120. When managers become overly focused on making acquisitions, it is
a. because the skills of top executives are better used in making acquisitions than they are in daily organization
operations.
b. because of the thrill of selecting, chasing, and seizing a target.
c. due to pressure from major stakeholders to diversify the firm.
d. because acquisitions are a quick way to improve the financial standing of the firm.
121. Acquisitions can become a time sink for top level managers for all the following reasons EXCEPT
a. the integration process after acquisition requires managerial attention.
b. they must prepare for acquisition negotiations.
c. managers are involved in the search for viable acquisition candidates.
d. only top managers can perform the required due diligence.
122. The strategy of Citigroup under CEO Sanford Weill was to create a “financial supermarket” where customers shop
for a variety of financial services within the same company. This strategy was executed via a series of acquisitions
but ultimately failed. This situation was the result of
a. Citigroup‘s managers focusing too much on acquisitions at the expense of managing their existing businesses.
b. key managers leaving from the acquired firms, which left the firms with inferior management talent.
c. the firm becoming too vertically integrated.
d. the firm becoming too focused on its core businesses.
123. All of the following were results of Citigroup’s acquisition strategy EXCEPT (Chapter 7 Strategic Focus)
a. overly diversified.
b. a much smaller, though global, business financial service firm.
c. too large.
d. lacking in synergy.
124. One problem with becoming too large is that large firms
a. tend to have less market power.
b. have less potential for economies of scale.
c. become attractive takeover targets.
d. usually increase bureaucratic controls.
125. Thomas is an upper-middle level manager for a firm that has been actively involved in acquisitions over the last 10
years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial
culture of the firm has been turning more and more to controls.
a. bureaucratic
b. strategic
c. tactical
d. organic
126. A friendly acquisition
a. raises the price that has to be paid for a firm.
b. enhances the complementarity of the two firms’ assets.
c. facilitates the integration of the acquired and acquiring firms.
d. allows joint ventures to be developed.
127. typically result(s) in the acquiring firm being able to prevent valuable human resources in the acquired firm
from leaving.
a. Financial slack
b. Private synergy
c. Friendly acquisitions
d. High compensation
128. Which of the following is NOT an attribute of a successful acquisition?
a. The acquiring firm has a large amount of financial slack.
b. The acquired and acquiring firms have complementary assets and/or resources.
c. Innovation and R&D investments continue as part of the firm’s strategy.
d. Investments in advertising and image building are made quickly.
129. Typically, in a failed acquisition, the organization will
a. restructure.
b. go into bankruptcy.
c. focus on building private synergy.
d. increase integration.
130. Ambrose is a scientist working for a pharmaceutical company. His company was acquired by a rival pharmaceutical
company, and now it is involved in downsizing and downscoping. Ambrose is concerned about his job security, since
he is actively involved in amateur sports in his community and does not wish to disrupt his current lifestyle.
Ambrose’s job will be most likely to be secure if
a. Ambrose’s research is in a non-core activity.
b. the acquisition has been financed by junk bonds.
c. Ambrose is in a position to take a poison pill.
d. Ambrose is a key employee in the firm’s primary business.
131. Magma, Inc., acquired Vulcan, Inc., 3 years ago. Effective integration of the two companies’ culture was never
achieved, and the two firms‘ assets were not complementary. It is very likely that Magma will
a. go public through an IPO.
b. review the due diligence information collected before the acquisition.
c. restructure.
d. review its tactical-level strategies.
132. Which of the following is NOT one of the three main restructuring strategies?
a. realigning
b. downsizing
c. downscoping
d. leveraged buyouts
133. 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
134. may be necessary because acquisitions create a situation in which the newly formed form has
duplicate organizational functions such as sales, manufacturing, distribution, and human resource management.
a. Management buyout
b. Leveraged buyout
c. Downsizing
d. Downscoping
135. 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
136. Failing to appropriately will result in too many employees doing the same work and prevent the
new firm from realizing the cost synergies it anticipated.
a. downsize
b. spin-off
c. downscope
d. buyout
137. 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.
138. Compared with downsizing, has (have) a more positive effect on firm performance.
a. reconfiguring
b. downscoping
c. leveraged buyouts
d. acquisitions
139. 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 buy all of the assets of a business
financed largely with equity.
140. The term “leverage” in leveraged buyouts refers to the
a. firm’s increased concentration on the firm‘s core competencies.
b. amount of new debt incurred in buying the firm.
c. fact that the employees are purchasing the firm for which they work.
d. process of removing the firm’s stock from public trading.
141. 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.
142. After a leveraged buyout, typically occur(s).
a. selling of assets
b. further rounds of acquisitions
c. due diligence
d. private synergy
143. How have changing conditions in the external environment influenced the type of M & A activity firms pursue?
144. How difficult is it for merger and acquisition strategies to create value and which firms benefit the most from M &
A activity?
