CH18 TB MERGERS, LBOs, DIVESTITURES, AND BUSINESS FAILURE Flashcards
(T/F) A merger occurs when two or more firms are combined to form a completely new corporation.
FALSE
(T/F) In the broadest sense, activities involving expansion or contraction of a firm’s operations or changes in
its assets or ownership structure are called corporate restructuring.
TRUE
(T/F) A merger transaction endorsed by a target firm’s management, approved by its stockholders, and
easily consummated is called a friendly merger.
TRUE
(T/F) Holding companies are corporations that have voting control of one or more other corporations and
the companies they control are referred to as subsidiaries.
TRUE
(T/F) Subsidiary companies are corporations having no voting control on holding companies.
TRUE
(T/F) Consolidation involves the combination of two or more firms, and the resulting firm maintains the
identity of one of the firms.
FALSE
Merger
(T/F) The companies controlled by a holding company are normally referred to as its subsidiaries.
TRUE
(T/F) A tender offer is a formal offer to purchase a given number of shares of a firm’s stock at a specified
price.
TRUE
(T/F) Strategic mergers seek to achieve various economies of scale by eliminating redundant functions,
increasing market share, and improving raw material sourcing and finished product distribution.
TRUE
(T/F) A holding company is a corporation which is controlled by one or more other corporations.
FALSE
(T/F) Financial mergers involve merging firms in order to achieve various economies of scale by
eliminating redundant functions, increasing market share, and improving raw material sourcing and
finished product distribution.
FALSE
Strategic mergers
(T/F) A consolidated corporation has voting control of one or more other corporations.
FALSE
Holding companies
(T/F) A financial merger is a merger transaction undertaken to achieve economies of scale.
FALSE
Strategic merger
(T/F) A strategic merger is a merger transaction undertaken with the goal of restructuring the acquired
company in order to improve its cash flow and unlock its hidden value.
FALSE
Financial merger
(T/F) A takeover target’s management will not support a proposed takeover due to a very high tender offer.
FALSE
(T/F) The overriding goal for merging is the maximization of the owners’ wealth as reflected in the
acquirer’s share price.
TRUE
(T/F) The synergy of mergers is the economies of scale resulting from the merged firm’s lower overhead.
TRUE
(T/F) Tax loss carryforward benefits can be used in mergers.
TRUE
(T/F) Primary motives for merging include growth or diversification, synergy, fund raising, increased
managerial skill or technology, tax considerations, increased ownership liquidity, and defense against
takeovers.
TRUE
(T/F) An acquisition of a “cash-rich” company immediately increases the acquiring firm’s borrowing power
by decreasing its financial leverage.
TRUE
(T/F) Firms’ motives to merge include growth or diversification, synergy, fund raising, tax considerations,
and defense against takeover.
TRUE
(T/F) A firm that wants to expand or extend its operations in existing or new product areas may avoid
many of the risks associated with the design, manufacture, and sale of additional or new product and
remove a potential competitor by acquiring a suitable going concern.
TRUE
(T/F) A conglomerate merger is a merger combining firms in unrelated businesses.
TRUE
(T/F) A congeneric merger is a merger combining firms in unrelated businesses.
FALSE
Conglomerate
(T/F) Greater control over the acquisition of new materials or the distribution of finished goods is an
economic benefit of horizontal merger.
FALSE
(T/F) A vertical merger may result in expansion of operations in an existing product line and elimination of
a competitor.
FALSE
Horizontal
(T/F) A vertical merger is a merger of two firms in the same line of business.
FALSE
horizontal
(T/F) A horizontal merger is a merger in which one firm acquires another firm in the same general industry
but neither in the same line of business nor a supplier or customer.
FALSE
congeneric
(T/F) A congeneric merger is a merger in which a firm acquires a supplier or a customer.
FALSE
The key benefit of a horizontal merger is its ability to reduce risk by merging firms that have different
seasonal or cyclic patterns of sales and earnings.
FALSE
Business combinations are used by firms to externally expand in order to increase ________.
A) provision for doubtful accounts
B) common stock outstanding
C) production capacity
D) financial leverage
C
A corporation that has voting control of one or more other corporations is called a ________.
A) holding company
B) congeneric formation
C) subsidiary
D) target firm
A
The combination of two or more companies to form a completely new corporation is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) conglomerate merger
B
A combination of companies where the former corporations cease to exist is ________.
A) a congeneric formation
B) a consolidation
C) a merger
D) a holding company
B
A combination of two or more companies that results in a firm maintaining the identity of one of the
firms is ________.
A) amalgamation
B) consolidation
C) merger
D) a holding company
C
A firm in a merger transaction that attempts to merge or takeover another company is called the
________.
A) target company
B) holding company
C) acquiring company
D) consolidated company
C
A firm in a merger transaction that is being pursued as a takeover potential is called the ________.
A) acquiring company
B) target company
C) holding company
D) consolidated company
B
A firm undertakes a merger in order to eliminate redundant functions or increase market share. This
is an example of ________.
A) financial merger
B) divestiture
C) spin-off
D) strategic merger
D
A merger transaction is not supported by the target firm’s management, forcing the acquiring
company to try to gain control of the firm by buying shares in the marketplace. This is an example of
________.
A) financial merger
B) hostile takeover
C) congeneric formation
D) strategic merger
B
A friendly merger is a ________.
