Chapter 7
Research shows that about _____percent of mergers and acquisitions are successful. a. 20 b. 40 c. 60 d. 80
A
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
A
Typically, in a failed acquisition, the organization will a. restructure. b. go into bankruptcy. c. focus on building private synergy. d. increase integration.
A
. Describe the seven problems in achieving a successful acquisition.
Acquisition strategies present many potential problems. (1) Integration difficulties. It may be difficult to effectively integrate the acquiring and acquired firms due to differences in corporate culture, financial and control systems, management styles, and status of executives in the combined firms. Turnover of key personnel from the acquired firm is particularly negative. (2) Inadequate evaluation of target. Due diligence assesses where, when, and how management can drive real performance gains through an acquisition. Acquirers that fail to perform effective due diligence are likely to pay too much for the target firm. (3) Large or extraordinary debt. Acquiring firms frequently incur high debt to finance the acquisition. High debt may prevent the investment in activities such as research and development, training of employees, and marketing that are required for long-term success. High debt also increases the risk of bankruptcy and can lead to downgrading of the firm's credit rating. (4) Inability to achieve synergy. Private synergy occurs when the acquiring and target firms' assets are complementary in unique ways, making this synergy difficult for rivals to understand and imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees and investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, and the loss of key managers and employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition. (5) Too much diversification. A high level of diversification can have a negative effect on the firm's long-term performance. For example, the scope created by diversification often causes managers to rely on financial controls rather than strategic controls because the managers cannot completely understand the business units' objectives and strategies. The focus on financial controls creates a short-term outlook among managers and they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run. (6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing additional acquisitions. This detracts from other important activities, such as identifying and taking advantage of other opportunities and interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed. (7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity and lack of innovation, and can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale and the benefits of the additional market power that comes with size.
. 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.
B
. 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.
B
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
B
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
B
The term "leverage" 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.
B
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.
B
. Some research findings have shown that acquisitions typically _____ for shareholders in the acquiring firm. a. result in above-average returns b. provide approximately average returns c. result in returns near zero d. take some time to achieve private synergy, but eventually result in above-average returns
C
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. a. 5 b. 10 c. 60 d. 20
C
Private synergy a. occurs in most related acquisitions and allows firms to see increased returns. b. is frequently achieved in conglomerates. c. is not easy for competitors to understand and imitate. d. is assessed by managers during the due diligence process.
C
. Each of the following is a rationale for acquisitions EXCEPT a. achieving greater market power. b. overcoming significant barriers to entry. c. increasing speed of market entry. d. positioning the firm for a tactical competitive move.
D
. 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.
D
What is restructuring and what are its common forms?
Restructuring refers to changes in a firm's portfolio of businesses and/or financial structure. There are three general forms of restructuring: (1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units. (2) Downscoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business. (3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, and finances the buyout with debt. Once the transaction is complete, the company's stock is no longer publicly traded
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 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.
a
Which of the following is NOT one of the three main restructuring strategies? a. realigning b. downsizing c. downscoping d. leveraged buyouts
a
Compared with downsizing, _____ has (have) a more positive effect on firm performance. a. reconfiguring b. downscoping c. leveraged buyouts d. acquisitions
b
. 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 a. go public through an IPO. b. review the due diligence information collected before the acquisition. c. restructure. d. review its tactical-level strategies.
c
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.
c
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
c
Which of the following is NOT an attribute 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.
d
Identify and explain the seven reasons firms engage in an acquisition strategy.
(1) Increased market power. Market power allows a firm to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors. Market power is derived from the size of the firm and the firm's resources and capabilities to compete in the marketplace. Firms use horizontal, vertical, and related acquisitions to increase their size and market power. (2) Overcoming entry barriers. Firms can gain immediate access to a market by purchasing a firm with an established product that has consumer loyalty. Acquiring firms can also overcome economies of scale entry barriers through buying a firm that has already successfully achieved economies of scale. In addition, acquisitions can often overcome barriers to entry into international markets. (3) Reducing the cost of new product development and increasing speed to market. Developing new products and ventures internally can be very costly and time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk and cost of internal innovation. In addition, acquisitions provide more predictable returns on investments than internal new product development. Acquisitions are a much quicker path than internal development to enter a new market, and they are a means of gaining new capabilities for the acquiring firm. (4) Lower risk compared to developing new products internally. Acquisitions are a means to avoid internal ventures (and R&D investments), which many managers perceive to be highly risky. However, substituting acquisitions for innovation may leave the acquiring firm without the skills to innovate internally. (5) Increased diversification. Firms can diversify their portfolio of business through acquiring other firms. It is easier and quicker to buy firms with different product lines than to develop new product lines independently. (6) Reshaping the firm's competitive scope. Firms can move more easily into new markets as a way to decrease their dependence on a market or product line that has high levels of competition. (7) Learning and developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities and technologies they do not possess. Acquisitions can reduce inertia and help a firm remain agile.
