Chapter: Chapter 27: Mergers and Acquisitions
Multiple Choice
1. The analysis of cost savings requires an industry-specific business system. Which of the
following are requirements of an insightful industry-specific business system?
I. It uses a top-down approach.
II. It uses detail to identify the precise source of the savings.
III. It assigns each cost item of the target to one segment of the business system.
IV. It assigns the savings within the bidder’s organization in the appropriate segments in the
business system.
a) I and II only.
b) I and III only.
c) II, III, and IV only.
d) I, II, III, and IV.
2. Which of the following are usual costs associated with pursuing synergies from an
acquisition?
I. Severance pay.
II. Rebranding campaigns.
III. Decommissioning a plant.
IV. Information technology integration costs.
a) I and II only.
b) I and III only.
c) II, III, and IV only.
d) I, II, III, and IV.
3. When an acquiring firm is making the decision to offer either cash or stock for a target, it
should be more inclined to offer cash if:
a) The target is larger.
b) The target is smaller.
c) The stock market is in a bubble.
d) The acquiring firm has relatively low debt-to-equity ratios.
4. An all-equity firm worth $50 billion acquires for $4 billion cash a firm whose postacquisition
value will be $6 billion. The acquiring firm had the cash and did not need to borrow. The current
market value of the target is $3 billion. What is the estimated return to the shareholders of the
acquiring firm?
a) 2 percent.
b) 4 percent.
c) 6 percent.
d) 8 percent.
5. Which of the following are archetypical strategies that have a higher probability of creating
value as opposed to being one of the more difficult strategies for creating value?
I. Using a roll-up strategy.
II. Consolidating to improve competitive behavior.
III. Consolidating to remove excess capacity from industry.
IV. Picking winners early and helping them develop their business.
a) I and II only.
b) I, III, and IV only.
c) II, III, and IV only.
d) III and IV only.
6. About one-third of all acquisitions create value, about one-third destroy value, and for the
remaining third it is not clear whether value is created or destroyed.
7. A large acquisition occurring is a good predictor of an increase in acquisitions.
8. When an acquiring firm is making the decision to offer either cash or stock for a target, it
should be more inclined to offer cash if the stock market is in a bubble.
9. List the four components that determine the value created for the acquirer in an acquisition
and whether an increase in each increases or decreases that value.