Chapter 31 - Mergers
Chapter 31
Mergers
Multiple Choice Questions
1. Market for corporate control includes the following:
I) Mergers
II) Spin-offs and divestitures
III) Leveraged buyouts (LBOs)
IV) Privatizations
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III, and IV
2. The merger of Pfizer and Wyeth is an example of:
I) Horizontal merger
II) Cross-border merger
III) Conglomerate merger
IV) Vertical merger
A. I only
B. II only
C. III only
D. I and III only
3. Tele Atlas acquisition of Tom Tom is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
A. I only
B. II only
C. III only
D. None of the given ones
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Chapter 31 - Mergers
4. Live Nation acquisition of Ticketmaster is an example of:
I) Cross-border merger
II) Horizontal merger
III) Conglomerate merger
IV) Vertical merger
A. I and II only
B. I and III only
C. III only
D. IV only
5. Roche acquisition of Genentech is an example of:
I) Horizontal merger
II) Conglomerate merger
III) Cross-border merger
IV) Vertical merger
A. I only
B. II only
C. I and III only
D. IV only
6. Google's acquisition of Double Click is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
IV) Cross-border merger
A. I only
B. II only
C. III only
D. I and IV only
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7. The BP and Amoco merger is an example of:
I) Cross-border merger
II) Horizontal merger
III) Economies of scale
A. I only
B. I and II only
C. I, II, and III only
D. III only
8. Bank of America and Merrill Lynch merger is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
IV) Cross-border merger
A. I only
B. II only
C. III only
D. III and IV only
9. Many mergers that appear to make economic sense fail because managers are unable to
handle the complex task of integrating two firms with different:
I) production processes
II) accounting methods
III) corporate cultures
A. I only
B. I and II only
C. III only
D. I, II and III
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10. The following reasons are good motives for mergers except:
I) Economies of scale
II) Complementary resources
III) Diversification
IV) Eliminating Inefficiencies
A. I only
B. II only
C. III only
D. I, II, and IV only
11. The following are good reasons for mergers:
I) Surplus funds
II) Eliminating inefficiencies
III) Complementary resources
IV) Increasing earnings per share (EPS)
A. I only
B. I and II only
C. I, II, and III only
D. IV only
12. The following are good reasons for mergers:
I) Economies of scale
II) Economics of vertical integration
III) Complementary resources
IV) Surplus funds
V) Eliminating inefficiencies
VI) Industry consolidation
A. I only
B. I, II, and III only
C. I, III, IV, and V only
D. I, II, III, IV, V, and VI
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13. The following are dubious reasons for mergers:
I) to diversify
II) increasing the earnings per share (EPS)
III) lower financing costs
IV) industry consolidation
A. I only
B. II and IV only
C. III and IV only
D. I, II, and III only
14. Error! Hyperlink reference not valid. What is the gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $75 million
15. Firm A has a value of $100 million, and B has a value of $70 million. Merging the two
would allow a cost savings with a present value of $20 million. Firm A purchases B for $75
million. What is the cost of this merger?
A. $30 million
B. $20 million
C. $5 million
D. $10 million
16. Firm A has a value of $100 million, and B has a value of $60 million. Merging the two
would allow a cost savings with a present value of $20 million. Firm A purchases B for $65
million. How much do firm A's shareholders gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $5 million
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17. Firm A has a value of $150 million, and B has a value of $100 million. Merging the two
would allow a cost savings with a present value of $40 million. Firm A purchases B for $120
million. What is the gain from this merger?
A. $20 million
B. $40 million
C. $100 million
D. $80 million
18. Error! Hyperlink reference not valid. What is the cost of this merger?
A. $30 million
B. $20 million
C. $15 million
D. $10 million
19. Firm A has a value of $200 million, and B has a value of $120 million. Merging the two
would allow a cost savings with a present value of $30 million. Firm A purchases B for $130
million. How much do firm A's shareholders gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $10 million
20. Companies A and B are valued as follows:
Company A now acquires B by offering one (new) share of A for every two shares of B (that
is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there
are no economic gains from the merger, what is the price-earnings ratio of A's stock after the
merger?
