Chapter 1: Introduction to Mergers and Acquisitions
1. Which of the following are generally considered restructuring activities?
a. A merger
b. An acquisition
c. A divestiture
d. A consolidation
e. All of the above
Answer:
2. All of the following are considered business alliances except for
a. Joint ventures
b. Mergers
c. Minority investments
d. Franchises
e. Licensing agreements
Answer:
3. Which of the following is an example of economies of scope?
a. Declining average fixed costs due to increasing levels of capacity utilization
b. A single computer center supports multiple business units
c. Amortization of capitalized software
d. The divestiture of a product line
e. Shifting production from an underutilized facility to another to achieve a higher overall operating rate and shutting down the first facility
Answer:
4. A firm may be motivated to purchase another firm whenever
a. The cost to replace the target firm’s assets is less than its market value
b. The replacement cost of the target firm’s assets exceeds its market value
c. When the inflation rate is accelerating
d. The ratio of the target firm’s market value is more than twice its book value
e. The market to book ratio is greater than one and increasing
Answer:
5. Which of the following is true only of a consolidation?
a. More than two firms are involved in the combination
b. One party to the combination disappears
c. All parties to the combination disappear
d. The entity resulting from the combination assumes ownership of the assets and liabilities of the acquiring firm only.
e. One company becomes a wholly owned subsidiary of the other.
Answer:
6. Which one of the following is not an example of a horizontal merger?
a. NationsBank and Bank of America combine
b. U.S. Steel and Marathon Oil combine
c. Exxon and Mobil Oil combine
d. SBC Communications and Ameritech Communications combine
e. Hewlett Packard and Compaq Computer combine
Answer:
7. Buyers often prefer “friendly” takeovers to hostile ones because of all of the following except for:
a. Can often be consummated at a lower price
b. Avoid an auction environment
c. Facilitate post-merger integration
d. A shareholder vote is seldom required
e. The target firm’s management recommends approval of the takeover to its shareholders
Answer:
8. Which of the following represent disadvantages of a holding company structure?
a. Potential for triple taxation
b. Significant number of minority shareholders may create contentious environment
c. Managers may have difficulty in making the best investment decisions
d. A, B, and C
e. A and C only
Answer:
9. Which of the following are not true about ESOPs?
a. An ESOP is a trust
b. Employer contributions to an ESOP are tax deductible
c. ESOPs can never borrow
d. Employees participating in ESOPs are immediately vested
e. C and D
Answer:
10. ESOPs may be used for which of the following?
a. As an alternative to divestiture
b. To consummate management buyouts
c. As an anti-takeover defense
d. A, B, and C
e. A and B only
Answer:
11. Which of the following represent alternative ways for businesses to reap some or all of the advantages of M&As?
a. Joint ventures and strategic alliances
b. Strategic alliances, minority investments, and licensing
c. Minority investments, alliances, and licensing
d. Franchises, alliances, joint ventures, and licensing
e. All of the above
Answer:
12. Which of the following are often participants in the acquisition process?
a. Investment bankers
b. Lawyers
c. Accountants
d. Proxy solicitors
e. All of the above
Answer:
13. The purpose of a “fairness” opinion from an investment bank is
a. To evaluate for the target’s board of directors the appropriateness of a takeover offer
b. To satisfy Securities and Exchange Commission filing requirements
c. To support the buyer’s negotiation effort
d. To assist acquiring management in the evaluation of takeover targets
e. A and B
Answer:
14. Arbitrageurs often adopt which of the following strategies just before or just after a merger announcement?
a. Buy the target firm’s stock
b. Buy the target firm’s stock and sells the acquirer’s stock short
c. Buy the acquirer’s stock only
d. Sell the target’s stock short and buys the acquirer’s stock
e. Sell the target stock short
Answer:
15. Institutional investors in private companies often have considerable influence approving or disapproving proposed mergers. Which of the following are generally not considered institutional investors?
