Part 6 Long-Term Investment Decisions
CHAPTER 15
MERGERS AND ACQUISITIONS
CHAPTER LEARNING OBJECTIVES
15.1 Describe the different types of takeovers.
15.2 Explain securities legislation as it applies to takeovers.
15.3 Differentiate between friendly and hostile acquisitions and describe the
15.4 Explain the various motivations underlying mergers and acquisitions.
15.5 Identify the valuation issues involved in assessing mergers and acquisitions.
15.6 Identify the issues involved in accounting for mergers and acquisitions.
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MULTIPLE CHOICE QUESTIONS
1. What is the key difference between a merger and an acquisition?
a) The target firm ceases to exist after a merger, but can continue on after an acquisition.
b) The target firm ceases to exist after an acquisition, but can continue on after a merger.
c) An acquisition requires the approval of both sets of shareholders from the two firms.
d) There is no difference between a merger and an acquisition.
2. Which of the following best defines an acquisition?
a) Two firms combining to form a completely new firm.
b) One firm purchases goods from another firm.
c) One firm completely absorbing another firm.
d) All of the above.
3. When a firm’s management decides to take on significant debt in order to take the firm private
it is called a:
a) Circular bid
b) Tender bid
c) Management buy-out (MBO)
d) Hostile takeover
4. Which of the acquisitions below would be considered a horizontal merger for Mercedes Benz
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(automobile manufacturer)?
a) Firestone (tire manufacturer)
b) BMW (a competitor)
c) Corning Glass (glass manufacturer)
d) RBC (bank)
5. The Canadian term for a merger process is called a(n):
a) Amendment
b) Combination
c) Amalgamation
d) Joint venture
6. In terms of shareholder approval requirements, the main difference between a cash
transaction and a share transaction is:
a) The approval of both sets of shareholders is often required for a cash transaction, but not for
a share transaction.
b) The approval of both sets of shareholders is often required for a share transaction, but not for
a cash transaction.
c) No approval is required for share transactions where the deal value is less than 50% of the
value of shares outstanding.
d) The approval of the acquiring firm’s shareholders is required for a cash transaction.
7. The fraction of shareholders required to approve an amalgamation agreement (assuming no
disputes) is at least:
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a) 20%
b) 50.01%
c) 66.67%
d) 75%
8. Which of the following is another term for a “going private” transaction?
a) Acquisition
b) Initial public offering
c) Merger
d) Issuer bid
9. An issuer bid occurs when:
I. An acquirer owns a majority stake of a target firm and wishes to acquire the remainder.
II. A potential acquirer with no stake in the target firm makes an offer for 50% of the shares.
III. An acquirer who owns a majority stake in the target recommends new management be put in
place.
IV. An acquirer wishes to reverse its purchase of the target firm.
a) I only
b) I and II
c) II and III
d) IV only
10. Use the following statements to answer the question:
I. The holdup problem consists of small shareholders asking for an excessive price to tender
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their shares in case of amalgamation.
II. Sweetening the deal results in increasing the price for the remaining shares to encourage the
holders to sell their shares.
a) I and II are correct.
b) I and II are incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
11. Which of the following is a side effect of the Free Trade Agreement (FTA)?
a) U.S. firms no longer wanted to acquire or merge with Canadian companies.
b) Canadian firms increased the public float held by Canadian investors.
c) U.S. multinationals began buying out the Canadian minority shareholders.
d) All of the above.
12. Use the following statements to answer the question:
I. A merger is the combination of two companies into a new entity.
II. An amalgamation is the exchange of shares in the old companies for shares in the new entity.
a) I is correct and II is correct.
b) I is incorrect and II is incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
13. A fairness opinion is used most often when:
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a) An unsolicited hostile tender offer is received from a potential acquirer who owns no stake in
the target firm.
b) A controlling shareholder seeks approval for an amalgamation.
c) Determining whether the exchange ratio in a stock swap transaction is appropriate.
d) None of the above.
14. Moose Travel Inc. (MT) owns 53% of Prairies Airways Inc. (PA) and wishes to make an
issuer bid. From what fraction of the PA shareholders does MT require approval for this deal to
be successful?
a) 12%
b) 10% plus a majority of the minority
c) 14% plus a majority of the minority
d) 47%
15. Securities legislation is a:
a) Federal responsibility.
b) Provincial responsibility.
c) National responsibility.
d) Both federal and provincial responsibility.