A. 7.5
B. 8.3
C. 10.0
D. 5.0
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21. Companies A and B are valued as follows:
Company A now acquires B by offering one (new) share of A for every two shares of B (that
is, after the merger, there are 2500 shares of A outstanding). Suppose that the merger really
does increase the value of the combined firms by $20,000. (i.e., PVAB - PVA - PVB = $20,000).
What is the cost of the merger?
A. Zero
B. $2,000
C. $8,000
D. $4,000
22. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the gain from the merger.
A. $600
B. $150
C. $550
D. $700
23. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the NPV of the merger.
A. $200
B. $400
C. $600
D. $150
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24. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What
will be the post-merger price per share for Firm A's stock if Firm A pays in cash?
A. $108
B. $110
C. $102
D. $114
E. None of the above
25. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the post merger P/E ratio assuming cash is used in the acquisition.
A. 12.75
B. 6.25
C. 13.75
D. None of the above
26. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What
will earnings per share be for Firm A after the merger assuming that cash is used in the
acquisition?
A. $6
B. $7
C. $8
D. $5
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27. Suppose that the market price of Company A is $50 per share and that of Company B is
$20. If A offers half a share of common stock for each share of B, the ratio of exchange of
market prices would be:
A. 0.8
B. 1.25
C. 0.4
D. none of the above
28. Firm A is planning to acquire Firm B. If Firm A prefers to make cash offer for the merger
it indicates that:
A. Firm A's managers are optimistic about the post merger value of A
B. Firm A's managers are pessimistic about the post merger value of A
C. Firm A's managers are neutral about the post merger value of A
D. None of the above
29. If firms A is acquiring firm B and Bs shareholders are given the fraction "x" of the
combined firm, then the cost of this merger is:
A. Cost = (PVAB) - (x) PVB
B. Cost = (x) PVAB - PVB
C. Cost = PVAB - (x) PVA
D. Cost = (x) PVAB - (x) PVB
30. Given the following data:
If Firm A intends to pay $7 million cash for B, calculate the cost of this merger:
A. $2 million
B. $3 million
C. $1 million
D. none of the above
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31. Given the following data:
If Firm A offers 250,000 shares for B's shareholders, calculate the apparent cost of merger
A. $2 million
B. $3 million
C. $1 million
D. none of the above
32. Given the following data:
If Firm A offers 250,000 shares for B's shareholders, calculate the true cost of merger:
A. $2 million
B. $3 million
C. $1 million
D. none of the above
33. Which of the following is not a major item of US antitrust legislation?
I) Garn-St. Germain Act
II) Clayton Act
III) Hart-Scott-Rodino Act
A. I only
B. II only
C. III only
D. II and III only
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34. Antitrust law can be enforced by the federal government by:
I) a civil suit brought by the Justice Department
II) a proceedings initiated by the Federal Trade Commission (FTC)
III) a proceedings initiated by the Securities and Exchange Commission (SEC)
A. I only
B. I and II only
C. I, II and III
D. II only
35. The following are industries in which large mergers have been blocked on antitrust
grounds are:
I) aerospace
II) aluminum
III) telecoms
IV) supermarkets
V) video rentals
VI) office equipment
A. I, II and III only
B. I, II, III and IV only
C. I, II, III, IV and V only
D. I, II, III, IV, V and VI
36. The following mergers have been blocked on antitrust grounds except:
A. Reynolds and Alcoa
B. Kroger and WinnDixie
C. Office Depot and Staples
D. AOL and Time Warner
37. The acquisition of stock has the advantage of:
A. No shareholder meeting to vote is necessary
B. Minority shareholders may exist
C. Opening the bidding to others
D. All of the above
E. None of the above
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38. When a merger of two firms is achieved by one firm automatically assuming all the assets
and all the liabilities of the other firm; such a merger requires:
A. no shareholder meeting to vote is necessary.
B. the approval of at least 50% of the stockholders (or as specified by corporate charters or
state laws) of each firm.
C. that the management of the two firms be tossed out.
D. none of the above.
39. Following an acquisition, the acquiring firm's balance sheet shows an asset labeled
"goodwill." What form of merger accounting is being used?