a. Pension funds
b. Insurance companies
c. Bank trust departments
d. United States Treasury Department
e. Mutual funds
Answer:
16. Which of the following are generally not considered motives for mergers?
a. Desire to achieve economies of scale
b. Desire to achieve economies of scope
c. Desire to achieve antitrust regulatory approval
d. Strategic realignment
e. Desire to purchase undervalued assets
Answer:
17. Which of the following are not true about economies of scale?
a. Spreading fixed costs over increasing production levels
b. Improve the overall cost position of the firm
c. Most common in manufacturing businesses
d. Most common in businesses whose costs are primarily variable
e. Are common to such industries as utilities, steel making, pharmaceutical, chemical and aircraft manufacturing
Answer:
18. Which of the following is not true of financial synergy?
a. Tends to reduce the firm’s cost of capital
b. Results from a better matching of investment opportunities available to the firm with internally generated funds
c. Enables larger firms to experience lower average security underwriting costs than smaller firms
d. Tends to spread the firm’s fixed expenses over increasing levels of production
e. A and B
Answer:
19. Which of the following is not true of unrelated diversification?
a. Involves buying firms outside of the company’s primary lines of business
b. Involves shifting from a firm’s core product lines into those which are perceived to have higher growth potential
c. Generally results in higher returns to shareholders
d. Generally requires that the cash flows of acquired businesses are uncorrelated with those of the firm’s existing businesses
e. A and D only
Answer:
20. Which of the following is not true of strategic realignment?
a. May be a result of industry deregulation
b. Is rarely a result of technological change
c. Is a common motive for M&As
d. A and C only
e. Is commonly a result of technological change
Answer:
21. The hubris motive for M&As refers to which of the following?
a. Explains why mergers may happen even if the current market value of the target firm reflects its true economic value
b. The ratio of the market value of the acquiring firm’s stock exceeds the replacement cost of its assets
c. Agency problems
d. Market power
e. The Q ratio
Answer:
22. Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders normally average
a. 10%
b. 30%
c. –3%
d. 100%
e. 50%
Answer:
23. Around the announcement date of a merger, acquiring firm shareholders normally earn
a. 30% positive abnormal returns
b. –20% abnormal returns
c. Zero to slightly negative returns
d. 100% positive abnormal returns
e. 10% positive abnormal returns
Answer:
24. Which of the following is the most common reason that M&As often fail to meet expectations?
a. Overpayment
b. Form of payment
c. Large size of target firm
d. Inadequate post-merger due diligence
e. Poor post-merger communication
Answer:
25. Post-merger financial performance of the new firm is often about the same as which of the following?
a. Joint ventures
b. Strategic alliances
c. Licenses
d. Minority investments
e. All of the above
Answer:
Chapter 2 Regulatory Considerations
1. In determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of the following except for
a. Market share of the combined businesses
b. Potential for price fixing
c. Ease of new competitors to enter the market
d. Potential for job loss among target firm’s employees
e. The potential for the target firm to fail without the takeover
Answer:
2. Which of the following is among the least regulated industries in the U.S.
a. Defenses
b. Communications
c. Retailing
d. Public utilities
e. Banking
Answer:
3. All of the following are true of the Williams Act except for
a. Consists of a series of amendments to the 1934 Securities Exchange Act
b. Facilitates rapid takeovers over target companies
c. Requires investors acquiring 5% or more of a public company to file a 13(d) with the SEC
d. Firms undertaking tender offers are required to file a 14(d)-1 with the SEC
e. Acquiring firms initiating tender offers must disclose their intentions and business plans
Answer:
4. The Securities Act of 1933 requires the registration of all securities issued to the public. Such registration requires which of the following disclosures:
a. Description of the firm’s properties and business
b. Description of the securities
c. Information about management
d. Financial statements audited by public accountants
e. All of the above.
Answer:
5. All of the following is true about proxy contests except for
a. Proxy materials must be filed with the SEC immediately following their distribution to investors
b. The names and interests of all parties to the proxy contest must be disclosed in the proxy materials
c. Proxy materials may be distributed by firms seeking to change the composition of a target firm’s board of directors
d. Proxy materials may be distributed by the target firm seeking to influence how their shareholders vote on a particular proposal
e. Target firm proxy materials must be filed with the SEC.
