CH-7 Merger and Acquisition Strategies – Strategic Management: Concepts and Cases: Competitiveness and Globalization : Exam Guide

Chapter 7 Merger and Acquisition Strategies True/False 1. Restructuring strategies are commonly used to correct or deal with the results of ineffective mergers and acquisitions. A. True B. False Answer: True 2. The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011. A. True B. False Answer: True 3. The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies. A. True B. False Answer: False 4. Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm. A. True B. False Answer: False 5. Evidence suggests that returns to shareholders of acquired firms are greater than those for acquiring firms. A. True B. False Answer: True 6. Typical returns on acquisitions for acquiring firms are close to zero. A. True B. False Answer: True 7. A merger is defined as a strategy in which one firm purchases controlling interest in another firm. A. True B. False Answer: False 8. A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis. A. True B. False Answer: True 9. In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders. A. True B. False Answer: True 10. Takeovers are unfriendly acquisitions where the target firm does not solicit the acquiring firm's bid. A. True B. False Answer: True 11. An acquisition occurs when one firm buys a controlling or 100 percent interest in another firm and the acquired firm becomes a subsidiary business. A. True B. False Answer: True 12. Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry. A. True B. False Answer: True 13. Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June. A. True B. False Answer: True 14. An acquisition of a firm in a highly related industry is referred to as a horizontal acquisition. A. True B. False Answer: False 15. Research evidence suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels. A. True B. False Answer: False 16. Research evidence suggests that horizontal acquisitions result in higher performance when the firms have similar strategies, assets, and capabilities. A. True B. False Answer: True 17. A horizontal acquisition involves two firms in the same industry. A. True B. False Answer: True 18. The acquisition of Sun Microsystems (a computer hardware producer) by Oracle (a software firm) is an example of a horizontal acquisition. A. True B. False Answer: False 19. A related acquisition involves two firms in the same industry. A. True B. False Answer: False 20. An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review. A. True B. False Answer: False 21. Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry. A. True B. False Answer: True 22. The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market. A. True B. False Answer: False 23. In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations. A. True B. False Answer: False 24. The Chapter 7 Strategic Focus shows that the first attempts at cross-border acquisitions by Chinese companies ended in failure. A. True B. False Answer: True 25. As noted in the Chapter 7 Strategic Focus, the current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in in branded products. A. True B. False Answer: False 26. Research suggests that emerging economy firms pay a higher premium than other firms when making cross-border acquisitions (Chapter 7 Strategic Focus). A. True B. False Answer: True 27. Research suggests (Chapter 7 Strategic Focus) that government ownership of emerging economy firms leads to overpayment in cross-border acquisitions and that overpayment reduces value for minority shareholders (nongovernment shareholders). A. True B. False Answer: True 28. China remains a challenging environment for investors and political and legal obstacles make acquisitions in China risky and difficult. A. True B. False Answer: True 29. A major problem with buying other companies in order to gain access to their product lines is that the acquiring firm may lose its own ability to innovate. A. True B. False Answer: True 30. Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy. A. True B. False Answer: False 31. United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy. A. True B. False Answer: False 32. Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successful. A. True B. False Answer: False 33. Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions. A. True B. False Answer: False 34. The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions. A. True B. False Answer: True 35. It is relatively common for a firm to develop new products internally to diversify its product lines. A. True B. False Answer: False 36. P&G's acquisition of Gillette reshaped its competitive scope by giving P&G a stronger presence in some products for whom men are the target market. A. True B. False Answer: True 37. The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself. A. True B. False Answer: False 38. Research shows that in times of high or increasing stock prices, due diligence is relaxed and firms often overpay for acquisitions and the long-run performance of the newly formed form suffers. A. True B. False Answer: True 39. The reasons why a firm would overpay for a company that it acquires include inadequate due diligence. A. True B. False Answer: True 40. Large or extraordinary debt is defined as overpaying for an acquired firm. A. True B. False Answer: False 41. Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers. A. True B. False Answer: False 42. Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders. A. True B. False Answer: True 43. Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the merged firm. A. True B. False Answer: True 44. Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company. A. True B. False Answer: True 45. Private synergies exist between a potential acquisition target and all firms seeking to acquire it. A. True B. False Answer: False 46. Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies. A. True B. False Answer: True 47. Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using an related diversification strategy. A. True B. False Answer: False 48. When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls. A. True B. False Answer: True 49. Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm. A. True B. False Answer: False 50. Citigroup's acquisitions and mergers were driven by the concept of a "financial supermarket" (Chapter 7 Strategic Focus) and was a success since very little or restructuring was later required. A. True B. False Answer: False 51. Citigroup's acquisition strategy (Chapter 7 Strategic Focus) was effective in that it created a firm that was not overdiversified or too large, and that was able to realize synergies between its units. A. True B. False Answer: False 52. Although Citigroup (Chapter 7 Strategic Focus) is still involved in many financial services sectors, those that will remain after its restructuring will be more solidly focused on its main business, consumer, and investment banking. A. True B. False Answer: True 53. Top manager participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success. A. True B. False Answer: True 54. Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions. A. True B. False Answer: True 55. One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of economies of scale and additional market power. A. True B. False Answer: True 56. One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance. A. True B. False Answer: True 57. Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms. A. True B. False Answer: False 58. Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself. A. True B. False Answer: True 59. Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Since both these companies have a long, stable history in highly related industries, this acquisition has a high probability of success. A. True B. False Answer: False 60. When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies. A. True B. False Answer: True 61. Restructuring refers to changes in the composition of a firm's set of businesses or its financial structure. A. True B. False Answer: True 62. Firms often use the down scoping and downsizing strategies simultaneously as did Citigroup in its restructuring (Chapter 7 Strategic Focus). A. True B. False Answer: True 63. Down scoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio. A. True B. False Answer: False 64. Down scoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses. A. True B. False Answer: True 65. Traditionally, leveraged buyouts were used as a restructuring strategy to correct managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of the shareholders. A. True B. False Answer: True 66. Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management. A. True B. False Answer: True 67. The outcome of downsizing, down scoping, and leveraged buyouts is higher performance. A. True B. False Answer: False 68. The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in 5–8 years. This tends to make the managers of the bought­out firm high­risk takers, since they will probably not survive the resale and thus have little to lose. A. True B. False Answer: False Multiple Choice 69. According to the Chapter 7 Opening Case, the difference between Facebook's acquisition approach and the approaches of Microsoft and Google is that A. Facebook tends to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire later- stage companies. B. none of Facebook's acquisitions have survived as independent companies, whereas those of Microsoft and Google have continued to operate as subsidiaries. C. Facebook's approach is to acquire earlier-stage companies, whereas Microsoft and Google tend to acquire later-stage companies. D. Microsoft's and Google's acquisitions have all been friendly, whereas Facebook's have all been hostile. Answer: B 70. During the recent financial crisis, M&A activity _________ , whereas in 2011, M&A activity A. declined; increased. B. declined; declined. C. increased; increased. D. increased; declined. Answer: A 71. Researchers have found that shareholders of acquired firms often A. earn above-average returns. B. earn below-average returns. C. earn close to zero as a result of the acquisition. D. are not affected by the acquisition. Answer: A 72. Some research findings have shown that acquisitions typically _________ for shareholders in the acquiring firm. A. result in above-average returns B. provide approximately average returns C. result in returns near zero D. take some time to achieve private synergy, but eventually result in above-average returns Answer: C 73. All of the following statements are correct EXCEPT A. immediately after