8.1 Mergers and Acquisitions (M&As) Flashcards
Which of the following is a defensive tactic against a hostile takeover by tender offer?
A. Leveraged buyout (LBO).
B. Saturday night special.
C. Conglomerate merger.
D. Acquisition.
A. Leveraged buyout (LBO).
A leveraged buyout (LBO) entails the company going private. A small group of investors, usually including senior management, purchases the publicly owned stock. The stock is then delisted because it will no longer be traded. Thus, a LBO competes with a hostile tender offer as an alternative.
Which type of acquisition does not require shareholders to have a formal vote to approve?
A. Merger.
B. Acquisition of all of the firm’s assets.
C. Consolidation.
D. Acquisition of stock.
D. Acquisition of stock.
Purchasing the stock of another company is advantageous when management and the board of directors of the purchased company are hostile to the combination because the acquisition does not require a formal vote by the shareholders. Thus, the management and the board of directors cannot influence shareholders. Also, after the acquisition, both companies continue to operate separately.
A horizontal merger is a merger between
A. A producer and its supplier.
B. Two or more firms in the same market.
C. Two or more firms at different stages of the production process.
D. Two or more firms from different and unrelated markets
B. Two or more firms in the same market.
A horizontal merger is one between competitors in the same market. From the viewpoint of the Justice Department, it is the most closely scrutinized type of merger because it has the greatest tendency to reduce competition.
The acquisition of a retail shoe store by a shoe manufacturer is an example of
A. Vertical integration.
B. Market extension.
C. A conglomerate.
D. Horizontal integration.
A. Vertical integration.
The acquisition of a shoe retailer by a shoe manufacturer is an example of vertical integration. Vertical integration is typified by a merger or acquisition involving companies that are in the same industry but at different levels in the supply chain. In other words, one of the companies supplies inputs for the other.
The synergy of a business combination can be determined by
A. Using the risk adjusted discount rate to discount the change in revenues of the newly-formed entity.
B. Calculating the change in revenue minus the change in cost.
C. Calculating the change in revenue minus the change in taxes.
D. Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity
D. Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity.
Synergy equals the value of the combined firm minus the sum of the values of the separate firms. These values can be calculated using the capital budgeting technique of discounted cash flow analysis. The difference between the cash flows of the combined firm and the sum of the cash flows of the separate firms is discounted at the appropriate rate, usually the cost of equity of the acquired firm. The components of the incremental cash flows are the incremental revenues, costs, taxes, and capital needs.
Firm A is considering acquiring Firm B for $2,000,000. Firm A has a value of $4,000,000 and Firm B has a value of $1,000,000 prior to the merger. The merged firm will have a combined value of $7,000,000. The synergy of the merger is
A. $(1,000,000)
B. $(2,000,000)
C. $2,000,000
D. $1,000,000
C. $2,000,000
Synergy exist when the value of the combined firm exceeds the sum of the values of the separate firms. Thus, adding $4,000,000 of Firm A to the $1,000,000 of Firm B produces an initial value of $5,000,000. Afterward, the combined firm is worth $7,000,000. Thus, there has been synergy of $2,000,000.
All of the following are true of mergers except
A. The acquiring firm maintains its name and identity in a merger.
B. A merger may never result from a public offer to the shareholders of the target firm to buy its shares directly.
C. Approval by shareholders vote of each firm involved in the merger generally is required.
D. Mergers are not consolidations.
B. A merger may never result from a public offer to the shareholders of the target firm to buy its shares directly.
A merger is a business combination in which the acquiring firm absorbs a second firm, and the acquiring firm remains in business as a combination of the two merged firms. The acquiring firm usually maintains its name and identity. The shareholders of each firm involved with the merger generally are required to vote to approve the merger. However, merger of the operations of two firms may ultimately result from an acquisition of stock.
Which of the following defensive maneuvers involves the issuance of rights to buy shares at a reduced price upon the occurrence of a takeover?
A. Crown jewels.
B. Greenmail.
C. A poison pill.
D. Golden parachutes.
C. A poison pill.
A poison pill may be included in a target corporation’s charter, by-laws, or contracts to reduce its value to potential tender offerors. A poison pill may be, for example, a right granted to the target firm’s shareholders to purchase shares of the merged firm resulting from a takeover. The bidding company loses money on its shares because this right dilutes the value of its stock.
