MGMT 466 Exam 2 - FLASHCARDS - Chapter 7
Research shows that shareholders of acquired firms often earn above-average returns from acquisitions?
TRUE
What is a strategy through which two firms agree to integrate their operations on a relatively coequal basis?
Merger
What is a strategy through which a firm buys most or all of a company’s stock with the intent of making the acquired firm a subsidiary business within its portfolio?
Acquisition
What is a special type of acquisition where the target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acquisitions. sometimes called “hostile,” acquisitions?
Takeover
True or false: Acquisitions are more common that mergers and takeovers?
TRUE
What are reasons for acquisition strategies?
- Increase market power
- Overcome entry barriers to new markets or regions
- Avoid the costs of developing new products and increase the
speed of new market entries - Reduce the risk of entering a new business
- Become more diversified
- Reshape their competitive scope by developing a different
portfolio of businesses - Enhance their learning as the foundation for developing new
capabilities
True or false: market power is usually derived from the size of the firm?
TRUE
True or false: market power is usually derived from the quality of the resources it uses to compete?
TRUE
True or false: market power is usually derived from its share of the market(s) in which it competes?
TRUE
True or false: to reduce the negative effect of an intense rivalry on financial performance, firms may use acquisitions to lessen their product and/or market dependencies?
TRUE
Is it true that the more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful?
Yes
True or false: firms should seek to acquire companies with different but related and complementary capabilities as a path to building their own knowledge base?
TRUE
What are problems in achieving acquisition success?
Integration difficulties
Incorrectly evaluating the target firm’s value
Large amount of debt
Inability to achieve synergy
Creating a firm that is too diversified
Managers overly focused on acquisitions
Firm is too large
What are examples of integration difficulties that are problems in achieving acquisition success?
- Culture clashes
- Linking and integrating financial and information control systems
- Management styles
- Leadership
What type of bonds carry a higher risk of default than other bonds, but they pay higher returns to make them attractive to investors?
Junk bonds
True or false: interest rates for junk bonds tend to be quite volatile, a condition that potentially exposes companies to greater financial risk?
TRUE
What is the only time a firm develops a competitive advantage through an acquisition strategy?
when a transaction generates private synergy
What is private synergy?
Created when combining and integrating the acquiring and acquired firms assets yield capabilities and core competencies that could not be developed by combining and integrating either firm’s assets with another company
What expenses do firms experience when seeking to create synergy?
Transaction costs
What are examples of transaction costs?
- Direct transaction costs such as legal fees, charges by investment banks to conduct due diligence)
- Indirect transaction costs such as managerial time spent evaluating targets and negotiating the acquisition,
- Loss of key managers and employees following the acquisition
What are the risks of overdiversificaion?
Causes managers to rely on financial, rather than strategic, controls to evaluate business units’ performance
The problem of acquision of a larger firm size often leads managers to implement more bureaucratic controls to manage the combined firm’s operations?
Yes
What are bureaucratic controls?
formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across a firm’s units
What is is a strategy through which two firms agree to integrate their operations on a relatively coequal basis?
Merger
What is a strategy through which one firm buys most or all a company’s shares with the intent of making the acquired firm a subsidiary business within its portfolio?
Acquisition
What is a special type of acquisition where the target firm does not solicit the acquiring firm’s bid?
Takeover
If the acquiring and target firms have complementary resources that are the foundation for developing new capabilities, is it an effective acquisition?
Yes
If the acquisition is friendly, thereby facilitating integration of the firm’s resources, is it an effective acquisition?
Yes
If the target firm is selected and purchased on the basis of completing a thorough due-diligence process, is it an effective acquisition?
Yes
If the acquiring and acquired firms do not have experience in terms of adapting to change, is it an efective acquisition?
No
Is it an effective acquisition if R&D and innovation are emphasized in the new firm?
Yes
Does the probability of being able to create value through acquisitions increase when the nature of the acquisition and the processes used to complete it are consistent with the attributes of successful acquisitions?
Yes
What is a strategy through which a firm changes its set of businesses or its financial structure?
Restructuring
Do firms focus on fewer products and markets after restructuring?
Yes
What are generally used to deal with acquisitions that are not reaching expectations?
Restructuring strategies
What can be used because of changes detected in the external environment by the firm?
Restructuring strategies
What are the three types of restructuring strategies?
- Downsizing
- Downscoping
- Leveraged buyouts
What is a reduction in the number of a firm’s employees and, sometimes, in the number of its operating units, to improve firm performance?
Downsizing
Is downsizing always a sign of organizational decline?
No
What refers to divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s core businesses?
Downscoping
Does downsizing or downscoping have more of a positive effect on firm performance?
Downscoping
Are downscoping and downsizing often used simultaneously?
Yes
True or false: Downscoping Is used more frequently in U.S. firms than in European companies?
TRUE
True or false: downsizing results in reduced labor costs, which results in lower performance?
TRUE
True or false: downsizing results in reduced labor costs, which results in loss of human capital?
TRUE
True or false: downscoping results in reduced debt costs, which results in higher performance?
TRUE
What is a restructuring strategy where a party (typically a private equity firm) buys all of a firm’s assets in order to take the firm private?
Leveraged buyout
Why are leveraged buyouts used?
– To correct for managerial mistakes
– Because the firm’s managers were making decisions that primarily served their own interests rather than those of shareholders
Is it common for those buying a firm through an LBO to restructure the firm to the point that it can be sold at a profit within a five- to eight-year period?
Yes
True or false: research shows that some LBOs lead to downscoping, increased strategic focus, and improved
performance?
TRUE
True or false: loss of human capital is a potential problem of downsizing?
TRUE
Is downsizing usually of more tactical (or short-term) value or
strategic (or long-term) value?
Downsizing may be of more tactical (or short-term) value than strategic (or long-term) value, meaning that firms should exercise caution when restructuring through downsizing
True or false: Compared to downsizing and leveraged buyouts, downscoping generally leads to more positive outcomes in both the short and long term?
TRUE
What are the short term outcomes of downsizing?
Reduced labor costs