the announcement of a planned acquisition, the stock price of the majority of acquiring firms declines. B. shareholders of acquired firms often earn above-average returns from an acquisition. C. the majority of acquisitions increase long-term value for the acquiring firm. D. shareholders of acquiring firms typically earn returns from the transaction that are close to zero. Answer: C 74. Claude holds a large number of shares of Bayou Beauty, a regional brewing company that is considered a likely takeover target by a major international brewer. It would probably be in Claude's financial interest if Bayou Beauty's owners A. resisted selling at any price. B. sold the company to the larger brewer. C. designed a poison pill to discourage a takeover. D. looked for smaller brewers to acquire instead of selling to the larger brewer. Answer: B 75. In a merger A. one firm buys controlling interest in another firm. B. two firms agree to integrate their operations on a relatively coequal basis. C. two firms combine to create a third separate entity. D. one firm breaks into two firms. Answer: B 76. There are few true mergers because A. few firms have complementary resources. B. integration problems are more severe than in outright acquisitions. C. one firm usually dominates in terms of market share, size, or value of assets. D. of managerial resistance. True mergers result in significant managerial-level layoffs. Answer: C 77. A(n) _________ occurs when one firm buys a controlling, or 100 percent interest, in another firm. A. merger B. acquisition C. spin-off D. restructuring Answer: B 78. When the target firm does not solicit the acquiring firm's bid, it is referred to as a(n) A. stealth raid. B. adversarial acquisition. C. takeover or unfriendly acquisition. D. leveraged buyout. Answer: C 79. Currently, the rationale for making an acquisition includes each of the following EXCEPT A. to increase market power. B. to decrease taxes paid by shareholders. C. to overcome entry barriers. D. to increase diversification. Answer: B 80. Market power is derived primarily from the A. core competencies of the firm. B. size of a firm and its resources and capabilities. C. quality of a firm's top management team. D. depth of a firm's strategy. Answer: B 81. The March 2011 announcement that AT&T was acquiring T-Mobile USA from Deutsche Telekom is a _________ acquisition and is intended to A. vertical; increase diversification. B. horizontal; increase market power. C. vertical; overcome entry barriers. D. related; increase speed to market. Answer: B 82. A primary reason for a firm to pursue an acquisition is to A. avoid increased government regulation. B. achieve greater market power. C. exit a hyper-competitive market. D. achieve greater financial returns in the short run. Answer: B 83. When a firm acquires its supplier, it is engaging in a(n) A. merger. B. unrelated acquisition. C. hostile takeover. D. vertical acquisition. Answer: D 84. The acquisition of Sun Microsystems (a computer hardware producer) by Oracle Corporation (a software firm) is an example of a(n) A. vertical acquisition. B. unrelated acquisition. C. horizontal acquisition. D. merger of equals. Answer: A 85. Horizontal, vertical, and related acquisitions to build market power A. are likely to undergo regulatory review and analysis by financial markets. B. are rarely permitted to occur across international borders. C. typically involve a firm purchasing one of its suppliers or distributors. D. concentrate on capturing value at more than one stage in the value chain. Answer: A 86. Baby Doe's, a designer and manufacturer of children's clothing, has decided to purchase a retail chain specializing in children's clothing. This purchase is a(n) A. merger. B. unrelated acquisition. C. horizontal acquisition. D. vertical acquisition. Answer: D 87. Manny Inc. recently completed the purchase of its primary supplier. Manny intends to begin expanding the market to which the suppliers' products are sold. This purchase is a(n) A. merger. B. unrelated acquisition. C. horizontal acquisition. D. vertical acquisition. Answer: D 88. Cross-border acquisitions are primarily made to A. reshape the firm's competitive scope. B. reduce the cost of new product development. C. take advantage of higher education levels of labor in developed countries. D. overcome barriers to entry in another country. Answer: D 89. The presence of barriers to entry in a particular market will generally make acquisitions _________ as an entry strategy. A. less likely B. more likely C. prohibitive D. illegal Answer: B 90. SpeakEasy, a U.S. software company that specializes in voice-recognition software, wishes to rapidly enter the growing technical translation software market. This market is dominated by firms making highly differentiated products. To enter this market, SpeakEasy would be best served if it considers a(an) A. vertical acquisition of a firm that uses technical translation products. B. acquisition of a highly related firm in the technical translation market. C. cross-border merger, preferably with an Indian or Chinese company. D. strategy of internally developing the technical translation products needed to compete in this market. Answer: B 91. Cross-border acquisitions are critical to U.S. firms competing internationally A. if they are