Business combinations are accomplished either through a direct acquisition of assets and liabilities by a surviving corporation or by stock investments in one or more companies. A parent-subsidiary relationship always arises from a
A. Vertical combination.
B. Greater than 50% stock investment in another company.
C. Tax-free reorganization.
D. Horizontal combination.
B. Greater than 50% stock investment in another company.
A parent-subsidiary relationship arises from an effective investment in the stock of another enterprise in excess of 50%. The financial statements for the two companies ordinarily should be presented on a consolidated basis. To the extent the corporation is not wholly owned, a minority interest is presented.
Which of the following is not a revenue enhancement advantage of acquiring another firm?
A. A strategic advantage in a new product line.
B. Enlarging an already existing distribution network.
C. Economies of scale.
D. Improvement of media efforts.
C. Economies of scale.
Economies of scale in production, marketing, purchasing, management, etc., arise from decreasing unit cost resulting from higher levels of activity. Thus, economies of scale produce synergy in the form of cost reduction rather than revenue enhancement.
Which of the following is a combination involving the absorption of one firm by another?
A. Proxy fight.
B. Merger.
C. Consolidation.
D. Acquisition.
B. Merger.
A merger is a business combination in which an acquiring firm absorbs another firm. The acquiring firm remains in business as a combination of the two merged firms. Thus, the acquiring firm maintains its name and identity. However, approval of the merger is required by votes of the shareholders of each firm.
The merger of an oil refinery with a chain of gasoline stations is an example of a
A. White knight.
B. Horizontal merger.
C. Vertical merger.
D. Conglomerate merger.
C. Vertical merger.
A vertical merger is the combination of a firm with one or more of its suppliers or customers. The acquiring firm remains in business as a combination of the two merged firms. The chain of gasoline stations is acquiring an oil refinery, which is a supplier. Therefore, this is a vertical merger.
A publicly-traded company is planning to divest its Division A for $100 million. Private investors have pooled their capital of $10 million and plan to finance the balance of $90 million via debt financing with Division A’s assets as collateral. The new owners plan to give the new management a bigger stake in the company by providing stock options. They also redesigned performance measures and incentive schemes for employees to minimize inefficiencies and bureaucracy. This scenario most closely describes a
A. Leveraged buyout
B. Leveraged recapitalization
C. Management recapitalization
D. Management buyout
A. Leveraged buyout
A leveraged buyout is a financing technique by which a company is purchased using very little equity. The cash-offer price is financed with large amounts of debt. An LBO is often used when a company is sold to management or some other group of employees. Because private investors have pooled their capital of $10 million and plan to finance the balance of $90 million via debt financing, it is a leveraged buyout.
A business combination may be legally structured as a merger, a consolidation, or an acquisition. Which of the following describes a business combination that is legally structured as a merger?
A. The surviving company is neither of the two combining companies.
B. A parent-subsidiary relationship is established.
C. The surviving company is one of the two combining companies.
D. An investor-investee relationship is established.
C. The surviving company is one of the two combining companies.
In a business combination legally structured as a merger, the assets and liabilities of one of the combining companies are transferred to the books of the other combining company (the surviving company). The surviving company continues to exist as a separate legal entity. The nonsurviving company ceases to exit as a separate entity. Its stock is canceled, and its books are closed.
A large conglomerate has a division that has developed a new and highly promising technology. The conglomerate would like to retain control of this division but also raise additional capital to support the further development of this technology. The conglomerate also realizes this promising technology is different than its usual business lines and will require a new management style and incentive program to attract and maintain talent. Which one of the following would best allow the conglomerate to achieve these objectives?
A. A management buy-out of the division.
B. An equity carve-out of the division.
C. Sale of the division to another firm.
D. A spin-off of the division.
B. An equity carve-out of the division.
An equity carve-out involves the sale of a portion of the firm through an equity offering of shares in the new entity to outsiders. This would allow the conglomerate to raise additional capital as well as bring in new management while still maintaining control, as it does not have to sell the whole division to achieve an equity carve-out.
A corporation issued a property dividend to its shareholders. The dividend was distributed in the form of 100% of the common stock of a subsidiary. This is known as a
A. Spin-off.
B. Reverse split.
C. Stock split.
D. Scrip dividend.
A. Spin-off.
A spin-off creates a new, separate entity. It is accomplished by distributing a property dividend in the form of stock of another corporation to shareholders, who then become shareholders of both corporations.