A. Consolidation
B. Aggregation
C. Purchase
D. None of the above
40. Accounting changes by the Financial Accounting Standards Board (FASB) in the US:
A. eliminated the "purchase method," allowing only the "pooling-of-interests" method for
mergers and acquisitions
B. eliminated the "pooling-of-interests" method, allowing only the "purchase method" for
mergers and acquisitions
C. allow for both the "purchase method" and the "pooling-of-interests" method for mergers
and acquisitions
D. none of the above
41. The PEN Corporation with a book value of $20 million and a market value of $30 million
has merged with the CNC Corporation with a book value of $6 million and a market value of
$8 million at a price of $9 million. If the transaction is a purchase then the total assets on the
books of the new company will be:
A. $38 million
B. $39 million
C. $29 million
D. $26 million
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Chapter 31 - Mergers
42. The DOC Corporation with a book value of $20 million and a market value of $30 million
has merged with the CIC Corporation with a book value of $6 million and a market value of
$8 million at a price of $9 million. If the transaction is a purchase will there be any goodwill,
and if so, what is the amount of goodwill?
A. No goodwill; 0
B. Yes goodwill; 3
C. Yes goodwill; 1
D. Cannot be calculated with the information given
43. If an acquisition is made using cash payment then the acquisition is:
A. taxable
B. viewed as exchanging of shares and is not taxed
C. a tax-free transaction as no capital gains or losses are recognized
D. none of the above
44. The main difference in a tax-free versus taxable acquisition to the shareholders is that:
I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares
are considered sold and realized capital gains or losses are taxed
II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued,
while in a taxable transaction the assets are revalued, taxed on any capital gains and losses
and then shares exchanged
III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a
taxable transaction the shareholders must stay with the new entity
A. I only
B. II only
C. III only
D. I and III only
45. What are the tax consequences of a taxable merger?
A. Selling shareholders can defer any capital gain until they sell their shares in the merged
company
B. Depreciation tax shield is unchanged by merger
C. Selling shareholders must recognize any capital gain
D. Depreciable value of assets will remain unchanged
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46. Which of the following factors influence the choice between merger and an acquisition of
stock?
I) Shareholders are dealt with directly to bypass target management and board of directors
II) In a tender offer, usually some minority shareholders do not tender stopping complete firm
absorption
III) Target management may be unfriendly and resist an offer. Resistance usually makes the
stock price higher
A. I only
B. II only
C. III only
D. I, II, and III
47. The following are methods available to change the management of a firm
I) a successful proxy contest in which a group of shareholders vote in a new board of directors
who then pick a new management team.
II) a takeover of one firm by another firm.
III) a leveraged buyout of the firm by a private group of investors.
A. I only
B. II and III only
C. I, II and III
D. I and III only
48. A dissident group solicits votes in an attempt to replace existing management. This is
called a:
A. Proxy fight
B. Shareholder derivative action
C. Tender offer
D. Management freeze-out
49. A modification of the corporate charter that requires 80% shareholder approval for
takeover is called a(n):
A. Repurchase standstill provision
B. Exclusionary self-tender
C. Super majority amendment
D. Tender offer
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50. Compensation paid to top management in the event of a takeover is called a:
A. Poison pill
B. Golden parachute
C. Self-tender
D. Buyout
51. An example of a shark-repellent charter amendment is:
I) Supermajority
II) Waiting period
III) Restricted voting rights
IV) Staggered board
A. I only
B. II only
C. I and II only
D. I, II, III, and IV
52. As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in
the event of an unfriendly takeover. These bonds are an example of:
A. Greenmail
B. A "scorched earth" policy
C. Crown jewels
D. A poison put
53. A poison pill defense is implemented by
A. Giving stock away
B. Selling firm assets
C. Issuing rights at a cheap price
D. Adding seats to the board of directors
54. Takeover defenses are designed to benefit
A. Stockholders
B. Workers
C. Creditors
D. Managers
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Chapter 31 - Mergers
True / False Questions
55. The easiest task for the managers is the integration of the two firms.
True False
56. A conglomerate merger is one in which a buyer buys a closely related firm.
True False
57. A vertical merger is one in which the buyer expands forward in the direction of the
ultimate consumer or backward toward the source of raw material.
True False
58. Two companies should consider a merger if they have complementary resources.
True False
59. Diversification is a very sensible reason for two companies to merge.
True False
60. Gain from mergers is defined as: Gain = PVAB - (PVA + PVB).
True False
61. If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash
payment minus B's value as a separate entity.
