Strategic Management and Competitive Advantage, 4e (Barney)
Chapter 10 Mergers and Acquisitions
1) A firm engages in an acquisition when it purchases a second firm.
2) For a firm to gain a controlling share in an acquisition, it must purchase more than 51% of the
acquired firm’s assets.
3) When the management of a target firm wants the firm to be acquired, this is known as a
hostile takeover.
4) A privately held firm has not sold any shares on the public stock market.
5) In an acquisition a tender offer can only be made with the support of the management of the
acquired firm.
6) When the assets of two similar-sized firms are combined, this is known as a merger.
7) While mergers typically begin as a transaction between equals, that is, between firms of equal
size and profitability, they often evolve after a merger such that one firm is more dominant in the
management of the merged firm than the other.
8) In the first 11 months of 2008, there were 9,900 mergers and acquisitions in the United States.
9) In 2007, the total value of mergers and acquisition deals in the United States was $10 trillion.
10) The price of each of a firm’s shares multiplied by the number of shares outstanding is known
as the firm’s current market value.
11) In all acquisitions bidding, firms will be willing to pay a price for a target up to the value that
the firm adds to the bidder once it is acquired.
12) The acquisition of strategically unrelated targets will generate substantial economic profits
for both the bidding and the target firms.
13) If there is any hope that mergers and acquisitions will be a source of superior performance
for bidding firms, it must be because of some sort of strategic relatedness between bidding and
target firms.
14) In principle, the Federal Trade Commission will allow any acquisition involving firms with
headquarters in the United States that could have the potential for generating monopoly or
oligopoly profits in an industry.
15) According to the Federal Trade Commission, a firm engages in a horizontal merger when it
acquires former suppliers or customers.
16) In a product extension merger, a firm acquires complementary products through merger and
acquisition activities.
17) Despite the popularity of conglomerate mergers in the 1960s, most mergers and acquisitions
among strategically related firms are divested shortly after they are completed.
18) Diversification economies are achieved by the ability of firms to dictate prices by exerting
market power.
19) To be economically valuable, links between bidding and target firms must meet the same
criteria as diversification strategies.
20) If bidding and target firms are strategically related, then the economic value of these two
firms combined is greater than their economic value as separate entities.
21) Firms should pursue merger and acquisition strategies only to obtain valuable economies of
scope that outside investors find too costly to create on their own.
22) The existence of strategic relatedness between bidding and target firms is sufficient for the
equity holders of bidding firms to earn economic profits from their acquisition strategies.
23) In an initial public offering, a firm (typically working with an investment banker) sells its
equity to the public at large.
24) One study that reviewed 40 empirical merger and acquisition studies in the finance literature
concluded that acquisitions, on average, increased the market value of bidding firms by about 25
percent and left the market value of the target firms unchanged.
25) Strategy researchers have found that in mergers and acquisitions, the more strategically
related bidding and target firms are, the more economic value these mergers and acquisitions
create.
26) In mergers and acquisitions, the owners of the bidding firm appropriate the economic value
created by the transaction.
27) The cumulative abnormal return for a merger or acquisition can be positive or negative
depending on whether the stock in question performs better or worse than what was expected
without an acquisition.
28) Free cash flow is simply the amount of cash a firm has to invest after all positive net present-
value investments in its ongoing businesses have been funded.
29) Managerial hubris is the well-founded belief held by managers in bidding firms that they can
manage the assets of a target firm more efficiently than the target firm’s current management.
30) The market for corporate control is the market that is created when multiple firms actively
seek to acquire one or several firms.
31) The difference between the unexpected value of an acquisition actually obtained by a bidder
and the price the bidder paid for the acquisition is a profit for the equity holders of the target
firm.
32) One of the main reasons why bidding firms do not obtain competitive advantages from
acquiring strategically related target firms is that several other bidding firms value the target firm
the same way.
33) One of the keys for a bidding firm to earn superior performance in an acquisition strategy is
to make sure that multiple bidders are pursuing the same target.
34) When acquiring a publicly traded firm a bidder has to release all the information it has about
the potential value of that target in combination with itself.
35) A thinly traded market is a market where there are only a small number of buyers and sellers,
where information about the opportunities in this market is not widely known, and where
interests besides purely maximizing the value of a firm can be important.
36) Mergers and acquisitions designed to create vertical integration should be managed through
the M-form structure.
37) Perhaps the most significant challenge in integrating bidding and target firms has to do with
cultural differences.
38) Operational, functional, strategic, and cultural differences between bidding and target firms
can all be compounded by the merger and acquisition process especially if that process was
unfriendly.
39) Unfriendly takeovers can generate anger and animosity among the target firm management
that is directed toward the management of the bidding firm.
40) The value that a bidding firm brings to a target firm through an acquisition should be
discounted by the cost of strategizing to implement an acquisition.
41) A firm engages in a(n) ________ when it purchases a second firm.
A) acquisition
B) joint venture
C) strategic alliance
D) equity alliance
42) When one firm acquires a(n) ________ of another firm, it has acquired enough of that firm’s
assets so that the acquiring firm is able to make all the management and strategic decisions in the
target firm.
A) market stake
B) equity share
C) controlling share
D) equity stake
43) A(n) ________ acquisition occurs when the management of a target firm wants to be
acquired.
A) hostile
B) admirable
C) strategic
D) friendly
44) When a firm has not sold shares on the public stock market, it is known as
A) closely held.
B) privately held.
C) publicly traded.
