, Chapter 1: Introduction to Mergers, Acquisitions, and Other Restructuring Activities
Examination Questions and Answers
True/False: Answer True or False to the following questions:
1. A divestiture is the sale of all or substantially all of a company or product line to another party for cash or
securities. True or False
Answer: True
2. The target company is the firm being solicited by the acquiring company. True or False
Answer: True
3. A merger of equals is a merger framework usually applied whenever the merger participants are comparable in
size, competitive position, profitability, and market capitalization. True or False
Answer: True
4. A vertical merger is one in which the merger participants are usually competitors. True or False
Answer: False
5. Joint ventures are cooperative business relationships formed by two or more separate parties to achieve
common strategic objectives True or False
Answer: True
6. Operational restructuring refers to the outright or partial sale of companies or product lines or to downsizing by
closing unprofitable or non-strategic facilities. True or False
Answer: True
7. The primary advantage of a holding company structure is the potential leverage that can be achieved by
gaining effective control of other companies’ assets at a lower overall cost than would be required if the firm
were to acquire 100 percent of the target’s outstanding stock. True or False
Answer: True
8. Holding companies and their shareholders may be subject to triple taxation. True or False
Answer: True
9. Investment bankers offer strategic and tactical advice and acquisition opportunities, screen potential buyers and
sellers, make initial contact with a seller or buyer, and provide negotiation support for their clients.
True or False
Answer: True
10. Large investment banks invariably provide higher quality service and advice than smaller, so-called boutique
investment banks. True or False
Answer: False
11. Financial restructuring generally refers to actions taken by the firm to change total debt and equity structure.
True or False
Answer: True
12. An acquisition occurs when one firm takes a controlling interest in another firm, a legal subsidiary of another
firm, or selected assets of another firm. The acquired firm often remains a subsidiary of the acquiring
company. True or False
Answer: True
13. A leveraged buyout is the purchase of a company using as much equity as possible. True or False
, Answer: False
14. In a statutory merger, both the acquiring and target firms survive. True or False
Answer: False
15. In a statutory merger, the acquiring company assumes the assets and liabilities of the target firm in accordance
with the prevailing federal government statutes. True or False
Answer: False
16. In a consolidation, two or more companies join together to form a new firm. True or False
Answer: True
17. A horizontal merger occurs between two companies within the same industry. True or False
Answer: True
18. A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core
business. True or False
Answer: False
19. The acquisition of a coal mining business by a steel manufacturing company is an example of a vertical
merger. True or False
Answer: True
20. The merger of Exxon Oil Company and Mobil Oil Company was considered a horizontal merger. True or
False
Answer: True
21. Most M&A transactions in the United States are hostile or unfriendly takeover attempts. True or False
Answer: False
22. Holding companies can gain effective control of other companies by owning significantly less than 100% of
their outstanding voting stock. True or False
Answer: True
23. Only interest payments on ESOP loans are tax deductible by the firm sponsoring the ESOP. True or False
Answer: False
24. A joint venture rarely takes the legal form of a corporation. True or False
Answer: False
25. When investment bankers are paid by a firm’s board to evaluate a proposed takeover bid, their opinions are
given in a so-called “fairness letter.” True or False
Answer: True
26. Synergy is the notion that the combination of two or more firms will create value exceeding what either firm
could have achieved if they had remained independent. True or False
Answer: True
27. Operating synergy consists of economies of scale and scope. Economies of scale refer to the spreading of
variable costs over increasing production levels, while economies of scope refer to the use of a specific asset to
produce multiple related products or services. True or False
Answer: False
28. Most empirical studies support the conclusion that unrelated diversification benefits a firm’s shareholders.
True or False
Answer: False
2
, 29. Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed.
True or False
Answer: True
30. Because of hubris, managers of acquiring firms often believe their valuation of a target firm is superior to the
market’s valuation. Consequently, they often end up overpaying for the firm. True and False
Answer: True
31. During periods of high inflation, the market value of assets is often less than their book value. This often
creates an attractive M&A opportunity. True or False
Answer: False
32. Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered
the primary reason for the acquisition of that firm. True or False
Answer: False
33. Market power is a theory that suggests that firms merge to improve their ability to set product and service
selling prices. True or False
Answer: True
34. Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring
firm shareholders. True or False
Answer: False
35. Pre-merger returns to target firm shareholders average about 30% around the announcement date of the
transaction. True or False
Answer: True
36. Post-merger returns to shareholders often do not meet expectations. However, this is also true of such
alternatives to M&As as joint ventures, alliances, and new product introductions. True or False
Answer: True
37. Overpayment is the leading factor contributing to the failure of M&As to meet expectations. True or False
Answer: True
38. Takeover attempts are likely to increase when the market value of a firm’s assets is more than their
replacement value. True or False
Answer: False
39. Although there is substantial evidence that mergers pay off for target firm shareholders around the time the
takeover is announced, shareholder wealth creation in the 3-5 years following a takeover is often limited.
True or False
Answer: True
40. A statutory merger is a combination of two corporations in which only one corporation survives and the
merged corporation goes out of existence. True or False
Answer: True
41. A subsidiary merger is a merger of two companies where the target company becomes a subsidiary of the
parent. True or False
Answer: True
42. Consolidation occurs when two or more companies join to form a new company. True or False
Answer: True
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