to develop differentiated products for markets served. B. when market share growth is the focus. C. where consolidated operations are beneficial. D. if they wish to overcome entry barriers to international markets. Answer: D 92. According to the Chapter 7 Strategic Focus, China's recent approach to acquisitions has been to focus on hard assets (e.g., mineral deposits or R&D facilities) instead of established branded products because A. China's initial acquisition activities in branded products was highly successful and it wanted to apply those successful techniques to hard assets that would create more value for Chinese firms. B. hard assets around the world had appreciated rapidly and China wanted to take advantage of that appreciation. C. China's currency had depreciated relative to currencies in developed countries making acquisition of hard assets in those countries cheaper. D. it did not always have the managerial capability to realize successful performance of branded products. Answer: D 93. According to the Chapter 7 Strategic Focus, research suggests that emerging market firms tend to than other firms and that government ownership of those firms leads to ______ for the acquisition. A. pay a higher premium; overpayment B. pay a lower premium; overpayment C. pay a lower premium; underpayment D. pay a higher premium; underpayment Answer: A 94. Managers perceive internal product development as a high-risk activity and tend to choose acquisitions because approximately _________ percent of innovations are imitated within 4 years after patents are obtained. A. 5 B. 10 C. 60 D. 20 Answer: C 95. Internal product development is often viewed as A. carrying a high risk of failure. B. the only reliable method of generating new products for the firm. C. a quicker method of product launch than acquisition of another firm. D. critical to the success of biotech and pharmaceutical firms. Answer: A 96. A manager in your company is proposing the acquisition of Taylor Company, which has developed a new, innovative product instead of a strategy of developing new products in-house. All of the following arguments are correct EXCEPT A. the acquisition of Taylor should be primarily for defensive rather than strategic reasons. B. research suggests that acquisition strategies are a common means of avoiding risky internal ventures. C. the outcomes of acquisitions can be estimated more easily and accurately than the outcomes for an internal product development process. D. acquisitions could become a substitute for innovation within your firm. Answer: A 97. Entering new markets through acquisitions of companies with new products is not risk-free, especially if acquisition becomes a substitute for A. market discipline. B. innovation. C. risk analysis. D. international diversification. Answer: B 98. Compared to internal product development, acquisitions allow A. immediate access to innovations in mature product markets. B. more accurate prediction of return on investment. C. slower market entry. D. more effective use of company core competencies. Answer: B 99. Research has shown that the more _________ , the greater is the probability that an acquisition will be successful. A. related the acquired and acquiring firms are B. diverse the resulting portfolio of competencies C. disparate the corporate cultures D. involved investment banking firms are in the due diligence process Answer: A 100. When a firm is overly dependent on one or more products or markets, and the intensity of rivalry in that market is intense, the firm may wish to _________ by making an acquisition. A. increase new product speed to market B. broaden its competitive scope C. increase its economies of scale D. overcome entry barriers Answer: B 101. The fastest and easiest way for a firm to diversity its portfolio of businesses is through acquisition because A. of barriers to entry in many industries. B. it is difficult and time intensive for companies to develop products that differ from their current product line. C. innovation in both the acquired and the acquiring firm is enhanced by the exchange of competencies resulting from acquisition. D. unrelated acquisitions are usually uncomplicated because the acquired firm is allowed to continue to function independently as it did before acquisition. Answer: B 102. Sales of watches among teenagers and twenty-somethings are declining rapidly as this age group uses cellphones, iPods, and other devices to tell time. A company that specializes in selling inexpensive watches to this age group may wish to consider _________ in order to develop new products other than watches. A. unrelated diversification B. backward integration C. forward integration D. horizontal acquisitions Answer: A 103. Each of the following is a rationale for acquisitions EXCEPT A. achieving greater market power. B. overcoming significant barriers to entry. C. increasing speed of market entry. D. positioning the firm for a tactical competitive move. Answer: D 104. Research shows that about _________ percent of mergers and acquisitions are successful. A. 20 B. 40 C. 60 D. 80 Answer: A 105. Problems associated with acquisitions include all of the following EXCEPT A. managers overly focused on acquisitions. B. integration difficulties. C. large or extraordinary debt. D. excessive time spent