145. Identify and explain the seven reasons firms engage in an acquisition strategy.
146. Describe the seven problems in achieving a successful acquisition.
147. Describe how an acquisition program can result in managerial time and energy absorption.
148. What are the attributes of a successful acquisition program?
149. What is restructuring and what are its common forms?
150. What are the differences between downscoping and downsizing and why are each used?
151. What is an LBO and what have been the results of such activities?
152. What are the results of the three forms of restructuring?
Subjective Short Answer
Case Scenario 1: Syco Inc. (SI).
Syco, Inc. (SI) was founded the late 1800s and grew through acquisition from being primarily a large discount
retailer into a highly diversified firm. Beyond retailing (still SI’s dominant business), by the middle of the 1990s its
lines of business included significant market positions in insurance, consumer credit cards, stock brokerage,
commercial and residential real estate brokerage, and an online Internet portal. Each of the non–retail businesses
was average in its relative industry performance. Consistent with the decentralized structure at SI and arms-length
corporate oversight, each of these businesses was also rapidly developing their own unique brands and customer
following. However, within a short period of time it became apparent that the retail business was failing. SI‘s vast
mall-based department store holdings were suffering from deferred maintenance and merchandising that did not
appear to be popular with its once large consumer base. At the same time, highly efficient and focused low-cost
competitors like Walmart were beginning to take significant market share from SI. On the verge of bankruptcy by
early 2000, SI’s management chose to sell off its insurance, real estate, and stock brokerage units; it also spun off
its credit card and portal businesses in separate public offerings.
153. (Refer to Case Scenario 1). Why do you suppose SI entered the non-retail businesses through acquisition? Is this a
cheaper route than starting up these businesses from scratch?
154. Part 1: (Refer to Case Scenario 1). Why do you suppose that SI sold off or spun-off its non-retail businesses?
Part 2: What should SI do after selling off the non–retail businesses?
155. (Refer to Case Scenario 1). Syco‘s acquisition strategy was appropriate since it would allow the firm to have
market power over its competitors.
Case Scenario 2: Raptec
Raptec was incorporated in 1991 and went public on the Nasdaq Stock Market in 1996. Raptec’s strategy is to
become the global leader in innovative storage solutions. Raptec is an S&P 500 and a Nasdaq Stock Market 100
member. The company’s hardware and software solutions for eBusiness and Internet applications move, manage,
and protect critical data and digital content. Raptec operates in three principal business segments: Direct Attached
Storage (“DAS”), Storage Networking Solutions (“SNS“) and Software. These hardware and software products are
found in high-performance networks, servers, workstations, and desktops from the world’s leading OEMs, and are
sold through distribution channels to Internet service providers, enterprises, medium and small businesses, and
consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable
operations. In early 2007, the company announced its plan to spin–off the software segment, subsequently
incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec’s most
profitable and fastest growing segment. By mid-2007 Raptec had completed the initial public offering of
approximately 15 percent of Axio’s stock, and then distributed the remaining Axio stock to Raptec’s stockholders in a
tax-free distribution.
156. (Refer to Case Scenario 2). Why would a successful firm like Raptec spin off its most promising business?
157. (Refer to Case Scenario 2). Prior to the spin-off, how would you go about identifying the respective boundaries of
the Raptec and Axio businesses?
158. (Refer to Case Scenario 2). What risks does Raptec run in spinning off Axio?
159. (Refer to Case Scenario 2). Leveraged buyouts such as the Axio spinoff is a form of restructuring strategy that is
only used to correct for managerial mistakes or because the firm’s managers were making decisions that only
served their own interests rather than those of the shareholders.
Case Scenario 3: Barracuda Inc.
Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and
plumbing fixture products that it sells to professionals (i.e., plumbers and electricians) and through the large volume
do–it–yourself (DIY) stores like The Home Depot and Lowe’s. While this successful growth has been achieved
primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by
looking to fragmented industries to acquire small firms with efficient operations and good management teams. It
then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the
professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it
practically reinvented though such technological innovations as the washerless faucet, and marketing innovations
like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its
businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit
after tax (NPAT) of 18 percent. The firm’s management is looking to broaden its revenue base and has identified
the home furnishings business as sharing many characteristics with faucets, prior to Barracuda‘s entry into faucets.
It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings
manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity.
There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT
is between 4 and 5 percent, which also reflects the fact that few firms have good managers. While the industry is
still primarily composed of single-business family–run firms, which manufacture furniture domestically, imports are
increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large
established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home
furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically
offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home
furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies
actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many
products to choose from, at many different price points, and few home furnishing products beyond those of the larger
companies have established brands. Also, customers can switch easily among high and low-priced furniture and
other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely).
160. (Refer to Case Scenario 3). Why would Barracuda consider acquisition as its preferred mode of entry into
furniture?
161. (Refer to Case Scenario 3). Given the history of Barracuda, what guidelines would you suggest to management
regarding their acquisition strategy in the home furnishings industry?
162. (Refer to Case Scenario 3). Given Barracuda’s history, what threats does Barracuda face in entering the furniture
industry through acquisition?
163. (Refer to Case Scenario 3). Barracuda’s acquisitions have been driven by the need to increase market power and
hence have been mostly horizontal and vertical acquisitions.