Chapter 21—Mergers, Acquisitions, and Corporate Control
MULTIPLE CHOICE
1. Which of the following is a means of changing corporate control?
a.
merger
b.
management buyout
c.
proxy contest
d.
all of the above
NARRBEGIN: Smart Acquires Snazzy
Smart Acquires Snazzy
Smart Products plans to acquire Snazzy Snaps, which will create $8 million in incremental cash flows
for Smart each year for the first six years. Smart Products plans to divest Snazzy Snaps at the end of
the sixth year for $112,500,000. Smart’s beta (b) is 1.2, and is expected to remain so after the
acquisition. The risk free rate is 5 percent and the expected return on the market is 16 percent. Smart
Products has a 100 percent equity capital structure which will be maintained post-acquisition.
NARREND
2. Refer to Smart Acquires Snazzy. What is Smart Products’ cost of equity?
a.
24.2%
b.
18.2%
c.
16.0%
d.
11.0%
3. Refer to Smart Acquires Snazzy. If Smart Products’ beta (b) falls to 0.95 post-acquisition, what would
its weighted average cost of capital be?
a.
9.05%
b.
18.2%
c.
12.10%
d.
15.45%
4. What is the maximum price Smart Products can pay for Snazzy Snaps?
a.
$30,153,951
b.
$69,090,200
c.
$102,729,660
d.
$48,257,950
5. Suppose Smart Products’ stock price is $40 per share, and there are 12,000,000 shares outstanding.
How many new shares must Smart issue to acquire Snazzy Snaps at the maximum price?
a.
6,534,325
b.
2,568,242
c.
1,727,255
d.
4,639,773
6. Refer to Smart Acquires Snazzy. If Smart Products’ beta (b) falls to 0.95 post-acquisition, what would
its weighted average cost of capital be?
a.
9.05%
b.
18.2%
c.
12.10%
d.
15.45%
NARRBEGIN: Needsalift, Inc.
Needsalift, Inc.
You are analyzing the potential acquisition of Nothing Better! Ice Creams, Inc. by your firm,
Needsalift, Inc. The ice cream firm is a wholly owned subsidiary of Grand Lake Investments, which
has set a firm selling price of $10,000,000. From your work you estimate that Nothing Better! will
generate the following incremental cash flows for Needsalift:
Year
Incremental Cash Flow
1
$1,000,000
2
$1,500,000
3
$3,000,000
4
$4,000,000
5
$4,500,000
To fund the $10 million price, Needsalift can use $2 million from internal sources (retained earnings)
with a required return of 15 percent, while the rest would come from a new debt issue yielding 10
percent. Needsalift’s tax rate is 40 percent.
NARREND
7. What is the required return on the acquisition of Nothing Better! for Needsalift?
a.
15.0%
b.
10.5%
c.
7.8%
d.
11.0%
8. What is the value of the proposed acquisition to Needsalift?
a.
$9,771,379
b.
$10,666,344
c.
$8,500,678
d.
$10,596,175
9. If the cost of debt increases to 12 percent, should Needsalift proceed with the acquisition?
a.
No, with the debt cost at 12 percent, the value of the acquisition falls below $10 million by
$853,000.
b.
No, with the debt cost at 12 percent, the value of the acquisition falls below $10 million by
$680,518.
c.
Yes, since the increased cost of debt does not affect the value of the acquisition to
Needsalift.
d.
Yes, with the debt cost at 12 percent the value of the acquisition exceeds $10 million by
$335,374.
10. If the project were financed completely with equity (retained earnings) and the required return
remained unchanged post-acquisition, what is the most Needsalift would be willing to pay for Nothing
Better! Ice Creams?
a.
$9,319,482
b.
$8,500,638
c.
$10,000,000
d.
$9,771,379
NARRBEGIN: Milner – Poudre
Milner – Poudre
Milner Manufacturing plans to acquire Poudre Chemicals, by giving Poudre shareholders 1.75 shares
of Milner stock per share of Poudre. There are 2 million shares of Poudre Chemicals outstanding, with
a pre-merger-offer price of $25 per share, and Milner’s pre-offer stock price is $16.50.
NARREND
11. What is the control premium being offered by Milner Manufacturing?
a.
$3.875 per share
b.
$18.75 per share
c.