True False
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Chapter 31 - Mergers
62. In the purchase method of merger accounting a new asset category called goodwill is
created.
True False
63. The would-be acquirer making a tender offer directly to shareholders is another form of
proxy fight.
True False
64. The following are pre-offer defenses: litigation, asset structuring and liability structuring.
True False
65. It appears that target companies capture most of the gains in hostile takeovers.
True False
66. A poison pill protects the rights of shareholders.
True False
67. Supermajorities give shareholders more control over the firm.
True False
Short Answer Questions
68. Briefly explain the different types of mergers.
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Chapter 31 - Mergers
69. Discuss the difficulties associated with a typical merger.
70. Briefly explain the term "economies of scale."
71. Briefly explain some of the good motives for mergers.
72. Briefly explain what is meant by "the Cost of acquiring" in the context of a merger?
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Chapter 31 - Mergers
73. Briefly explain what is meant by economic gain from merger?
74. Explain the central tenet of the Clayton Act of 1914.
75. Name the agencies that have successfully blocked mergers on antitrust (anti-monopoly)
grounds.
76. Briefly discuss different forms of acquisition.
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Chapter 31 - Mergers
77. Briefly discuss takeover defenses.
78. Who gains most in mergers?
79. Who are anti-takeover defenses designed to protect?
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Chapter 31 - Mergers
Chapter 31 Mergers Answer Key
Multiple Choice Questions
1. Market for corporate control includes the following:
I) Mergers
II) Spin-offs and divestitures
III) Leveraged buyouts (LBOs)
IV) Privatizations
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III, and IV
Type: Medium
2. The merger of Pfizer and Wyeth is an example of:
I) Horizontal merger
II) Cross-border merger
III) Conglomerate merger
IV) Vertical merger
A. I only
B. II only
C. III only
D. I and III only
Type: Easy
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3. Tele Atlas acquisition of Tom Tom is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
A. I only
B. II only
C. III only
D. None of the given ones
Type: Easy
4. Live Nation acquisition of Ticketmaster is an example of:
I) Cross-border merger
II) Horizontal merger
III) Conglomerate merger
IV) Vertical merger
A. I and II only
B. I and III only
C. III only
D. IV only
Type: Easy
5. Roche acquisition of Genentech is an example of:
I) Horizontal merger
II) Conglomerate merger
III) Cross-border merger
IV) Vertical merger
A. I only
B. II only
C. I and III only
D. IV only
Type: Easy
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6. Google's acquisition of Double Click is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
IV) Cross-border merger
A. I only
B. II only
C. III only
D. I and IV only
Type: Easy
7. The BP and Amoco merger is an example of:
I) Cross-border merger
II) Horizontal merger
III) Economies of scale
A. I only
B. I and II only
C. I, II, and III only
D. III only
Type: Medium
8. Bank of America and Merrill Lynch merger is an example of:
I) Horizontal merger
II) Vertical merger
III) Conglomerate merger
IV) Cross-border merger
A. I only
B. II only
C. III only
D. III and IV only
Type: Easy
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9. Many mergers that appear to make economic sense fail because managers are unable to
handle the complex task of integrating two firms with different:
I) production processes
II) accounting methods
III) corporate cultures
A. I only
B. I and II only
C. III only
D. I, II and III
Type: Medium
10. The following reasons are good motives for mergers except:
I) Economies of scale
II) Complementary resources
III) Diversification
IV) Eliminating Inefficiencies
A. I only
B. II only
C. III only
D. I, II, and IV only
Type: Medium
11. The following are good reasons for mergers:
I) Surplus funds
II) Eliminating inefficiencies
III) Complementary resources
IV) Increasing earnings per share (EPS)
A. I only
B. I and II only
C. I, II, and III only
D. IV only
Type: Medium
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12. The following are good reasons for mergers:
I) Economies of scale
II) Economics of vertical integration
III) Complementary resources
IV) Surplus funds
V) Eliminating inefficiencies
VI) Industry consolidation
A. I only
B. I, II, and III only
C. I, III, IV, and V only
D. I, II, III, IV, V, and VI
Type: Difficult
13. The following are dubious reasons for mergers:
I) to diversify
II) increasing the earnings per share (EPS)
III) lower financing costs
IV) industry consolidation
A. I only
B. II and IV only
C. III and IV only
D. I, II, and III only
Type: Medium
14. Error! Hyperlink reference not valid. What is the gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $75 million
Type: Medium
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15. Firm A has a value of $100 million, and B has a value of $70 million. Merging the two
would allow a cost savings with a present value of $20 million. Firm A purchases B for $75
million. What is the cost of this merger?