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.
C
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) a. merger. b. unrelated acquisition. c. horizontal acquisition. d. vertical acquisition.
D
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.
D
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 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.
D
When a firm acquires its supplier, it is engaging in a(n) a. merger. b. unrelated acquisition. c. hostile takeover. d. vertical acquisition.
D
. How have changing conditions in the external environment influenced the type of M & A activity firms pursue?
During the recent financial crisis, tightening credit markets made it more difficult for firms to complete megadeals (those costing $10 billion or more). As a result, many acquirers focused on smaller targets with a niche focus that complemented their existing businesses. In addition, the relatively weak U.S. dollar increased the interest of firms from other nations to acquire U.S. companies.
According to the Chapter 7 Strategic Focus, China's recent approach to acquisitions has been to focus on hard assets (e.g., mineral deposits or R&D facilities) instead of established branded products because a. China's initial acquisition activities in branded products was highly successful and it wanted to apply those successful techniques to hard assets that would create more value for Chinese firms. b. hard assets around the world had appreciated rapidly and China wanted to take advantage of that appreciation. c. China's currency had depreciated relative to currencies in developed countries making acquisition of hard assets in those countries cheaper. d. it did not always have the managerial capability to realize successful performance of branded products.
d
_______ is often used when the acquiring firm paid too high a premium to acquire the target firm. a. Management buyout b. Leveraged buyout c. Downscoping d. Downsizing
d
. 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. buyout
A
According to the Chapter 7 Strategic Focus, research suggests that emerging market firms tend to_____than other firms and that government ownership of those firms leads to_____ for the acquisition. a. pay a higher premium; overpayment b. pay a lower premium; overpayment c. pay a lower premium; underpayment d. pay a higher premium; underpayment
A
After a leveraged buyout, _____ typically occur(s). a. selling of assets b. further rounds of acquisitions c. due diligence d. private synergy
A
The strategy of Citigroup under CEO Sanford Weill was to create a "financial supermarket" where customers shop for a variety of financial services within the same company. This strategy was executed via a series of acquisitions but ultimately failed. This situation was the result of a. Citigroup's managers focusing too much on acquisitions at the expense of managing their existing businesses. b. key managers leaving from the acquired firms, which left the firms with inferior management talent. c. the firm becoming too vertically integrated. d. the firm becoming too focused on its core businesses.
A
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 because the acquired firm is allowed to continue to function independently as it did before acquisition.
B
__________ 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. a. Management buyout b. Leveraged buyout c. Downsizing d. Downscoping
C
__________typically result(s) in the acquiring firm being able to prevent valuable human resources in the acquired firm from leaving. a. Financial slack b. Private synergy c. Friendly acquisitions d. High compensation
C
Acquisitions can become a time sink 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.
D
________ 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
D
__________refers to a divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core business. a. Downsizing b. Hostile takeovers c. Shakeouts d. Downscoping
D
What are the differences between downscoping and downsizing and why are each used?
Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the company's portfolio. In contrast, the goal of downscoping is to reduce the firm's level of diversification. Downsizing is often used when the acquiring form paid too high a premium to acquire the target firm or where the acquisition created a situation in which the newly formed form had duplicate organizational functions such as sales or manufacturing. Downscoping is accomplished by divesting unrelated businesses. Downscoping is used to make the firm less diversified and allow its top-level managers to focus on a few core businesses. A firm that downscopes often also downsizes at the same time.
What is an LBO and what have been the results of such activities?
Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly traded) firm is purchased so that it can be taken private. In this manner, the company's stock is no longer publicly traded. LBOs usually are financed largely through debt, and the new owners usually sell off a number of assets. There are three types of LBOs: management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts. Because they provide managerial incentives, MBOs have been the most successful of the three leveraged buyout types. MBOs tend to result in downscoping, an increased strategic focus, and improved performance.
. Describe how an acquisition program can result in managerial time and energy absorption
Typically, a substantial amount of managerial time and energy is required for acquisition strategies if they are to contribute to a firm's strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations and managing the integration process after the acquisition is completed. Company experience shows that participating in and overseeing the acquisition activities can divert managerial attention from other matters that are linked with long- term competitive success (e.g., identifying and acting on other opportunities, interacting effectively with external stakeholders).
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.
a
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
a
During the recent financial crisis, M&A activity ______ , whereas in 2011, M&A activity a. declined; increased. b. declined; declined. c. increased; increased. d. increased; declined.
A
Horizontal, vertical, and related acquisitions to build market power a. are likely to undergo regulatory review and analysis by financial markets. 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.
A
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 acquisitions
A
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.
A
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.
A
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.
A
What are the attributes of a successful acquisition program?
Acquisitions can contribute to a firm's competitiveness if they have the following attributes: (1) The acquired firm has assets or resources that are complementary to the acquiring firm's core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms and evaluates the target firm's health (financial, cultural, and human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained and consistent emphasis on R&D and innovation. (7) The acquiring firm manages change well and is flexible and adaptable.
. The March 2011 announcement that AT&T was acquiring T-Mobile USA from Deutsche Telekom is a _______ acquisition and is intended to a. vertical; increase diversification. b. horizontal; increase market power. c. vertical; overcome entry barriers. d. related; increase speed to market.
B
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.
B
According to the Chapter 7 Opening Case, the difference between Facebook's acquisition approach and the approaches of Microsoft and Google is that a. Facebook tends to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire later- stage companies. b. none of Facebook's acquisitions have survived as independent companies, whereas those of Microsoft and Google have continued to operate as subsidiaries. c. Facebook's approach is to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire later-stage companies. d. Microsoft's and Google's acquisitions have all been friendly, whereas Facebook's have all been hostile.
B
All of the following were results of Citigroup's acquisition strategy EXCEPT (Chapter 7 Strategic Focus) a. overly diversified. b. a much smaller, though global, business financial service firm. c. too large. d. lacking in synergy.
B
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 a. downscoping firm because the higher debt load will discipline managers to act in shareholders' best interests. b. downscoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing on the firm's core businesses. 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.
B
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.
B
Currently, the rationale for making an acquisition includes each of the following EXCEPT a. to increase market power. b. to decrease taxes paid by shareholders. c. to overcome entry barriers. d. to increase diversification.
B
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.
B
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.
B
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) 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.
B
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
B
When managers become overly focused on making acquisitions, it is a. because the skills of top executives are better used in making acquisitions than they are in daily organization operations. b. because of the thrill of selecting, chasing, and seizing a target. c. due to pressure from major stakeholders to diversify the firm. d. because acquisitions are a quick way to improve the financial standing of the firm
B
Which of the following is NOT a result of over-diversification? 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.
B
. There are few true mergers because a. few firms have complementary resources. b. integration problems are more severe than in outright acquisitions. c. one firm usually dominates in terms of market share, size, or value of assets. d. of managerial resistance. True mergers result in significant managerial-level layoffs.
C
A leveraged buyout refers to a. a firm restructuring itself by selling off unrelated units of the company's portfolio. b. a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background. c. a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private. d. an action where the management of the firm and/or an external party buy all of the assets of a business financed largely with equity.
C
All of the following statements are correct EXCEPT a. immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines. 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.
C
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 a. integration difficulties. b. inability to achieve synergy. c. large or extraordinary debt. d. managers overly focused on acquisitions.
C
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 intended transaction.
C
The expenses incurred by firms trying to create synergy through acquisition are called _____ costs. a. differentiation b. diversification c. transaction d. interaction
C
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.
C
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 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.
D
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
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.
D
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.
D
Transaction costs include all of the following EXCEPT a. charges from investment bankers who complete due diligence for the acquiring firm. b. the loss of key employees following the acquisition. c. managers' time spent evaluating target firms. d. managers' time spent planning the diversification strategy of the firm.
D
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.
D
What are the results of the three forms of restructuring?
Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, downscoping generally improves firm performance through reducing debt costs and concentrating on the firm's core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk and may end in bankruptcy. The managers of the bought-out firm often have a short-term and risk-averse focus because the acquiring firm intends to sell it within 5 to 8 years. This prevents investment in R&D and other actions that would improve the firm's core competence. But, if the firms have an entrepreneurial mindset, buyouts can lead to greater innovation if the debt load is not too large.
How difficult is it for merger and acquisition strategies to create value and which firms benefit the most from M & A activity?
Evidence suggests that using merger and acquisition strategies to create value is challenging. This is particularly true for acquiring firms in that some research results indicate that shareholders of acquired firms often earn above-average returns from acquisitions while shareholders of acquiring firms typically earn returns that are close to zero. In addition, in approximately two-thirds of all acquisitions, the acquiring firm's stock price falls immediately after the intended transaction is announced. This negative response reflects investor's skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium.
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.
a
Evidence suggests that firms using acquisitions as a substitute for internally developed innovations a. are able to offset the loss of research and development competencies by competencies in other areas. b. extend their time-to-market for new product launches. c. eventually encounter performance problems. d. can leverage their core competencies across a broader range of products.
c