16. In Canada, what percentage of shares purchased by an investor is considered the early
warning threshold signalling that the company is a possible target?
a) 5%
b) 10%
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c) 25 %
d) 50 + 1%
17. In contrast to the question above, in the U.S. what percentage of shares purchased by an
investor is considered the early warning threshold signalling that the company is a possible
target?
a) 5%
b) 10%
c) 25 %
d) 50 + 1%
18. In Canada, the early warning threshold is hit when an investor purchases what percent of
shares?
a) 5%
b) 10%
c) 25%
d) 33.33%
19. Once an investor has purchased 20% of the outstanding shares of a firm, which of the
following is NOT allowed?
a) Open market share purchase with a takeover bid.
b) Open market sale of the stake.
c) Open market share purchase without a takeover bid.
d) A hostile takeover bid.
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20. A minority squeeze-out occurs when:
a) Minority shareholders change the top management of the firm.
b) When an acquirer owns 90% of the shares, the minority of the shareholders are forced to sell
their shares for the takeover price.
c) A small minority of shareholders frustrate a fair bid that has already been accepted by a
majority of shareholders.
d) All of the above.
21. In the U.S. the threshold of early warning is:
a) 5%
b) 10%
c) 20%
d) 30%
22. Why is the two-part tender offer illegal in Canada?
a) Because it discriminates between shareholders.
b) Because shareholders are not consulted in the deal.
c) Because the price is not fair.
d) Because it creates a rush to sell at the higher price.
23. Use the following statements to answer this question:
I. Each province is responsible for the mergers and acquisitions within its own jurisdiction.
II. The Ontario Securities Commission regulates most of the public deals in Canada.
a) I is correct and II is correct.
b) I is incorrect and II is incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
24. Which of the following is not one of the benefits of obtaining a toehold?
a) Acquiring shares at the market price requires no premium.
b) A toehold reduces the number of shares needed to be purchased in a later takeover bid.
c) A toehold eliminates competition from other potential acquirers.
d) A toehold can increase the probability of success of a later takeover.
25. Which of the following is NOT a reason why a takeover can be exempted from the Ontario
Securities Act?
a) There is limited involvement by shareholders in Ontario.
b) The firm being taken over is private.
c) The acquirer is buying shares from fewer than five shareholders and paying a premium of
less than 50 percent over the market price.
d) No more than 5 percent of the shares are purchased through the exchange over a one-year
period.
26. Which of the following is a document describing a target firm’s important characteristics to
potential acquirers?
a) Letter of intent
b) Offering memorandum
c) Prospectus
d) Break form
27. A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:
a) Golden parachute
b) White knight
c) Poison pill
d) LBO (Leveraged buy–out)
28. A no-shop clause is a promise from:
a) A potential acquirer to seek possible alternative target firms in order to reduce the bid price.
b) A potential target not to seek another buyer, thus demonstrating its commitment to
completing the transaction.
c) A potential acquirer to make a firm offer, thus requiring the target firm not to seek other
potential acquirers.
d) None of the above.
29. Which of the following best describes a no-shop clause?
a) The target firm agrees not to find another buyer, demonstrating its commitment to completing
the transaction.
b) The acquiring firm agrees not to find another target, demonstrating its commitment to
completing the transaction.
c) Once a potential acquirer makes an offer; no other buyers can make a bid for the target firm.
d) All of the above.
30. Which of the following is NOT a purpose of a break fee?
a) To reward the original acquirer for generating a competing bid.
b) To compensate the original acquirer for the costs incurred in negotiations.
c) To signal the high value of the target firm to the original acquiring firm.
d) To reduce the probability that a potential acquirer will back out of negotiations.
31. Place the following acquisition steps in chronological order, starting with the earliest:
I. Sign letter of intent
II. Final sale agreement
III. Ratification
IV. Main due diligence
V. Confidentiality agreement
a) V, I, IV, II, and III
b) IV, I, III, V, and II
c) II, III, IV, V, and I
d) V, IV, I, II, and III
32. Use the following statements to answer this question:
I. A letter of intent is a preliminary sale agreement.
II. The break fee is the amount paid for the due diligence process.
a) I is correct and II is correct.
b) I is incorrect and II is incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
33. Use the following statements to answer this question:
I. The friendly acquisition process involves investigating only the value of the firm using public
information, not confidential information.
II. The data room provides specific information about the acquiring firm’s valuation process.
a) I is correct and II is correct.
b) I is incorrect and II is incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
34. When an acquiring firm bypasses current management and makes a direct offer to purchase
shares from the shareholders, it is termed a:
a) Leveraged buy-out
b) Hostile takeover
c) Tender offer
d) Corporate buy–out
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35. A large amount of trading following a hostile tender offer is a good sign for the acquirer
because:
a) The shares are moving from regular investors into the hands of arbitrageurs.
b) A competing offer is likely.
c) The acquirer will pay a lower premium for the shares.
d) A large amount of trading is a bad sign for the acquirer.