A. $30 million
B. $20 million
C. $5 million
D. $10 million
Cost = 75 - 70 = 5
Type: Medium
16. Firm A has a value of $100 million, and B has a value of $60 million. Merging the two
would allow a cost savings with a present value of $20 million. Firm A purchases B for $65
million. How much do firm A's shareholders gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $5 million
NPV = 20 - 5 = 15
Type: Medium
17. Firm A has a value of $150 million, and B has a value of $100 million. Merging the two
would allow a cost savings with a present value of $40 million. Firm A purchases B for $120
million. What is the gain from this merger?
A. $20 million
B. $40 million
C. $100 million
D. $80 million
290 - 150 - 100 = 40
Type: Medium
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Chapter 31 - Mergers
18. Error! Hyperlink reference not valid. What is the cost of this merger?
A. $30 million
B. $20 million
C. $15 million
D. $10 million
Cost = 130 - 120 = 10
Type: Medium
19. Firm A has a value of $200 million, and B has a value of $120 million. Merging the two
would allow a cost savings with a present value of $30 million. Firm A purchases B for $130
million. How much do firm A's shareholders gain from this merger?
A. $30 million
B. $20 million
C. $15 million
D. $10 million
NPV = 30 - 10 = 20
Type: Medium
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20. Companies A and B are valued as follows:
Company A now acquires B by offering one (new) share of A for every two shares of B (that
is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there
are no economic gains from the merger, what is the price-earnings ratio of A's stock after the
merger?
A. 7.5
B. 8.3
C. 10.0
D. 5.0
After merger: EPS = [(2000)(10) + (1000)(10)]/2500 = 12;
Price = [(2000)(10) + (1000)(50)]/2500 = 100; P/E ratio = 8.3
Type: Difficult
21. Companies A and B are valued as follows:
Company A now acquires B by offering one (new) share of A for every two shares of B (that
is, after the merger, there are 2500 shares of A outstanding). Suppose that the merger really
does increase the value of the combined firms by $20,000. (i.e., PVAB - PVA - PVB = $20,000).
What is the cost of the merger?
A. Zero
B. $2,000
C. $8,000
D. $4,000
PVAB = 200,000 + 50,000 + 20,000 = 270,000; Price per share = 270,000/2,500 = 108; Cost
= (108)(500) 50,000 = 4,000
Type: Difficult
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22. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the gain from the merger.
A. $600
B. $150
C. $550
D. $700
11,000 - 10,000 - 400 = 600
Type: Difficult
23. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the NPV of the merger.
A. $200
B. $400
C. $600
D. $150
NPV = Gain - cost; (11000 - 10400) - ((20)(40) - 400) = 200
Type: Difficult
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24. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What
will be the post-merger price per share for Firm A's stock if Firm A pays in cash?
A. $108
B. $110
C. $102
D. $114
E. None of the above
P = (10,000 + 200)/100 = 102
Type: Difficult
25. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.
Calculate the post merger P/E ratio assuming cash is used in the acquisition.
A. 12.75
B. 6.25
C. 13.75
D. None of the above
P/E ratio = 102/8 = 12.75
Type: Difficult
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26. The following data on a merger is given:
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What
will earnings per share be for Firm A after the merger assuming that cash is used in the
acquisition?