$8.50 per share
d.
$14.875 per share
12. If, six months later at the completion of the merger, Milner’s stock price has dropped to $14 per share,
what is the completed control premium percentage?
a.
-44.0%
b.
-15.15%
c.
-0.50%
d.
-2.0%
13. What is the value of the transaction at the time of the offer for Milner Manufacturing?
a.
$87,500,000
b.
$33,000,000
c.
$50,000,000
d.
$57,750,000
14. If an acquirer wishes to keep the identity of a target after the acquisition, it most likely will seek a
a.
statutory merger.
b.
subsidiary merger.
c.
consolidation.
d.
none of the above allow the target to keep a separate identity.
15. A change in corporate control brought about by the creation of new shares with special voting rights is
a(n)
a.
management buyout.
b.
employee stock ownership plan.
c.
dual-class recapitalization.
d.
Florida.
16. Which of the following anti-takeover measures may actually help align manager and shareholder
interests?
a.
super majority votes
b.
pac man defense
c.
golden parachutes
d.
staggered director elections
17. If the board of directors of a target seeks an alternative, “friendly,” acquirer, then it is said to be using
which takeover defense?
a.
just say no
b.
standstill
c.
white squire
d.
white knight
18. A corporate control change like Pepsi’s divestiture of its restaurant holdings is called a(n)
a.
bust-up
b.
equity carve out
c.
spin-off
d.
split-up
NARRBEGIN: Smart HH measures
Smart Products
Suppose Smart Products has three divisions which contribute 40, 35, and 25 percent each to its
revenues.
NARREND
19. What is Smart Products’ Herfindahl Index on focus?
a.
1.0
b.
0.40
c.
0.345
d.
0.333
20. Now suppose Smart Products acquires a competitor of one of its divisions and the new shares of
revenues are 60, 25, and 15 percent. Is Smart Products more or less focused?
a.
less focused; the HI increases to 0.445
b.
less focused; the HI decreases to 0.25
c.
more focused; the HI decreases to 0.25
d.
more focused; the HI increases to 0.445
21. FASB Statement 141 holds that
a.
goodwill is to be amortized over time.
b.
goodwill can no longer be created in merged financial statements.
c.
goodwill can be increased or decreased over time after the merger.
d.
goodwill is to be regularly evaluated for impairment.
22. Stock market evidence reveals
a.
target shareholders receive larger premia in mergers than tender offers.
b.
target shareholders’ returns have decreased over time.
c.
target shareholders receive larger premia when there are multiple bidders.
d.
target shareholders receive smaller premia when target management resists.
23. Recent stock market evidence reveals
a.
target and bidder shareholders receive significant positive returns.
b.
target shareholders receive significant positive returns, while acquirers’ returns are
actually negative.
c.
acquiring firms’ shareholders receive a larger share than target shareholders of the
increased value of the combined firms.
d.
acquirers’ returns have been increasing over time.
24. If you were the shareholder in a firm that became the target of an acquisition bid, which method of
payment would stock market evidence suggest signals a better deal?
a.
stock swap
b.
stock/cash mixture
c.
cash for stock
d.
all, if the price is right
25. Which of the following is (are) not value-enhancing motives for mergers and acquisitions?
a.
external expansion
b.
economies of scale and/or scope
c.
diversification
d.
managerial synergies
26. Conglomerate mergers may be explained by which of the following?
a.
seeking financial synergies
b.
availability of free cash flow
c.
diversification/risk reduction
d.
all of the above
27. A transaction in which two or more business organizations combine into a single entity is called a(n)
a.
acquisition
b.
merger
c.
consolidation
d.
none of the above
28. The transformation of a public corporation into a private company by the employees of the corporation
itself is called a(n)
a.
management buyout
b.
employee stock ownership plan
c.
reverse LBO
d.
reverse merger
29. Antitakeover measures in a corporate charter are called
a.
shark repellents
b.
bear hugs
c.
poison pills
d.
white knights
30. A merger that combines companies with similar but not identical lines of business is called a
a.
product extension merger
b.
pure conglomerate merger
c.
vertical merger
d.
none of the above
31. If GM were to merge with Wal-Mart, this would be called a
a.
vertical merger
b.
product extension merger
c.
pure conglomerate merger
d.
none of the above
NARRBEGIN: Bavarian Merger
Bavarian Merger
Bavarian Brew is planning on acquiring Bavarian Sausage in a pure exchange merger. Bavarian
Brew’s stock is currently trading at $35 and they set the exchange ratio at 0.80. Bavarian Sausage has
75 million shares outstanding which are currently trading at $18 a share.
