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Chapter 06 Corporate-Level Strategy: Creating Value through
Diversification Answer Key
True / False Questions
1.
Research shows that the vast majority of acquisitions of public corporations results in value
creation rather than value destruction.
2.
The Hewlett-Packard and Autonomy merger in 2011 is an example of a successful merger.
3.
Many acquisitions ultimately result in divestiture.
4.
At times, the only other people who may have benefited from a merger-acquisition were the
shareholders of the acquired firms or the investment bankers advising the acquiring firm.
5.
Reasons for acquisition failure include the effective integration of the acquisition.
6.
Corporate-level strategy focuses on gaining short-term revenue through managing operations
in multiple businesses.
7.
Sprint and Nextel merged in 2005. The successful merger resulted in a 31 billion USD merger-
related charge that lead to a 76 percent decrease in its value by late 2012.
8.
In a study of 270 international mergers between 2000 and 2003 it was found that sales growth
increased, earnings growth increased, and market valuations increased overall for the merged
companies.
9.
One of the reasons that the Cisco acquisition of the Flip product failed is that the core
businesses were very different.
10.
In large, widely diversified firms, decision making can become slow and remote to market
conditions thus creating potential difficulties for successful mergers as evidenced by the
Cisco-Flip failure.
11.
All diversification moves, including those involving mergers and acquisitions, erode
performance.
12.
Diversification initiatives must be justified by the creation of value for shareholders.
13.
When firms diversify into unrelated businesses, the primary potential benefits are horizontal
relationships, i.e., businesses sharing tangible and intangible resources.
14.
When firms diversify into related businesses, the primary potential benefits come from
horizontal relationships, which are businesses sharing intangible and tangible resources.
15.
Benefits derived from horizontal and hierarchical relationships are mutually exclusive.
16.
Economies of scope are cost savings from leveraging core competencies or sharing unrelated
activities among businesses in a corporation.
17.
Cooper Industries has followed a successful strategy of related diversification. There are few
similarities in the products it makes or the industries in which it competes.
18.
ConAgra uses the related diversification vertical integration initiative to enhance market power.
They do this to increase their power over suppliers by centrally purchasing huge quantities of
packaging materials for all of its food divisions.
19.
Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by
producing much of its own polypropylene fiber, a key input to its manufacturing process. This
is an example of using the related diversification vertical integration initiative to enhance their
market power.
20.
Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities,
including resource allocation and reward and evaluation systems. This is an example of using
unrelated diversification corporate restructuring and parenting initiatives to create value.
21.
Related diversification enables a firm to benefit from horizontal relationships across different
businesses in the diversified corporation by leveraging core competencies and sharing
activities.
22.
Economies of scope in a related diversification strategy result from the leveraging of core
competencies and the sharing of activities among businesses in the corporation such as
production.
23.
Core competencies do not create value in a business.
24.
For a core competency to create value and provide a viable basis for synergy among the
businesses in a corporation, it must at least create superior customer value and it must be
difficult to imitate.
25.
Gillette developed the Fusion and Mach 3 shaving systems that created superior customer
value as a result of the company core competency in research and development.
26.
One of the criteria for a core competence is that the different businesses in the corporation
must be similar in at least one important way related to the core competence.
27.
It is not necessary for a core competence to be difficult to imitate or to be non-substitutable.
28.
IBM leverages its competencies in computing technology to provide health care services. This
is an example of a core competence being used across dissimilar businesses within the same
corporation.
29.
Sharing activities across business units can provide two primary benefits: cost savings and
cost enhancements.
30.
Starbucks acquired the baker chain, La Boulange, with the intention of selling the bakery
products at its coffee cafes. The increased market exposure for La Boulange is an example of
a revenue enhancing benefit that can arise from the differentiation strategy.
31.
With unrelated diversification, potential benefits can be gained from vertical or hierarchical
relationships; that is, the creation of synergies from the interaction of the corporate office with
outside stakeholders.
32.
Restructuring requires the corporate office to find either poorly performing firms with
unrealized potential or firms in industries on the threshold of significant, positive change.