A. $6
B. $7
C. $8
D. $5
EPS = (500 + 300)/100 = $8.00
Type: Difficult
27. Suppose that the market price of Company A is $50 per share and that of Company B is
$20. If A offers half a share of common stock for each share of B, the ratio of exchange of
market prices would be:
A. 0.8
B. 1.25
C. 0.4
D. none of the above
ratio = 25/20 = 1.25
Type: Easy
28. Firm A is planning to acquire Firm B. If Firm A prefers to make cash offer for the merger
it indicates that:
A. Firm A's managers are optimistic about the post merger value of A
B. Firm A's managers are pessimistic about the post merger value of A
C. Firm A's managers are neutral about the post merger value of A
D. None of the above
Type: Difficult
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29. If firms A is acquiring firm B and Bs shareholders are given the fraction "x" of the
combined firm, then the cost of this merger is:
A. Cost = (PVAB) - (x) PVB
B. Cost = (x) PVAB - PVB
C. Cost = PVAB - (x) PVA
D. Cost = (x) PVAB - (x) PVB
Type: Difficult
30. Given the following data:
If Firm A intends to pay $7 million cash for B, calculate the cost of this merger:
A. $2 million
B. $3 million
C. $1 million
D. none of the above
cost = 7 - 5 = 2
Type: Medium
31. Given the following data:
If Firm A offers 250,000 shares for B's shareholders, calculate the apparent cost of merger
A. $2 million
B. $3 million
C. $1 million
D. none of the above
apparent cost = (250,000)(20) - 5,000,000 = 0
Type: Medium
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Chapter 31 - Mergers
32. Given the following data:
If Firm A offers 250,000 shares for B's shareholders, calculate the true cost of merger:
A. $2 million
B. $3 million
C. $1 million
D. none of the above
total # of shares = 1,250,000; share price of Firm AB = 30,000,000/1,250,000 = $24
True cost = (250,000)(24) - 5,000,000 = $1,000,000 = $1 million
Type: Medium
33. Which of the following is not a major item of US antitrust legislation?
I) Garn-St. Germain Act
II) Clayton Act
III) Hart-Scott-Rodino Act
A. I only
B. II only
C. III only
D. II and III only
Type: Medium
34. Antitrust law can be enforced by the federal government by:
I) a civil suit brought by the Justice Department
II) a proceedings initiated by the Federal Trade Commission (FTC)
III) a proceedings initiated by the Securities and Exchange Commission (SEC)
A. I only
B. I and II only
C. I, II and III
D. II only
Type: Difficult
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35. The following are industries in which large mergers have been blocked on antitrust
grounds are:
I) aerospace
II) aluminum
III) telecoms
IV) supermarkets
V) video rentals
VI) office equipment
A. I, II and III only
B. I, II, III and IV only
C. I, II, III, IV and V only
D. I, II, III, IV, V and VI
Type: Medium
36. The following mergers have been blocked on antitrust grounds except:
A. Reynolds and Alcoa
B. Kroger and WinnDixie
C. Office Depot and Staples
D. AOL and Time Warner
Type: Medium
37. The acquisition of stock has the advantage of:
A. No shareholder meeting to vote is necessary
B. Minority shareholders may exist
C. Opening the bidding to others
D. All of the above
E. None of the above
Type: Medium
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Chapter 31 - Mergers
38. When a merger of two firms is achieved by one firm automatically assuming all the assets
and all the liabilities of the other firm; such a merger requires:
A. no shareholder meeting to vote is necessary.
B. the approval of at least 50% of the stockholders (or as specified by corporate charters or
state laws) of each firm.
C. that the management of the two firms be tossed out.
D. none of the above.
Type: Difficult
39. Following an acquisition, the acquiring firm's balance sheet shows an asset labeled
"goodwill." What form of merger accounting is being used?
A. Consolidation
B. Aggregation
C. Purchase
D. None of the above
Type: Easy
40. Accounting changes by the Financial Accounting Standards Board (FASB) in the US:
A. eliminated the "purchase method," allowing only the "pooling-of-interests" method for
mergers and acquisitions
B. eliminated the "pooling-of-interests" method, allowing only the "purchase method" for
mergers and acquisitions
C. allow for both the "purchase method" and the "pooling-of-interests" method for mergers
and acquisitions
D. none of the above
Type: Medium
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Chapter 31 - Mergers
41. The PEN Corporation with a book value of $20 million and a market value of $30 million
has merged with the CNC Corporation with a book value of $6 million and a market value of
$8 million at a price of $9 million. If the transaction is a purchase then the total assets on the
books of the new company will be:
A. $38 million
B. $39 million
C. $29 million
D. $26 million
Purchase method: 30 + 8 + 1 = 39
Type: Difficult
42. The DOC Corporation with a book value of $20 million and a market value of $30 million
has merged with the CIC Corporation with a book value of $6 million and a market value of
$8 million at a price of $9 million. If the transaction is a purchase will there be any goodwill,
and if so, what is the amount of goodwill?