Answer:
6. The purpose of the 1968 Williams Act was to
a. Give target firm shareholders time to review takeover proposals
b. Prosecute target firm shareholders who misuse information
c. Protect target firm employees from layoffs
d. Prevent tender offers
e. Promote tender offers
Answer:
7. Which of the following represent important shortcomings of using industry concentration ratios to determine whether the combination of certain firms will result in an increase in market power?
a. Frequent inability to define what constitutes an industry
b. Failure to measure ease of entry or exit for other firms
c. Failure to account for foreign competition
d. Failure to account properly for the distribution of firms of different sizes
e. All of the above
Answer:
8. In a tender offer, which of the following is true?
a. Both acquiring and target firms are required to disclose their intentions to the SEC
b. The target’s management cannot advise its shareholders how to respond to a tender offer until has disclosed certain information to the SEC
c. Information must be disclosed only to the SEC and not to the exchanges on which the target’s shares are traded
d. A and B
e. A, B, and C
Answer:
9. Which of the following are true about the Sherman Antitrust Act?
a. Prohibits business combinations that result in monopolies.
b. Prohibits business combinations resulting in a significant increase in the pricing power of a single firm.
c. Makes illegal all contracts unreasonably restraining trade.
d. A and C only
e. A, B, and C
Answer:
10. All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act except for
a. Acquisitions involving firms of a certain size cannot be completed until certain information is supplied to the FTC
b. Only the acquiring firm is required to file with the FTC
c. An acquiring firm may agree to divest certain businesses following the completion of a transaction in order to get regulatory approval.
d. The Act is intended to give regulators time to determine whether the proposed combination is anti- competitive.
e. The FTC may file a lawsuit to block a proposed transaction
Answer:
11. All of the following are true of antitrust lawsuits except for
a. The FTC files lawsuits in most cases they review.
b. The FTC reviews complaints that have been recommended by its staff and approved by the FTC
c. FTC guidelines commit the FTC to make a final decision within 13 months of a complaint
d. As an alternative to litigation, a company may seek to negotiate a voluntary settlement of its differences with the FTC.
e. FTC decisions can be appealed in the federal circuit courts.
Answer:
12. All of the following are true about a consent decree except for
a. Requires the merging parties to divest overlapping businesses
b. An acquirer may seek to negotiate a consent decree in advance of consummating a deal.
c. In the absent of a consent decree, a buyer usually makes the receipt of regulatory approval necessary to closing the deal.
d. FTC studies indicate that consent decrees have historically been largely ineffectual in promoting competition
e. Consent decrees tend to be most effective in promoting competition if the divestitures made by the acquiring firms are to competitors.
Answer:
13. U.S. antitrust regulators are most concerned about what types of transaction?
a. Vertical mergers
b. Horizontal mergers
c. Alliances
d. Joint ventures
e. Minority investments
Answer:
14. Which of the following are used by antitrust regulators to determine whether a proposed transaction will be anti-competitive?
a. Market share
b. Barriers to entry
c. Number of substitute products
d. A and B only
e. A, B, and C
Answer:
15. European antitrust policies differ from those in the U.S. in what important way?
a. They focus on the impact on competitors
b. They focus on the impact on consumers
c. They focus on both consumers and competitors
d. They focus on suppliers
e. They focus on consumers, suppliers, and competitors
Answer:
16. Which other types of legislation can have a significant impact on a proposed transaction?
a. State anti-takeover laws
b. State antitrust laws
c. Federal benefits laws
d. Federal and state environmental laws
e. All of the above
Answer:
17. State “blue sky” laws are designed to
a. Allow states to block M&As deemed as anticompetitive
b. Protect individual investors from investing in fraudulent securities’ offerings
c. Restrict foreign investment in individual states
d. Protect workers’ pensions
e. Prevent premature announcement of M&As
Answer:
18. All of the following are examples of antitakeover provisions commonly found in state statutes except for
a. Fair price provisions
b. Business combination provisions
c. Cash-out provisions
d. Short-form merger provisions
e. Share control provisions
Answer:
19. A collaborative arrangement is a term used by regulators to describe agreements among competitors for all of the following except for
a. Joint ventures
b. Strategic alliances
c. Mergers and acquisitions
d. A & B only
e. A & C only
Answer:
20. Vertical mergers are likely to be challenged by antitrust regulators for all of the following reasons except for
a. An acquisition by a supplier of a customer prevents the supplier’s competitors from having access to the customer.