36. Arbitrageurs predict what happens in takeovers and attempt to earn profits by:
a) Buying target firm shares after the tender offer announcement and selling the shares later for
a higher premium.
b) Selling acquiring firm shares before the tender offer announcement and buying the shares
later at a lower price.
c) Charging commissions for their advice to target and acquiring firms.
d) None of the above.
37. Which of the following is FALSE about the friendly acquisition process?
a) A friendly acquisition involves estimating the value of the firm using information provided by
the firm.
b) The due diligence process is the investigating of the correctness of information provided by
the target.
c) The no-shop clause prohibits the acquiring firm to look into other target firms.
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d) The confidentiality agreement prohibits the disclosure of private information about the target
firm.
38. A firm decides to defend itself from a hostile takeover. Management tries to solicit competing
takeover bids from other firms. This defense involves the use of a:
a) Poison pill
b) White knight
c) Shareholders’ rights plan
d) Tender offer
39. ______ involve issuing special securities that entitle the holders to unusual rights and
privileges if the issuing firm becomes the subject of a takeover bid.
a) Poison pills
b) Tender offers
c) White knights
d) Legal barriers
40. Which one of the following is an example of a poison pill?
a) A firm that sells its efficient business division because it interests the acquirer.
b) A firm that pays all its cash as dividends to existing shareholders because it interests the
acquirer.
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c) A firm that opens talks with another potential acquirer.
d) A firm that distributes new shares to the existing shareholders at a discount in the event of a
takeover.
41. What is the main difference between the U.S. and Canada in terms of the use of poison
pills?
a) In Canada, poison pills are illegal.
b) In the U.S., poison pills cannot be challenged in court.
c) In Canada, courts always dismiss the usage of poison pills.
d) In Canada, poison pills are used to delay the acquisition in case of the existence of another
bidder; they cannot be used to frustrate a bid the way they are in the U.S.
42. Which of the following are possible defenses that a target firm can use against an unfriendly
acquiring firm? The target firm may:
I. Sell attractive assets
II. Issue additional voting shares to dilute voting power
III. Assume a heavy debt burden
a) III only
b) I and II
c) II and III
d) I, II, and III
43. In Canada, which of the following are possible defenses that a target firm can use against
an unfriendly acquiring firm? The target firm may:
I. Change the company by-laws so that the successful bidder may be prevented from quickly
replacing the existing board of directors.
II. Attempt to buy the shares of the pursuing firm.
III. Argue through the courts that the takeover violates the substance or procedures set out in an
applicable statute.
IV. Issue additional voting shares to dilute earnings per share.
a) I and III
b) II, III, and IV
c) I, II, and III
d) I, III, and IV
44. Use the following statements to answer this question:
I. The white knight is a strategy to avoid being acquired by another firm.
II. Selling the crown jewels can lead to a long-term decrease in the value of the firm.
a) I is correct and II is correct.
b) I is incorrect and II is incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
45. If an automobile manufacturer and a steelworks producer decided to merge, it would be an
example of a:
a) Horizontal merger
b) Vertical merger
c) Conglomerate merger
d) None of the above
46. Which of the following is a motivation for vertical integration?
a) Acquiring a larger customer base
b) Reducing variable costs through economies of scale
c) Eliminating a significant competitor
d) Acquiring a cheaper source of raw materials
47. Synergies, which are due to capturing increased value as a result of a merger, could occur
due to which of the following?
a) Access to more and better debt financing
b) Reduction in costs due to overlap of job functions (e.g., layoffs)
c) Increased tax losses transferred from target firm
d) All of the above.
48. Which of the following represent possible source(s) of increased value when a merger or
acquisition takes place?
a) Improved management
b) Tax considerations
c) Improved financing
d) All of the above.
49. If the target and acquirer have initial values of $100 million and $150 million, respectively,
and the combined firm is worth $400 million, then the synergy value is:
a) $50 million
b) $400 million
c) $150 million
d) $100 million
50. Which of the following is NOT an example of economies of scale?
a) Reducing capacity
b) Geographic roll-up
c) Spreading fixed costs
d) Complementary strengths
51. Empirical evidence regarding merger gains shows that, on average:
a) Target firm shareholders experience a significant gain.
b) Acquiring firm shareholders experience a significant gain, while target firm shareholders gain
nothing.
c) Target firm shareholders experience no gain, while acquiring firm shareholders lose.
d) None of the above.
52. Notre Dame Alliance Inc. (NDA) is worth $3 billion and wants to take over Vancouver
Company Inc. (VC), which is worth $1.5 billion. NDA expects the deal to result in $0.5 billion in
synergies. Supposing a bidding war arises and NDA ends up paying $2 billion in cash for VC,
and then finds there are no synergies, how much has NDA gained or lost on the deal?