A. No goodwill; 0
B. Yes goodwill; 3
C. Yes goodwill; 1
D. Cannot be calculated with the information given
Purchase method: MV(DOC) + MV(CEC) + Goodwill = 30 + 8 + 1 = 39
Type: Difficult
43. If an acquisition is made using cash payment then the acquisition is:
A. taxable
B. viewed as exchanging of shares and is not taxed
C. a tax-free transaction as no capital gains or losses are recognized
D. none of the above
Type: Medium
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Chapter 31 - Mergers
44. The main difference in a tax-free versus taxable acquisition to the shareholders is that:
I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares
are considered sold and realized capital gains or losses are taxed
II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued,
while in a taxable transaction the assets are revalued, taxed on any capital gains and losses
and then shares exchanged
III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a
taxable transaction the shareholders must stay with the new entity
A. I only
B. II only
C. III only
D. I and III only
Type: Difficult
45. What are the tax consequences of a taxable merger?
A. Selling shareholders can defer any capital gain until they sell their shares in the merged
company
B. Depreciation tax shield is unchanged by merger
C. Selling shareholders must recognize any capital gain
D. Depreciable value of assets will remain unchanged
Type: Medium
46. Which of the following factors influence the choice between merger and an acquisition of
stock?
I) Shareholders are dealt with directly to bypass target management and board of directors
II) In a tender offer, usually some minority shareholders do not tender stopping complete firm
absorption
III) Target management may be unfriendly and resist an offer. Resistance usually makes the
stock price higher
A. I only
B. II only
C. III only
D. I, II, and III
Type: Difficult
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Chapter 31 - Mergers
47. The following are methods available to change the management of a firm
I) a successful proxy contest in which a group of shareholders vote in a new board of directors
who then pick a new management team.
II) a takeover of one firm by another firm.
III) a leveraged buyout of the firm by a private group of investors.
A. I only
B. II and III only
C. I, II and III
D. I and III only
Type: Medium
48. A dissident group solicits votes in an attempt to replace existing management. This is
called a:
A. Proxy fight
B. Shareholder derivative action
C. Tender offer
D. Management freeze-out
Type: Medium
49. A modification of the corporate charter that requires 80% shareholder approval for
takeover is called a(n):
A. Repurchase standstill provision
B. Exclusionary self-tender
C. Super majority amendment
D. Tender offer
Type: Medium
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Chapter 31 - Mergers
50. Compensation paid to top management in the event of a takeover is called a:
A. Poison pill
B. Golden parachute
C. Self-tender
D. Buyout
Type: Easy
51. An example of a shark-repellent charter amendment is:
I) Supermajority
II) Waiting period
III) Restricted voting rights
IV) Staggered board
A. I only
B. II only
C. I and II only
D. I, II, III, and IV
Type: Medium
52. As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in
the event of an unfriendly takeover. These bonds are an example of:
A. Greenmail
B. A "scorched earth" policy
C. Crown jewels
D. A poison put
Type: Medium
53. A poison pill defense is implemented by
A. Giving stock away
B. Selling firm assets
C. Issuing rights at a cheap price
D. Adding seats to the board of directors
Type: Medium
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Chapter 31 - Mergers
54. Takeover defenses are designed to benefit
A. Stockholders
B. Workers
C. Creditors
D. Managers
Type: Medium
True / False Questions
55. The easiest task for the managers is the integration of the two firms.
FALSE
Type: Medium
56. A conglomerate merger is one in which a buyer buys a closely related firm.
FALSE
Type: Medium
57. A vertical merger is one in which the buyer expands forward in the direction of the
ultimate consumer or backward toward the source of raw material.
TRUE
Type: Medium
58. Two companies should consider a merger if they have complementary resources.
TRUE
Type: Easy
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Chapter 31 - Mergers
59. Diversification is a very sensible reason for two companies to merge.
FALSE
Type: Medium
60. Gain from mergers is defined as: Gain = PVAB - (PVA + PVB).
TRUE
Type: Medium
61. If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash
payment minus B's value as a separate entity.
TRUE
Type: Medium
62. In the purchase method of merger accounting a new asset category called goodwill is
created.
TRUE
Type: Difficult
63. The would-be acquirer making a tender offer directly to shareholders is another form of
proxy fight.
