Chapter 20 – External Growth through Mergers
1. In a merger, two or more companies are combined to form an entirely new entity.
Chapter 20 – External Growth through Mergers
2. A tax loss carryforward is a benefit to the acquired firm’s shareholders.
3. Risk averse investors may discount the future earnings of the merged firm at a higher rate if
they move in different directions during business cycles.
4. One potential advantage of a merger to the acquiring firm is the Portfolio Effect which
attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.
5. The potential of a tax loss carryforward has no effect when considering the acquisition of a
company.
Chapter 20 – External Growth through Mergers
6. Too much diversification has led many companies to sell off companies previously
acquired during the merger boom.
7. Mergers often improve the financing flexibility that a larger company has available.
8. A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in
present value to a firm that might acquire company ZZZ.
9. The stock market reaction to divestitures may actually be positive if the divestiture is
perceived to rid the company of an unprofitable business, or if it seems to sharpen the
company’s focus.
Chapter 20 – External Growth through Mergers
10. The portfolio effect of a merger is greatest for the selling stockholders.
11. The desire to expand management and marketing capabilities is a direct financial motive.
12. Synergy is said to take place when the whole is less than the sum of the parts.
13. Vertical integration represents acquisition of a competitor.
14. Antitrust policy can preclude the acquisition of a competitor.
Chapter 20 – External Growth through Mergers
15. Most mergers are horizontal in nature in order to avoid the potential antitrust
complications involved with the elimination of competition.
16. In a horizontal merger, the integration that occurs comes from acquiring companies that
supply resources to the company’s production process.
17. While a horizontal merger may improve profitability, it will not necessarily reduce the
portfolio risk of the acquiring company.
18. Vertical integration is usually prohibited or severely restricted by government antitrust
regulations.
Chapter 20 – External Growth through Mergers
19. Synergy is the greatest and most easily measured nonfinancial benefit in a merger.
20. Selling stockholders are often anxious to sell because of the potential of higher profits.
21. Selling stockholders may receive a price well above current market or book value.
22. A motive for selling stockholders may be the bias against smaller companies.
23. A cash purchase is similar to a capital budgeting decision.
Chapter 20 – External Growth through Mergers
24. Following a merger, the change in the risk profile of the merged companies may influence
the P/E ratio as much as the change in the overall growth rate.
25. Stockholders of acquired firms in mergers tend to be more concerned with future earnings
and dividends exchanged than with the market value exchanged.
26. By using cash instead of stock, a company may diminish the perceived dilutive effects of
a merger.
27. If the acquiring firm’s P/E ratio is greater than the P/E of the acquired firm, the surviving
firm will automatically get an increase in E.P.S.
Chapter 20 – External Growth through Mergers
28. The earnings per share impact of a merger is influenced by relative price-earnings ratios
and the terms of exchange.
29. A Tender Offer describes the attempted purchase of a firm with the consent of that firm’s
management.
30. A takeover tender offer lets a company attempt to acquire a target firm against its will.
31. For mergers occurring after 2001, goodwill must be amortized over 40 years or less.
Chapter 20 – External Growth through Mergers
32. Existing management of a firm is almost always ready to accept an offer for the purchase
of the firm at a price above the market.
33. If an acquiring firm’s merger proposal was initially rejected by a target firm’s management
and board of directors, the acquiring firm could utilize a tender offer to gain control of the
target firm.
34. Leveraged Takeovers occur to firms that have an unusually large cash/total assets
position.
35. “Poison pills” are strategies which reduce the value of a firm if it is taken over by a
corporate raider.
Chapter 20 – External Growth through Mergers
36. Leveraged buyouts are restricted to “outside” tender offers.
37. The two step buy-out procedure allows the acquiring firm to pay a lower total price than if
a single offer is made.
38. The two step buy-out procedure induces stockholders to delay their reaction to the offer,
since they will receive a higher price later.
39. After a merger has been announced, subsequent cancellation generally causes the potential
acquiree’s stock to decline in value.
Chapter 20 – External Growth through Mergers
40. Although corporate managers have a responsibility to act in shareholders’ best interest,
management frequently opposes acquisitions due to personal motives.
41. One of the reasons that companies merge with other companies is to secure access to a
competing industry.
42. Multinational mergers provide economic and political diversification which can lead to a
higher cost of capital for the new firm.
43. Selling stockholders generally receive a price below the current market value of their prior
stock during a merger.
Chapter 20 – External Growth through Mergers
44. It is possible to merge with a company which results in the same earnings per share but
still lowers the new firm’s cost of capital.
45. A business combination of two or more companies in which the resulting firm maintains
the identity of the acquiring company is defined as a
46. Which of the following types of mergers is most likely to lead to diversification benefits?
Chapter 20 – External Growth through Mergers
47. When a tobacco firm merges with a steel company, it would be called
48. Which of the following is not a potential benefit of a merger?
49. The rising ratio of divestitures to new acquisitions which occurred in the past suggests
that
Chapter 20 – External Growth through Mergers
50. The direct financial motives for merger activity include all of following EXCEPT
51. The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring
Shirt Company, a firm in the 30% tax bracket, would be willing to pay (on a nondiscounted
basis) the sum of ______________ for the carryforward alone.
52. Synergy is said to occur when the whole is