D) a small cap stock.
45) The difference between the current market price of a target firm’s shares and the price a
potential acquirer offers to pay for those shares is known as an
A) acquisition premium.
B) acquisition discount.
C) acquisition margin.
D) acquisition price.
46) When Sears and Kmart, two retail firms of relatively equal size in the United States, agreed
to combine their assets, this was an example of a(n)
A) joint venture.
B) acquisition.
C) merger.
D) equity agreement.
47) In 2007, the total value of announced merger and acquisition activities in the United States
was
A) $2.5 trillion
B) $1.7 trillion.
C) $3.0 trillion.
D) $5.0 trillion.
48) In the first 11 months of 2008, there were ________ acquisitions or mergers in the United
States.
A) 3,290
B) 4,160
C) 5,270
D) 8,190
49) The price of each of a firm’s shares multiplied by the number of shares outstanding
represents the firm’s
A) total equity base.
B) current market value.
C) total market share.
D) current market share.
50) In an unrelated acquisition, if 5 firms are interested in acquiring a firm and each of the
bidding firms had a current market value of $30,000 while the current market value of the target
firm is $20,000, this acquisition is likely to generate economic profits of ________ for the
acquiring firm.
A) $10,000
B) $20,000
C) $50,000
D) $0.00
51) If an electronics manufacturer were to acquire a chain of retail electronic stores to sell its
products, this would be an example of a ________ merger.
A) vertical
B) horizontal
C) market extension
D) product extension
52) If eBay were to acquire a smaller online auction company, this would be an example of a
________ merger.
A) conglomerate
B) vertical
C) market extension
D) horizontal
53) In a ________ merger, firms acquire complementary products through their merger and
acquisition activities.
A) vertical
B) market extension
C) product extension
D) horizontal
54) When eBay acquired Baaze.com, an Indian auction firm, in order to enter the Indian online
auction market, this was an example of a ________ merger.
A) product extension
B) market extension
C) conglomerate
D) vertical
55) If there are no vertical, horizontal, product extension, or market extension links between
firms, the FTC defines the merger or acquisition activity between firms as a ________ merger.
A) conglomerate
B) vertical
C) horizontal
D) product extension
56) ________ economies are scale economies that occur when the physical processes inside a
firm are altered so that the same amounts of input produce a higher quantity of outputs.
A) Pecuniary
B) Diversification
C) Technical
D) Vertical
57) Which of the following is a source of diversification economies?
A) Marketing
B) Production
C) Scheduling
D) Portfolio management
58) ________ economies are achieved by the ability of firms to dictate prices by exerting market
power.
A) Pecuniary
B) Technical
C) Diversification
D) Production
59) ________ economies are achieved by improving a firm’s performance relative to its risk
attributes or lowering its risk attributes relative to its performance.
A) Technical
B) Diversification
C) Pecuniary
D) Market
60) Which of the following is a financial motivation for why bidding firms might want to engage
in merger and acquisition strategies?
A) To increase leverage opportunities
B) To capture economies of scale
C) To adopt more efficient production or organizational technology
D) To engage in vertical integration
61) Which one of the following is not one of the reasons that Jensen and Ruback listed as to why
bidding firms might want to engage in merger and acquisition strategies?
A) To reduce production or distribution costs
B) To gain market power in product markets
C) To expand individual managers’ power within an organization
D) To eliminate inefficient target management
62) In a related acquisition, if there is one target firm and ten bidding firms, and the value of
each of the bidding firms as a stand-alone entity is $50,000 and the value of the target firm as a
stand-alone entity is $30,000, the market value of the combined entity will be
A) $0.00.
B) less than $80,000.
C) $80,000.
D) more than $80,000.
63) Wealthy individuals who provide capital to entrepreneurs to help them grow their businesses
are known as
A) business angels.
B) venture capitalists.
C) stockholders.
D) CEOs.
64) ________ firms typically raise money from numerous smaller investors, which they then
invest in a portfolio of entrepreneurial firms.
A) Business angel
B) Venture capital
C) Closely held
D) Private equity
65) In a(n) ________, a firm, typically working with an investment banker, sells its equity to the
public at large.
A) FTC
B) merger
C) IPO
D) acquisition
66) Research suggests that, on average, acquisitions increased the market value of target firms by
about ________ percent and ________.
A) 50; left the market value of the bidding firms unchanged
B) 25; left the market value of the bidding firms unchanged
C) 50; increased the market value of the bidding firms by 25 percent
D) 25; increased the market value of the bidding firms by 15 percent
67) Managers of bidding firms continue to engage in merger or acquisition strategies even
though they usually do not generate profits for bidding firms in order to
A) ensure survival.
B) generate free cash flow.
C) reduce agency problems.
D) reduce managerial hubris.
68) Which of the following actions should bidding firm managers take to help earn superior
performance in an acquisition strategy?
A) Share information with other bidders.
B) Delay the closing of the deal.
C) Avoid winning bidding wars.
D) Operate in competitive acquisition markets.
69) A thinly traded market is a market where
A) there are only a small number of buyers and sellers.
B) many firms are implementing acquisition strategies.
C) information about opportunities in this market is widely known.
D) the only important interest is to maximize the value of a firm.
70) To ensure that the owners of target firms appropriate whatever value is created by a merger
or acquisition, managers in these target firms should
A) create a thinly traded market for their firm.
B) seek information from bidders.
C) close the acquisition deal quickly.
D) limit the number of bidders involved in the bidding competition.