A) merger in which the acquirer gains control of the target firm by buying sufficient shared through
private placement
B) merger in which the acquirer can attempt to gain control of the target firm by buying sufficient shares
of the target firm in the marketplace
C) merger transaction that is endorsed by the target firm’s management, approved by its stockholders,
and easily consummated
D) merger in which the target firm’s management acts to deter rather than facilitate the acquisition
C
When a firm undertakes a merger to improve its sources and supply of raw materials, this is an
example of a ________.
A) financial merger
B) hostile takeover
C) divestiture
D) strategic merger
D
A ________ occurs when the operations of the acquiring and target firms are combined in order to
achieve economies and thereby cause the performance of the merged firm to exceed that of the pre
merged firm.
A) financial merger
B) hostile takeover
C) operating merger
D) strategic merger
D
A friendly merger transaction ________.
A) is a transaction in which merger is completed by forceful acquisition of the target’s shares from the
secondary market
B) requires a public announcement for its plan of acquisition
C) can be consummated through an exchange of the acquirer’s stock and cash
D) can only be completed by purchasing all the outstanding bonds of the target firm
C
A financial merger is undertaken to ________.
A) increase profit margin to enhance the retained earnings of the merged firm
B) improve raw material sourcing and finished product distribution
C) increase market share, which is used to maximize shareholder wealth
D) increase cash flows to service the debt incurred to finance the merger
D
A merger involving the purchase of a specific product line, rather than the whole company is
________.
A) an operating merger
B) a financial merger
C) a selective lines merger
D) a variation of the strategic merger
D
A hostile merger is accomplished through ________.
A) a cash purchase of stock
B) leveraged buyouts
C) a tender offer
D) divestitures
C
A(n) ________ is undertaken with the goal of restructuring the acquired company in order to improve
its cash flow and unlock its hidden value.
A) operating merger
B) strategic merger
C) financial merger
D) hostile takeover
C
An attempt to gain control of a target firm by buying sufficient shares of it in the marketplace is
known as a ________ and is typically accomplished through a ________.
A) friendly takeover; leveraged buyout
B) leveraged buyout; consolidation
C) friendly takeover; consolidation
D) hostile takeover; tender offer
D
A major impetus fueling financial mergers during the 1980s was ________.
A) high interest rates
B) high tax rates
C) high cash balances that could be utilized for takeovers
D) ready availability of junk bond financing
D
The combination of two or more companies that results in one of the corporations having a voting
control of one or more of the other companies is a ________.
A) congeneric formation
B) consolidation
C) spin-off
D) holding company
D
Motive for merging includes ________.
A) increased financial leverage
B) increased common stock outstanding
C) increased provision for doubtful accounts
D) increased liquidity
D
Which of the following is a reason for undertaking mergers?
A) increasing dividends
B) profit maximization
C) easy process
D) wealth maximization
D
One of the key motives for mergers is ________.
A) reducing the marginal tax rate
B) taking advantage of the other firm’s tax loss carryforward
C) to sell the assets of the target company to increase the cash balance
D) increasing additional recaptured depreciation
B
The overriding goal for merging is to ________.
A) develop monopoly control over the markets
B) maximize shareholders’ wealth as reflected in the acquirer’s share price
C) maximize shareholders’ profit as reflected in the share price of the target firm
D) maximize dividend payout ratio
B
Which of the following is a reason for mergers?
A) to reduce common stock outstanding
B) to gain monopoly control over the markets
C) to decrease the level of provision for doubtful accounts
D) to gain increased managerial skills
D
The acquisition of a “cash-rich” company allows the acquiring company ________.
A) to reap greater tax benefits
B) to reduce leverage and to increase borrowing power
C) to develop monopoly control over the markets
D) to achieve economies of scale in some phase of the business
B
A ________ results from the combination of firms in the same line of business.
A) congeneric merger
B) conglomerate diversification
C) horizontal merger
D) hostile takeover
C
A ________ is when a firm acquires a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
Which of the following is true of a conglomerate merger?
A) It occurs when a firm acquires a supplier or a customer.
B) It involves the combination of firms in unrelated businesses.
C) It is achieved by acquiring a firm that is in the same general industry but neither in the same line of
business nor a supplier or customer.
D) It results in the expansion of a firm’s operations in a given product line and at the same time
eliminates a competitor.
B
Which of the following is true of a horizontal merger?
A) The key benefit of this merger stems from the merged firm’s increased control over the acquisition of
raw materials or the distribution of finished goods.
B) The key benefit of this form of merger is its ability to reduce risk by merging firms that have different
patterns of sales and earnings.
C) This form of merger results when two firms in the same line of business are merged.
D) This form of merger occurs when a firm acquires a supplier or a customer.
C
The combination of a dress manufacturer and a credit bureau is an example of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
B
Greater control over the acquisition of raw materials or the distribution of finished goods is an
economic benefit of a ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
A ________ may result in the expansion of a firm’s operations in an existing product line and
elimination of a competitor.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
C
A ________ is achieved by acquiring a company in the same general industry, but neither in the same
line of business nor a supplier or a customer.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
A
The ability to use the same sales and distribution channels to reach customers of both businesses is a
benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
A
A merger of a paper manufacturer and a logging company is an example of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
D
The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns of
sales or earnings is a key benefit of ________.
A) congeneric merger
B) conglomerate merger
C) horizontal merger
D) vertical merger
B
(T/F) LBOs are an example of a financial merger undertaken to create a high-debt private corporation with
improved cash flow and value.
TRUE
(T/F) An attractive candidate for acquisition through leveraged buyout must have a good position in its
industry with a solid profit history and reasonable expectation for growth.
TRUE
(T/F) An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of
debt and a low level of “bankable” assets.
FALSE
(T/F) The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.
TRUE