b. The relevant market has few customers and is highly concentrated
c. The relevant market has many suppliers.
d. The acquisition by a customer of a supplier could become a concern if it prevents the customer’s competitors from having access to the supplier.
e. The suppliers’ products are critical to a competitor’s operations
Answer:
21. All of the following are true of the U.S. Foreign Corrupt Practices Act except for which of the following:
a. The U.S. law carries anti-bribery limitations beyond U.S. political boundaries to within the domestic boundaries of foreign states.
b. This Act prohibits individuals, firms, and foreign subsidiaries of U.S. firms from paying anything of value to foreign government officials in exchange for obtaining new business or retaining existing contracts.
c. The Act permits so-called facilitation payments to foreign government officials if relatively small amounts of money are required to expedite goods through foreign custom inspections, gain approvals for exports, obtain speedy passport approvals, and related considerations.
d. The payments described in c above are considered legal according to U.S. law and the laws of countries in which such payments are considered routine
e. Bribery is necessary if a U.S. company is to win a contract that comprises more than 10% of its annual sales.
Answer:
22. Foreign direct investment in U.S. companies that may threaten national security is regulated by which of the following:
a. Hart-Scott-Rodino Antitrust Improvements Act
b. Defense Production Act
c. Sherman Act
d. Federal Trade Commission Act
e. Clayton Act
Answer:
23. A diligent buyer must ensure that the target is in compliance with the labyrinth of labor and benefit laws, including those covering all of the following except for
a. Sexual harassment
b. Age discrimination,
c. National security
d. Drug testing
e. Wage and hour laws.
Answer:
24. All of the following factors are considered by U.S. antitrust regulators except for
a. Market share
b. Potential adverse competitive effects
c. Barriers to entry
d. Purchase price paid for the target firm
e. Efficiencies created by the combination
Answer:
25. The Sarbanes-Oxley bill is intended to achieve which of the following:
a. Auditor independence
b. Corporate responsibility
c. Improved financial disclosure
d. Increased penalties for fraudulent behavior
e. All of the above
Answer:
Chapter 3: The Corporate Takeover Market:
Common Takeover Tactics, Anti-Takeover Defenses, and Corporate Governance
1. All of the following are commonly used takeover tactics, except for
a. Poison pills
b. Bear hug
c. Tender offer
d. Proxy contest
e. Litigation
Answer:
2. According to the management entrenchment theory,
a. Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium
b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm
c. Shareholders tend to benefit when management resists takeover attempts
d. Management attempts to maximize shareholder value
e. Describes the primary reason takeover targets resist takeover bids
Answer:
3. Which of the following factors often affects hostile takeover bids?
a. The takeover premium
b. The composition of the board of the target firm
c. The composition of the ownership of the target’s stock
d. The target’s bylaws
e. All of the above
Answer:
4. All of the following are true of a proxy contest except for
a. Are usually successful
b. Are sometimes designed to replace members of the board
c. Are sometimes designed to have certain takeover defenses removed
d. May enable effective control of a firm without owning 51% of the voting stock
e. Are often costly
Answer:
5. Purchasing the target firm’s stock in the open market is a commonly used tactic to achieve all of the following except for
a. Acquiring a controlling interest in the target firm without making such actions public knowledge.
