Name:
Class:
Date:
chapter 7
Answer Key
1. True
2. True
3. True
4. False
5. True
6. False
7. True
8. True
9. True
10. True
11. True
12. True
13. False
14. False
15. True
16. False
17. False
18. False
19. True
20. False
21. True
22. False
23. True
24. False
25. True
Name:
Class:
Date:
chapter 7
Page 2
26. False
27. False
28. True
29. True
30. True
31. True
32. False
33. True
34. False
35. False
36. False
37. True
38. True
39. False
40. True
41. True
42. True
43. True
44. True
45. False
46. False
47. True
48. True
49. False
50. False
51. True
Name:
Class:
Date:
chapter 7
52. False
53. True
54. False
55. False
56. True
57. c
58. b
59. d
60. d
61. b
62. a
63. d
64. b
65. b
66. d
67. c
68. d
69. d
70. d
71. c
72. a
73. d
74. a
75. b
76. d
Name:
Class:
Date:
chapter 7
Page 4
77. c
78. a
79. c
80. b
81. a
82. c
83. b
84. c
85. b
86. d
87. b
88. a
89. b
90. c
91. d
92. b
93. a
94. b
95. b
96. c
97. c
98. a
99. b
100. d
101. d
102. a
Name:
Class:
Date:
chapter 7
103. a
104. d
105. c
106. c
107. a
108. b
109. d
110. a
111. d
112. d
113. a
114. b
115. c
116. a
117. a
118. a
119. b
120. c
121. c
Name:
Class:
Date:
chapter 7
Name:
Class:
Date:
chapter 7
Name:
Class:
Date:
chapter 7
Page 8
a.
True
b.
False
3. Restructuring refers to changes in the composition of a firm’s set of businesses or its financial structure.
a.
True
b.
False
4. Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance
levels.
a.
True
b.
False
5. Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.
a.
True
b.
False
6. Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate
the firms.
a.
True
b.
False
7. A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm
may lose its own ability to innovate.
a.
True
b.
False
8. Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition
strategies to create synergies.
a.
True
b.
False
9. When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring
strategies.
a.
True
b.
False
10. The recent financial crisis made it difficult for firms to complete “megadeals” and the slowdown in merger and
acquisition has continued in 2011.
a.
True
b.
False
11. Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has
duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management.
a.
True
b.
False
12. Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a
Name:
Class:
Date:
chapter 7
Page 9
distributor, or a business in a highly related industry.
a.
True
b.
False
13. United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators,
and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for
implementing its related diversification strategy.
a.
True
b.
False
14. Horizontal acquisitions and related acquisitions tend to contribute less to a firm’s competitiveness than do unrelated
acquisitions.
a.
True
b.
False
15. When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than
strategic controls.
a.
True
b.
False
16. Firms can increase their speed to market for new products by pursuing an internal product development strategy rather
than an acquisition strategy.
a.
True
b.
False
17. It is relatively common for a firm to develop new products internally to diversify its product lines.
a.
True
b.
False
18. The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies.
a.
True
b.
False
19. In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all
stakeholders, including stockholders.
a.
True
b.
False
20. The current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in
branded products.
a.
True
b.
False
21. Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in
bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.
a.
True
b.
False
Name:
Class:
Date:
chapter 7
Page 10
22. Downscoping represents a reduction in the number of a firm’s employees and sometimes in the number of its operating
units, but it may or may not represent a change in the composition of businesses in the corporation’s portfolio.
a.
True
b.
False
23. Downscoping makes management of the firm more effective because it allows the top management team to better
understand the remaining businesses.
a.
True
b.
False
24. Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines
managers.
a.
True
b.
False
25. Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition,
even when substantial leverage was used to finance the acquisition itself.
a.
True
b.
False
26. The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm
and resell it in 5–8 years. This tends to make the managers of the bought-out firm high-risk takers, since they will
probably not survive the resale and thus have little to lose.
a.
True
b.
False
27. Top managers typically become overly focused on acquisitions because only they can perform most of the tasks
involved, such as performing due diligence on the target firm.
a.
True
b.
False
28. Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for
acquisitions and the long-run performance of the newly formed form suffers.
a.
True
b.
False
29. Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the
firm’s managers were making decisions that primarily served their own interests rather than those of the shareholders.
a.
True
b.
False
30. Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either
firm’s assets with another company.
a.
True
b.
False
Name:
Class:
Date:
chapter 7
Page 11
31. Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border
acquisitions.
a.
True
b.
False
32. Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm.
a.
True
b.
False
33. Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large
potential return to bondholders.
a.
True
b.
False
34. A merger is defined as a strategy in which one firm purchases controlling interest in another firm.
a.
True
b.
False
35. Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is
being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for
77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both
firms have “grown up” with their companies. Because both these companies have a long, stable history in highly related
industries, this acquisition has a high probability of success.
a.
True
b.
False
36. The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.
a.
True
b.
False
37. Research suggests that horizontal acquisitions result in higher performance when the firms have similar strategies,
assets, and capabilities.
a.
True
b.
False
38. Top manager participation in and overseeing the activities required for making acquisitions can divert managerial
attention from other matters that are necessary for long-term competitive success.
a.
True
b.
False
39. Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using a
related diversification strategy.
a.
True
b.
False
40. A horizontal acquisition involves two firms in the same industry.
a.
True
Name:
Class:
Date:
chapter 7
Page 12
b.
False
41. Typical returns on acquisitions for acquiring firms are close to zero.
a.
True
b.
False
42. Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.
a.
True
b.
False
43. Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing
resources across the businesses in the merged firm.
a.
True
b.
False
44. A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis.
a.