FALSE
Type: Difficult
64. The following are pre-offer defenses: litigation, asset structuring and liability structuring.
FALSE
Type: Medium
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Chapter 31 - Mergers
65. It appears that target companies capture most of the gains in hostile takeovers.
TRUE
Type: Medium
66. A poison pill protects the rights of shareholders.
FALSE
Type: Medium
67. Supermajorities give shareholders more control over the firm.
FALSE
Type: Medium
Short Answer Questions
68. Briefly explain the different types of mergers.
There are essentially three types of mergers: horizontal, vertical, and conglomerate. We can
also add a new type that is the cross-border merger. A horizontal merger is one where two
firms in the same line of business merge. A vertical merger is one where companies at
different stages of production merge. A conglomerate merger involves companies in unrelated
lines of business. A cross-border merger involves companies from different countries.
Type: Medium
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69. Discuss the difficulties associated with a typical merger.
The difficulties are numerous and easily overlooked. They include integration of product
lines, processes, training, R and D etc. The biggest hurdle is the merging of two corporate
cultures. Many mergers have failed because of this.
Type: Difficult
70. Briefly explain the term "economies of scale."
The natural goal of horizontal mergers is achieving economies of scale. Economies of scale
are achieved when the average unit cost of production decreases as production increases. One
way to achieve economies of scale is to spread fixed costs over a larger volume of production.
Economies of scale are also claimed even in other types of mergers. For example, in vertical
mergers economies of scale are achieved through better coordination and administration, and
through elimination of redundant costs.
Type: Medium
71. Briefly explain some of the good motives for mergers.
There are several good motives for mergers. They are: Economies of scale; economies of
vertical integration; complementary resources; unused tax shields; surplus funds; eliminating
inefficiencies. Of these economies of scale and complementary resources are the two widely
known motives for mergers.
Type: Medium
72. Briefly explain what is meant by "the Cost of acquiring" in the context of a merger?
The cost of acquiring is the cash paid minus the value of the acquired firm as a separate entity.
Cost = Cash paid - PVB. This calculation becomes more complicated if the payment made is
in the form of acquiring firm's stock.
Type: Medium
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73. Briefly explain what is meant by economic gain from merger?
There is an economic gain only if the two firms that are merging are worth more together than
apart. Gain = PVAB - (PVA + PVB) > 0
Type: Medium
74. Explain the central tenet of the Clayton Act of 1914.
The Clayton Act of 1914 forbids an acquisition whenever " in any line of commerce or in any
section of the country" the effect " may be substantially to lessen competition or to tend to
create a monopoly." This is enforced either by a civil suit brought by the Justice Department
or by a proceeding initiated by the Federal Trade Commission (FTC).
Type: Medium
75. Name the agencies that have successfully blocked mergers on antitrust (anti-monopoly)
grounds.
The US Justice Department and the Federal trade commission (FTC) have, in the past,
successfully blocked several large mergers. For example Reynolds and Alcoa, WorldCom and
Sprint, Hollywood Entertainment and Blockbuster, and office Depot and Staples mergers
were blocked on antitrust grounds. Recently, European Commission blocked the merger
between GE and Honeywell.
Type: Medium
76. Briefly discuss different forms of acquisition.
Basically an acquisition can take three forms. First approach is for one company to
automatically assume all the assets and all the liabilities of the other company. Second, is to
buy the seller's stock in exchange for cash, shares, or other securities. The third approach is to
buy some or all of the seller's assets.
Type: Difficult
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77. Briefly discuss takeover defenses.
The main purpose of takeover defenses is to raise the price an acquiring firm must pay to take
over a firm. Examples of defensive tactics include the staggered board, supermajority
amendment, restricted voting rights, poison pill, litigation, asset restructuring, and liability
restructuring among others.
Type: Difficult
78. Who gains most in mergers?
Generally, sellers do better than buyers in mergers. According to empirical studies, selling
shareholders receive a healthy gain averaging 16%. The overall value of the merging firms
increases by about 2%.
Type: Medium
79. Who are anti-takeover defenses designed to protect?
Firms institute anti-takeover measures to protect managers and senior executives. The
dominant research shows that shareholders of selling firms benefit from an acquisition. Thus,
the only real beneficiary is management, at the expense of shareholders.
Type: Medium
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