b. Lowering the average cost of acquiring the target firm’s shares
c. Recovering the cost of an unsuccessful takeover attempt
d. Obtaining additional voting rights in the target firm
e. Strengthening the effectiveness of proxy contests
Answer:
6. All of the following are true of tender offers except for
a. Tender offers consist only of offers of cash for target stock
b. Are generally considered an expensive takeover tactic
c. Are extended for a specific period of time
d. Are sometimes over subscribed
e. Must be filed with the SEC
Answer:
7. Which of the following are common takeover tactics?
a. Bear hugs
b. Open market purchases
c. Tender offers
d. Litigation
e. All of the above
Answer:
8. All of the following are common takeover defenses except for
a. Poison pills
b. Litigation
c. Tender offers
d. Staggered boards
e. Golden parachutes
Answer:
9. All of the following are true of poison pills except for
a. They are a new class of security
b. Generally prevent takeover attempts from being successful
c. Enable target shareholders to buy additional shares in the new company if an unwanted shareholder’s ownership exceeds a specific percentage of the target’s stock
d. Delays the completion of a takeover attempt
e. May be removed by the target’s board if an attractive bid is received from a so-called “white knight.”
Answer:
10. The following takeover defenses are generally put in place by a firm before a takeover attempt is initiated.
a. Standstill agreements
b. Poison pills
c. Recapitalization
d. Corporate restructuring
e. Greenmail
Answer:
11. The following takeover defenses are generally put in place by a firm after a takeover attempt is underway.
a. Staggered board
b. Standstill agreement
c. Supermajority provision
d. Fair price provision
e. Reincorporation
Answer:
12. Which of the following is true about so-called shark repellants?
a. They are put in place to strengthen the board
b. They include poison pills
c. Often consist of the right to issue greenmail
d. Involve White Knights
e. Involve corporate restructuring
Answer:
13. Which of the following is true? A hostile takeover attempt
a. Is generally found to be illegal
b. Is one that is resisted by the target’s management
c. Results in lower returns to the target firm’s shareholders than a friendly attempt
d. Usually successful
e. Supported by the target firm’s board and its management
Answer:
14. Which is true of the following? A white knight
a. Is a group of dissident shareholders which side with the bidding firm
b. Is a group of the target firm’s current shareholders which side with management
c. Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes the target’s management
d. Is a firm which is viewed by management as a more appropriate suitor than the bidder
e. Is a firm that is willing to acquire only a large block of stock in the target firm
Answer:
15. Which of the following is true about supervoting stock?
a. Is a commonly used takeover tactic.
b. Is generally encouraged by the SEC
c. May have 10 to 100 times of the voting rights of other classes of stock
d. Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm
e. Is a widely used takeover defense
Answer:
16. Which of the following factors influences corporate governance practices?
a. Securities legislation
b. Government regulatory agencies
c. The threat of a hostile takeover
d. Institutional activism
e. All of the above
Answer:
17. Which of the following are commonly considered alternative models of corporate governance?
a. Market model
b. Control model
c. Takeover model
d. A & B only
e. A & C only
Answer:
18. The market governance model is applicable when which of the following conditions are true?
a. Capital markets are liquid
b. Equity ownership is widely dispersed
c. Ownership and control are separate
d. Board members are largely independent
e. All of the above
Answer:
19. The control market is applicable when which of the following conditions are true?
a. Capital markets are illiquid
b. Equity ownership is heavily concentrated
c. Board members are largely insiders
d. Ownership and control overlap
e. All of the above
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Answer:
20. The control model of corporate governance is applicable under all of the following conditions except for
a. Capital markets are illiquid
b. Board members are largely insiders
c. Ownership and control overlap
d. Equity ownership is widely dispersed
e. A, B, & D only
Answer:
21. Which of the following are the basic principles on which the market model is based?
a. Management incentives should be aligned with those of shareholders and other major stakeholders
b. Transparency of financial statements
c. Equity ownership should be widely dispersed
d. A & B only
e. A, B, and C only
Answer:
22. Which of the following statements best describes the business judgment rule?
a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in the best interests of the shareholders.
b. Board members are always expected to make good decisions.
c. The courts are expected to “second guess’ decisions made by corporate boards.