True
b.
False
45. A related acquisition involves two firms in the same industry.
a.
True
b.
False
46. The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.
a.
True
b.
False
47. The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.
a.
True
b.
False
48. Research suggests that government ownership of emerging economy firms leads to overpayment in cross-border
acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders).
a.
True
b.
False
49. The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself.
a.
True
b.
False
50. Research has shown that the more different the acquired firm is in terms of competencies and resources than the
acquiring firm, the more likely the acquisition is to be successful.
a.
True
b.
False
51. The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.
Name:
Class:
Date:
chapter 7
Page 13
a.
True
b.
False
52. Large or extraordinary debt is defined as overpaying for an acquired firm.
a.
True
b.
False
53. An acquisition occurs when one firm buys a controlling or 100 percent interest in another firm and the acquired firm
becomes a subsidiary business.
a.
True
b.
False
54. In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently
than firms from other nations.
a.
True
b.
False
55. An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review.
a.
True
b.
False
56. One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in
a strategic alliance.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
57. Which of the following statements is FALSE?
a.
Synergy resulting from an acquisition generates gains in shareholder wealth beyond what they could achieve
through diversification of their own portfolios.
b.
Private synergy results when the combination of two firms yields competencies and capabilities that could not
be achieved by combining with any other firm.
c.
Private synergy is easy for competitors to understand and imitate.
d.
Private synergy is more likely when the two firms in an acquisition have complementary assets.
58. The use of high levels of debt in acquisitions has contributed to:
a.
the increase in above-average returns earned by acquiring firms.
b.
an increased risk of bankruptcy for acquiring firms.
c.
the confidence of the stock market in firms issuing junk bonds.
d.
an increase in investments that have long-term payoffs.
59. Pappelbon Enterprises recently acquired a chain of convenience stores offering both fuel and food. Pappelbon is now
surprised and dismayed to find that the gas pumps have been poorly maintained and will need to be replaced at
considerable expense. Each of the following statements accurately reflect this EXCEPT:
a.
Pappelbon did not fully evaluate the target.
Name:
Class:
Date:
chapter 7
Page 14
b.
Pappelbon overpaid.
c.
Pappelbon’s due diligence was not fully effective.
d.
Pappelbon’s management was overly focused on acquisitions.
60. Cross-border acquisitions are critical to U.S. firms competing internationally:
a.
if they are to develop differentiated products for markets served.
b.
when market share growth is the focus.
c.
where consolidated operations are beneficial.
d.
if they wish to overcome entry barriers to international markets.
61. The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because:
a.
of barriers to entry in many industries.
b.
it is difficult and time intensive for companies to develop products that differ from their current product line.
c.
innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting
from acquisition.
d.
unrelated acquisitions are usually uncomplicated because the acquired firm is allowed to continue to function
independently as it did before acquisition.
62. Without effective due diligence the:
a.
acquiring firm is likely to overpay for an acquisition.
b.
firm may miss its opportunity to buy a well-matched company.
c.
acquisition may deteriorate into a hostile takeover, reducing the value creating potential of the action.
d.
firm may be unable to act quickly and decisively in purchasing the target firm.
63. _________ refers to a divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm’s
core business.
a.
Downsizing
b.
Hostile takeovers
c.
Shakeouts
d.
Downscoping
64. An investor is analyzing two firms in the same industry. She is looking for long-term performance from her
investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is
undertaking aggressive downscoping. The investor should invest in the:
a.
downscoping firm because the higher debt load will discipline managers to act in shareholders’ best interests.
b.
downscoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing
on the firm’s core businesses.
c.
downsizing firm because it will be making decisions based on tactical strategies.
d.
downsizing firm because it is eliminating employees who are essentially “dead weight” and are dragging down
the firm’s profitability.
65. SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the
growing technical translation software market. This market is dominated by firms making highly differentiated products.
To enter this market, SpeakEasy would be best served if it considers a(an):
a.
vertical acquisition of a firm that uses technical translation products.
Name:
Class:
Date:
chapter 7
Page 15
b.
acquisition of a highly related firm in the technical translation market.
c.
cross-border merger, preferably with an Indian or Chinese company.
d.
strategy of internally developing the technical translation products needed to compete in this market.
66. Problems associated with acquisitions include all of the following EXCEPT:
a.
managers overly focused on acquisitions.
b.
integration difficulties.
c.
large or extraordinary debt.
d.
excessive time spent on the due diligence process.
67. A leveraged buyout refers to:
a.
a firm restructuring itself by selling off unrelated units of the company’s portfolio.
b.
a firm pursuing its core competencies by seeking to build a top management team that comes from a similar
background.
c.
a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes
the firm private.
d.
an action where the management of the firm and/or an external party buys all of the assets of a business
financed largely with equity.
68. Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT:
a.
large debt and increased financial risk.
b.
failure to invest in R&D.
c.
risk-averse management.
d.
inefficient operations.
69. ____ are unsecured obligations that are not tied to specific assets for collateral.
a.
Bearer bonds
b.
No-load stocks
c.
Penny stocks
d.
Junk bonds
70. ___________ is often used when the acquiring firm paid too high a premium to acquire the target firm.
a.
Management buyout
b.
Leveraged buyout
c.
Downscoping
d.
Downsizing
71. All of the following statements are correct EXCEPT:
a.
immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring
firms declines.
b.
shareholders of acquired firms often earn above-average returns from an acquisition.
c.
the majority of acquisitions increase long-term value for the acquiring firm.
d.
shareholders of acquiring firms typically earn returns from the transaction that are close to zero.
72. Internal product development is often viewed as: