63. 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
64. 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
65. 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
66. 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
67. The outcome of downsizing, downscoping, and leveraged buyouts is higher performance.
a. True
b. False
68. 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
Multiple Choice
69. According to the Chapter 7 Opening Case, the difference between Facebook’s acquisition approach and the
approaches of Microsoft and Google is that
a. Facebook tends to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire later-
stage companies.
b. none of Facebook‘s acquisitions have survived as independent companies, whereas those of Microsoft and
Google have continued to operate as subsidiaries.
c. Facebook’s approach is to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire
later-stage companies.
d. Microsoft’s and Google’s acquisitions have all been friendly, whereas Facebook’s have all been hostile.
70. During the recent financial crisis, M&A activity , whereas in 2011, M&A activity
a. declined; increased.
b. declined; declined.
c. increased; increased.
d. increased; declined.
71. Researchers have found that shareholders of acquired firms often
a. earn above-average returns.
b. earn below-average returns.
c. earn close to zero as a result of the acquisition.
d. are not affected by the acquisition.
72. Some research findings have shown that acquisitions typically for shareholders in the acquiring firm.
a. result in above-average returns
b. provide approximately average returns
c. result in returns near zero
d. take some time to achieve private synergy, but eventually result in above-average returns
73. 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.
74. Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely
takeover target by a major international brewer. It would probably be in Claude’s financial interest if Bayou
Beauty’s owners
a. resisted selling at any price.
b. sold the company to the larger brewer.
c. designed a poison pill to discourage a takeover.
d. looked for smaller brewers to acquire instead of selling to the larger brewer.
75. In a merger
a. one firm buys controlling interest in another firm.
b. two firms agree to integrate their operations on a relatively coequal basis.
c. two firms combine to create a third separate entity.
d. one firm breaks into two firms.
76. There are few true mergers because
a. few firms have complementary resources.
b. integration problems are more severe than in outright acquisitions.
c. one firm usually dominates in terms of market share, size, or value of assets.
d. of managerial resistance. True mergers result in significant managerial-level layoffs.
77. A(n) occurs when one firm buys a controlling, or 100 percent interest, in another firm.
a. merger
b. acquisition
c. spin-off
d. restructuring
78. When the target firm does not solicit the acquiring firm’s bid, it is referred to as a(n)
a. stealth raid.
b. adversarial acquisition.
c. takeover or unfriendly acquisition.
d. leveraged buyout.
79. Currently, the rationale for making an acquisition includes each of the following EXCEPT
a. to increase market power.
b. to decrease taxes paid by shareholders.
c. to overcome entry barriers.
d. to increase diversification.
80. Market power is derived primarily from the
a. core competencies of the firm.
b. size of a firm and its resources and capabilities.
c. quality of a firm’s top management team.
d. depth of a firm’s strategy.
81. The March 2011 announcement that AT&T was acquiring T-Mobile USA from Deutsche Telekom is a
acquisition and is intended to
a. vertical; increase diversification.
b. horizontal; increase market power.
c. vertical; overcome entry barriers.
d. related; increase speed to market.
82. A primary reason for a firm to pursue an acquisition is to
a. avoid increased government regulation.
b. achieve greater market power.
c. exit a hyper-competitive market.
d. achieve greater financial returns in the short run.
83. When a firm acquires its supplier, it is engaging in a(n)
a. merger.
b. unrelated acquisition.
c. hostile takeover.
d. vertical acquisition.
84. The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is
an example of a(n)
a. vertical acquisition.
b. unrelated acquisition.
c. horizontal acquisition.
d. merger of equals.
85. Horizontal, vertical, and related acquisitions to build market power
a. are likely to undergo regulatory review and analysis by financial markets.
b. are rarely permitted to occur across international borders.
c. typically involve a firm purchasing one of its suppliers or distributors.
d. concentrate on capturing value at more than one stage in the value chain.
86. Baby Doe’s, a designer and manufacturer of children‘s clothing, has decided to purchase a retail chain specializing
in children’s clothing. This purchase is a(n)
a. merger.
b. unrelated acquisition.
c. horizontal acquisition.
d. vertical acquisition.
87. Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market
to which the suppliers‘ products are sold. This purchase is a(n)
a. merger.
b. unrelated acquisition.
c. horizontal acquisition.
d. vertical acquisition.
88. Cross-border acquisitions are primarily made to
a. reshape the firm‘s competitive scope.
b. reduce the cost of new product development.
c. take advantage of higher education levels of labor in developed countries.
d. overcome barriers to entry in another country.
89. The presence of barriers to entry in a particular market will generally make acquisitions as an entry strategy.
a. less likely
b. more likely
c. prohibitive
d. illegal
90. 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.
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.
91. 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.
92. According to the Chapter 7 Strategic Focus, China‘s recent approach to acquisitions has been to focus on hard
assets (e.g., mineral deposits or R&D facilities) instead of established branded products because
a. China’s initial acquisition activities in branded products was highly successful and it wanted to apply those
successful techniques to hard assets that would create more value for Chinese firms.
b. hard assets around the world had appreciated rapidly and China wanted to take advantage of that
appreciation.
c. China‘s currency had depreciated relative to currencies in developed countries making acquisition of hard
assets in those countries cheaper.
d. it did not always have the managerial capability to realize successful performance of branded products.
93. According to the Chapter 7 Strategic Focus, research suggests that emerging market firms tend to
than other firms and that government ownership of those firms leads to
a. pay a higher premium; overpayment
b. pay a lower premium; overpayment
c. pay a lower premium; underpayment
d. pay a higher premium; underpayment
for the acquisition.
94. Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because
approximately percent of innovations are imitated within 4 years after patents are obtained.
a. 5
b. 10
c. 60
d. 20
95. Internal product development is often viewed as
a. carrying a high risk of failure.
b. the only reliable method of generating new products for the firm.
c. a quicker method of product launch than acquisition of another firm.
d. critical to the success of biotech and pharmaceutical firms.
96. A manager in your company is proposing the acquisition of Taylor Company, which has developed a new,
innovative product instead of a strategy of developing new products in–house. All of the following arguments are
correct EXCEPT
a. the acquisition of Taylor should be primarily for defensive rather than strategic reasons.
b. research suggests that acquisition strategies are a common means of avoiding risky internal ventures.
c. the outcomes of acquisitions can be estimated more easily and accurately than the outcomes for an internal
product development process.
d. acquisitions could become a substitute for innovation within your firm.
97. Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition
becomes a substitute for
a. market discipline.
b. innovation.
c. risk analysis.
d. international diversification.
98. Compared to internal product development, acquisitions allow
a. immediate access to innovations in mature product markets.
b. more accurate prediction of return on investment.
c. slower market entry.
d. more effective use of company core competencies.
99. Research has shown that the more , the greater is the probability that an acquisition will be successful.
a. related the acquired and acquiring firms are
b. diverse the resulting portfolio of competencies
c. disparate the corporate cultures
d. involved investment banking firms are in the due diligence process
100. When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is
intense, the firm may wish to by making an acquisition.
a. increase new product speed to market
b. broaden its competitive scope
c. increase its economies of scale
d. overcome entry barriers
101. 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.
102. Sales of watches among teenagers and twenty-somethings are declining rapidly as this age group uses cellphones,
iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group
may wish to consider in order to develop new products other than watches.
a. unrelated diversification
b. backward integration
c. forward integration
d. horizontal acquisitions
103. Each of the following is a rationale for acquisitions EXCEPT
a. achieving greater market power.
b. overcoming significant barriers to entry.
c. increasing speed of market entry.
d. positioning the firm for a tactical competitive move.
104. Research shows that about percent of mergers and acquisitions are successful.
a. 20
b. 40
c. 60
d. 80
105. 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.
106. The factors that lead to poor long–term performance by acquisitions include all of the following EXCEPT firms
a. with insufficient diversification.
b. having too much debt.
c. being unable to achieve synergy.
d. growing too large.
107. The phase is probably the single most important determinant of shareholder value creation in mergers and
acquisitions.
a. pre–acquisition negotiations
b. pre-acquisition due diligence
c. post-acquisition integration
d. post-acquisition restructuring
108. 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.
109. Due diligence includes all of the following activities EXCEPT assessing
a. differences in firm cultures.
b. tax consequences of the acquisition.
c. the level of private synergy between the two firms.
d. financing for intended transaction.
110. 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.
b. Pappelbon overpaid.
c. Pappelbon’s due diligence was not fully effective.
d. Pappelbon’s management was overly focused on acquisitions.
111. 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.
112. 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
113. Caterpillar’s payment of a 32 percent premium for the acquisition of Bucyrus in 2011 and subsequent need to issue
more stock illustrates the acquisition problem of
a. integration difficulties.
b. inability to achieve synergy.
c. large or extraordinary debt.
d. managers overly focused on acquisitions.
114. 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.
115. Private synergy
a. occurs in most related acquisitions and allows firms to see increased returns.
b. is frequently achieved in conglomerates.
c. is not easy for competitors to understand and imitate.
d. is assessed by managers during the due diligence process.
116. The expenses incurred by firms trying to create synergy through acquisition are called costs.
a. differentiation
b. diversification
c. transaction
d. interaction
117. Transaction costs include all of the following EXCEPT
a. charges from investment bankers who complete due diligence for the acquiring firm.
b. the loss of key employees following the acquisition.
c. managers’ time spent evaluating target firms.
d. managers’ time spent planning the diversification strategy of the firm.
118. Which of the following is NOT a result of over-diversification?
a. Executives do not have a rich understanding of all of the firm’s business units.
b. Managers emphasize strategic controls rather than financial controls.
c. Firms use acquisition as a substitute for innovation.
d. Managers become short-term in their orientation.
119. Evidence suggests that firms using acquisitions as a substitute for internally developed innovations
a. are able to offset the loss of research and development competencies by competencies in other areas.
b. extend their time–to-market for new product launches.
c. eventually encounter performance problems.
d. can leverage their core competencies across a broader range of products.