Chapter 7 — Acquisiti on and Restructuri ng Strategies
TRUE/FALSE
1. A merger is defi ned as a tra nsact ion
in which one firm purchases con troll ing
in terest in ano ther firm. ANS: F
PTS: 1
DIF: Medium
REF: 184
2. Most acquisitions that are designed to achieve greater market power entail buying a
competitor, a supplier, a distributor, or a bus in ess in a highly related in dustry. ANS: T
PTS: 1
DIF: Medium REF: 184-185
3. An acquisition of a firm in a highly related industry is referred to as a horiz on tal acquisiti
on. ANS: F
PTS: 1
DIF: Medium REF: 186
4. In most nations, regulations limiting acquisition activity has been stre ngthe ned.
5. The reasons why a firm would overpay for a company that it acquires include in adequate
due dilige nee. ANS: T
PTS: 1
DIF: Easy
REF: 192-193
6. Synergy is created by the efficiencies derived from economies of scale and econo mies
of scope and by shari ng resources across the bus in esses in the merged firm. ANS: T PTS: 1
DIF: Easy
7. Acquisitions can becomea substitute for innovation future rounds of acquisiti ons.
ANS: T
PTS: 1
DIF: Medium
8. Restructuring refers to changes in the composition of a firm
' s set of
bus in esses or its finan cial structure.
MULTIPLE CHOICE
1. Cross-border acquisitions involve
a. acquisiti ons by firms from develop ing coun tries of firms in developed coun tries.
b. acquisiti ons by firms from developed coun tries of firms in develop ing coun tries.
c. acquisitions
made by firms both within and between developed and developing
coun tries. d. none of the above. ANS: C PTS: 1
DIF: Medium REF: 181-182
2. In a merger
a. two firms agree to integrate their operations on a relatively coequal basis.
b. one firm buys controlling interest in another firm.
c. two firms combine to create a third separate entity.
d. one firm breaks into two firms. ANS: A PTS: 1 DIF: Easy REF: 184
3. A(an) ___ occurs when one firm buys a controlling, or 100% interest, in
another firm. a. merger
ANS: F PTS: 1 DIF: Hard REF: 187-188
REF: 194
in somefirms and trigger REF: 195-196
ANS: T PTS: 1 DIF: Medium REF: 198
b. acquisition
c. spin-off
d. restructuring ANS: B PTS: 1 DIF: Medium REF: 184
4. When the target firm ' s managers oppose an acquisition, it is referred to as a(an)
a. stealth raid.
b. adversarial acquisition.
c. leveraged buyout.
d. hostile takeover.
ANS: D PTS: 1 DIF: Easy REF: 184
5. When a firm acquires its supplier, it is engaging in a(an)
a. merger.
b. unrelated acquisition.
c. vertical acquisition.
d. hostile takeover.
ANS: C PTS: 1 DIF: Medium REF: 185-186
6. Cross-border acquisitions are typically made to
a. incr ease a firm ' s market power.
b. reduce the cost of new product development.
c. take advantage of higher education levels of labor in developed countries.
d. circumvent barriers to entry in another country.
ANS: D PTS: 1 DIF: Medium REF: 187 | 181-182
7. Entering new markets through acquisitions of companies with new products is not risk-free,
especially if acquisition becomes a substitute for
a. innovation.
b. market discipline.
c. risk analysis.
d. international diversification.
ANS: A PTS: 1 DIF: Medium REF: 189
8. 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.
9. Due diligence includes all of the following activities EXCEPT assessing a. differences in firm cultures.
b. the level of private synergy between the two firms.
c. tax consequences of the acquisition.
d. the appropriate purchase pric
e. ANS: C PTS: 1 DIF: Medium REF: 192-193
10. 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. ANS: B PTS: 1 DIF: Hard REF: 193
11. One problem with becoming too large is that large firms
a. become excessively diverse and have difficulty focusing on strategic
b. usually increase bureaucratic controls.
c. become attractive takeover targets.
d. tend to have inadequate financial controls. ANS: B PTS: 1 DIF: Medium REF: 196 12. A friendly acquisition
a. facilitates the integration of the acquired and acquiring firms.
b. enhances the complementarity of the two firms ' assets.
c. raises the price that has to be paid for a firm.
d. allows joint ventures to be developed. ANS: A PTS: 1 DIF: Medium REF: 197
ANS: A PTS: 1 DIF: Medium REF: 192-193 goals.