NARREND
32. How many shares will Bavarian Brew issue in exchange for Bavarian Sausage’s shares.
a.
75 million
b.
60 million
c.
100 million
d.
50 million
33. Refer to Bavarian Merger. What is the transaction value of the merger?
a.
$1.5 billion
b.
$2.1 billion
c.
$750 million
d.
$500 million
34. Refer to Bavarian Merger. If you owned 250 shares of Bavarian Sausage what would be the value of
your stock holdings after the merger?
a.
$3,600
b.
$4,500
c.
$7,000
d.
$8,750
35. Refer to Bavarian Merger. If you owned 250 shares of Bavarian Sausage what would be the control
premium?
a.
55.6%
b.
35.7%
c.
62.5%
d.
41.9%
NARRBEGIN: Smith-Miler Merger
Smith-Miler Merger
Smith Enterprises can acquire Miller, Inc for $250,000 in either cash or stock. Both companies are
100% equity financed. The synergy value of the acquisition for Smith is $35,000. Currently Smith has
25,000 shares outstanding which trade at $29 a share, whereas Miller has 15,000 shares outstanding
that trade at $14 a share.
NARREND
36. What is the merger premium over Miller’s stock price?
a.
19%
b.
16%
c.
21%
d.
23%
37. What is the value of Miller to Smith?
a.
$35,000
b.
$245,000
c.
$210,000
d.
$125,000
38. How many shares would be given to Miller’s shareholders in a stock-financed deal?
a.
10,000
b.
8,621
c.
17,857
d.
14,478
39. For Smith and Miller, what would be the exchange ratio in a pure stock exchange merger?
a.
57.48%
b.
34.48%
c.
63.48%
d.
25.42%
40. What is the net value of the acquisition to Smith if cash is used?
a.
$245,000
b.
-$5,000
c.
-$250,000
d.
$5,000
41. For Smith and Miller, what is the value of the post merger firm if cash is used?
a.
$-5,000
b.
$725,000
c.
$720,000
d.
$250,000
42. For Smith and Miller, what is the stock price of the new firm after a cash acquisition?
a.
$29
b.
$28.80
c.
$18
d.
$21.50
NARRBEGIN: Exhibit 21-1 HHI
Exhibit 21-1
Firm
Market share (%)
1
35%
2
20
3
15
4
10
5
8
6
7
7
5
NARREND
43. Refer to Exhibit 21-1. What is the HHI of this industry?
a.
2,088
b.
1,645
c.
2,495
d.
1,325
44. Refer to Exhibit 21-1. If firms 1 and 2 were to merge what would be the HHI of the industry?
a.
2,088
b.
3,488
c.
2,495
d.
1,645
45. Refer to Exhibit 21-1. If firms 6 and 7 were to merge what would be the HHI of the industry?
a.
2,088
b.
2,158
c.
2,495
d.
1,645
46. Refer to Exhibit 21-1. If firms 1 and 7 were to merge what is the HHI of the industry?
a.
2,050
b.
2,469
c.
2,438
d.
2,945
NARRBEGIN: Bavarian-Bavarian Merger
Bavarian-Bavarian Merger
Bavarian Brew is planning on acquiring Bavarian Sausage in a pure exchange merger. Bavarian
Brew’s stock is currently trading at $45 and they set the exchange ratio at 1.80. Bavarian Sausage has
75 million shares outstanding which are currently trading at $23 a share.
Twelve months after the merger Bavarian Brew’s stock price drops to $37.
NARREND
47. How many shares will Bavarian Brew issue in the exchange offer?
a.
75 million
b.
135 million
c.
95 million
d.
150 million
48. What is the transaction value of the merger for Bavarian Brew?
a.
$3.375 billion
b.
$6.075 billion
c.
$135 million
d.
$1.350 billion
49. If you owned 200 shares of Bavarian Sausage what would be the control premium?
a.
252%
b.
125%
c.
52%
d.
189%