33.
Portfolio management should be considered as the primary basis for formulating corporate-
level strategies.
34.
Portfolio management matrices generally consist of two axes that reflect industry or market
growth and the market share of a business.
35.
The acquisition of two or more counter-cyclical businesses is an example of using
diversification to reduce risk.
36.
Loews Corporation, a conglomerate with 15 billion USD in revenues, competes across several
industries including oil and gas, tobacco, watches, insurance, and hotels. Its related
diversification strategy is to buy low and sell high as in the example where they bought six oil
tankers for 5 million USD and then sold them eight years later for 50 million USD.
37.
Diversified public corporations, such as Berkshire Hathaway and Virgin Group, create value
through management expertise by improving plans and budgets. This is an example of a
related diversification strategy.
38.
Portfolio models such as the BCG Portfolio matrix are limited in value because they only
compare the SBU on four dimensions.
Level of Difficulty: 2 Medium
Topic: Unrelated Diversification through Financial Synergies and Parenting
39.
In analyzing the Cabot Corporation portfolio using the BDG matrix, the company decided to
shift away from its core competence to unrelated areas of its business. The ensuing decline in
assets indicated that it needed to return to its core competence in order to grow.
40.
Risk reduction by itself is usually a means to create shareholder value, regardless of the
overall diversification strategy of the firm.
41.
An advantage of mergers and acquisitions is that they can enable a firm to rapidly enter new
product markets.
42.
Among the advantages of acquisitions are the expensive premiums that are frequently paid to
acquire a business.
43.
Through joint ventures, firms can directly acquire the assets and competencies of other firms.
44.
The potential advantages of strategic alliances and joint ventures include entering new
markets as well as developing and diffusing new technologies.
45.
One of the obligatory aspects of strategic alliances is the dependence on written contracts to
delimit responsibilities and enforce compliance.
46.
An advantage of a firm entering into a strategic alliance is that it does not have to share the
wealth with its partners.
47.
An advantage of internal development is that firms do not have to combine activities across
the value chains of many companies and merge company cultures.
48.
Divestment is useful to help a firm reverse an earlier acquisition that did not result in
successful growth.
49.
Zara, a Spanish clothing company, operates stores in over 70 countries. When entering
markets very distant from its home markets, Zara rarely uses local alliance partners to help it
negotiate the different cultural and regulatory environments.
50.
Compared to mergers and acquisitions, firms that engage in internal development capture the
value created by their own innovative activities by not having to share the wealth with alliance
partners or face the difficulties associated with combining activities across the value chains of
several firms or merging corporate cultures.
51.
In recent years, many high tech firms such as Priceline.com have suffered from the negative
impact of uncontrolled growth.
52.
Greenmail is an offer by a company, threatened by takeover, to offer its stock at a reduced
price to a third party.
53.
A golden parachute is a prearranged contract with managers specifying that, in the event of a
hostile takeover, the target company managers will be paid a significant severance package.
54.
Unfriendly or hostile takeovers always occur when the stock of the company becomes
undervalued.
55.
Former Merrill Lynch CEO John Thain gave out 4 billion USD in discretionary year-end
bonuses just before the company was rescued by Bank of America. This practice
demonstrates managerial greed.
56.
Poison pills are used by a company to take away shareholder rights in the event of a takeover
by another firm.
57.
Antitakeover defenses are always a management ploy to protect their own self interests.
58.
When Oracle launched a hostile bid for PeopleSoft in 2003, CEO Larry Ellison accused
PeopleSoft of launching a poison pill campaign. The outcome of the bitter fight was a better
financial reward for PeopleSoft shareholders.
59.
Poison pills always are used to protect the best interests of management.
60.
Managerial behaviors that erode shareholder returns include egotism, antitakeover tactics and
controlled growth.
Multiple Choice Questions
61.
The Cisco acquisition of Pure Digital Technologies, the parent of the Flip video camera, failed
because
62.
Which of the following is not a reason for merger and acquisition failures?
