statement 1 nor Statement 2 are correct

Both Statement 1 and Statement 2 are correct

All of the below are forms of strategy through which a firm changes its set of businesses or its financial structure, except: Answers: Downsizing Downscoping Downscaling Leveraged Buyouts

Downscaling

Which of the below is not a reason why a firm engages in acquisition. Answers: Increase market power Lower cost of capital Learn and develop new capabilities Increase speed to market Overcome entry barriers

Lower cost of capital

Statement 1: While mergers and acquisitions can create competitive advantage for the combined firm, in most cases acquiring firm's stock price falls immediately after the acquisition announced. Statement 2: Acquisitions made to increase market power are always more successful than acquisitions made to overcome entry barriers.

Only Statement 1 is correct

Statement 1: While mergers and acquisitions can create competitive advantage for the combined firm, in most cases, they do not. Statement 2: Acquisitions made to overcome a competitive disadvantage in the market are always more successful than acquisitions made to gain access to a new capability or competency. Answers: Only Statement 1 is correct Only Statement 2 is correct Both Statement 1 and Statement 2 are correct Neither Statement 1 nor Statement 2 are correct

Only Statement 1 is correct

Rodney Dairy makes its' own plastic bottles and fills them in its' own production facility. Rodney Dairy decides to purchase, Razorback Freight, that used to deliver the filled milk containers from Rodney Dairy to its' retail customers. By engaging in purchase of Razorback Freight, Rodney Dairy could be considered to be engaged in _________.

Vertical acquisition

Rolly Tide, an Alabama alumni, works for his family t-shirt business in Hoover, Alabama. They have enjoyed substantial success by manufacturing unique, personalized, Nick Sabin designs. Rolly has convinced his dad they can sell more shirts if they acquire a unique retail location, named Faye Ride, just off campus that used to sell their family t-shirts at significant mark-up. Rolly's company is planning to engage in ______________.

Vertical acquisition

acquisition/takeover

a combo of two companies operations, assets and financial transactions not done on a basis of equity - firm that is acquiring is usually bigger than the one it is buying

mutual consent

acquisition

KLM Corporation is an Amsterdam based satellite repair and service company. It has a strong presence in Europe but none in China. As part of its expansion strategy into China, KLM is in talks with ABS Corp which is a small satellite repair and service company based out of Shanghai. ABS's shares have been trading at about 35 dollars each. KLM informs ABS that it would like to offer each ABS shareholder one KLM share in exchange for ABS share (Equity Swap). KLM's share is trading at 43 dollars. After deliberations, the Board of ABS decides to turn down KLM's offer as not in the best interest of its shareholders. KLM then decides to directly go to the shareholders of ABS and offer to buy their shares directly at 45 dollars per share. KLM is engaging in a:

hostile takeover

downsizing

reduction in number of firms employees and sometimes number of its operating units

without mutual consent

takeover/hostile takeover

joint venture

two independent companies come together to start 3rd independent company in which they both have equity (usually financial)

merger

voluntary combo of two companies operations, assets, and financial transactions done on a basis of equity - agree on common name, logo