on the due diligence process. Answer: D 106. The factors that lead to poor long-term performance by acquisitions include all of the following EXCEPT firms A. with insufficient diversification. B. having too much debt. C. being unable to achieve synergy. D. growing too large. Answer: A 107. The ________ phase is probably the single most important determinant of shareholder value creation in mergers and acquisitions. A. pre-acquisition negotiations B. pre-acquisition due diligence C. post-acquisition integration D. post-acquisition restructuring Answer: C 108. Without effective due diligence the A. acquiring firm is likely to overpay for an acquisition. B. firm may miss its opportunity to buy a well-matched company. C. acquisition may deteriorate into a hostile takeover, reducing the value creating potential of the action. D. firm may be unable to act quickly and decisively in purchasing the target firm. Answer: A 109. Due diligence includes all of the following activities EXCEPT assessing A. differences in firm cultures. B. tax consequences of the acquisition. C. the level of private synergy between the two firms. D. financing for intended transaction. Answer: C 110. Pappelbon Enterprises recently acquired a chain of convenience stores offering both fuel and food. Pappelbon is now surprised and dismayed to find that the gas pumps have been poorly maintained and will need to be replaced at considerable expense. Each of the following statements accurately reflect this EXCEPT A. Pappelbon did not fully evaluate the target. B. Pappelbon overpaid. C. Pappelbon's due diligence was not fully effective. D. Pappelbon's management was overly focused on acquisitions. Answer: D 111. The use of high levels of debt in acquisitions has contributed to A. the increase in above-average returns earned by acquiring firms. B. an increased risk of bankruptcy for acquiring firms. C. the confidence of the stock market in firms issuing junk bonds. D. an increase in investments that have long-term payoffs. Answer: B 112. _________ are unsecured obligations that are not tied to specific assets for collateral. A. Bearer bonds B. No-load stocks C. Penny stocks D. Junk bonds Answer: D 113. Caterpillar's payment of a 32 percent premium for the acquisition of Bucyrus in 2011 and subsequent need to issue more stock illustrates the acquisition problem of A. integration difficulties. B. inability to achieve synergy. C. large or extraordinary debt. D. managers overly focused on acquisitions. Answer: C 114. Which of the following statements is FALSE? A. Synergy resulting from an acquisition generates gains in shareholder wealth beyond what they could achieve through diversification of their own portfolios. B. Private synergy results when the combination of two firms yields competencies and capabilities that could not be achieved by combining with any other firm. C. Private synergy is easy for competitors to understand and imitate. D. Private synergy is more likely when the two firms in an acquisition have complementary assets. Answer: C 115. Private synergy A. occurs in most related acquisitions and allows firms to see increased returns. B. is frequently achieved in conglomerates. C. is not easy for competitors to understand and imitate. D. is assessed by managers during the due diligence process. Answer: C 116. The expenses incurred by firms trying to create synergy through acquisition are called _________ costs. A. differentiation B. diversification C. transaction D. interaction Answer: C 117. Transaction costs include all of the following EXCEPT A. charges from investment bankers who complete due diligence for the acquiring firm. B. the loss of key employees following the acquisition. C. managers' time spent evaluating target firms. D. managers' time spent planning the diversification strategy of the firm. Answer: D 118. Which of the following is NOT a result of over-diversification? A. Executives do not have a rich understanding of all of the firm's business units. B. Managers emphasize strategic controls rather than financial controls. C. Firms use acquisition as a substitute for innovation. D. Managers become short-term in their orientation. Answer: B 119. Evidence suggests that firms using acquisitions as a substitute for internally developed innovations A. are able to offset the loss of research and development competencies by competencies in other areas. B. extend their time-to-market for new product launches. C. eventually encounter performance problems. D. can leverage their core competencies across a broader range of products. Answer: C 120. When managers become overly focused on making acquisitions, it is A. because the skills of top executives are better used in making acquisitions than they are in daily organization operations. B. because of the thrill of selecting, chasing, and seizing a target. C. due to pressure from major stakeholders to diversify the firm. D. because acquisitions are a quick way to improve the financial standing of the firm. Answer: B 121. Acquisitions can become a time sink for top level managers for all the following reasons EXCEPT A. the integration process after acquisition requires managerial attention. B. they must prepare for acquisition negotiations. C. managers are involved in the search for viable acquisition candidates. D. only top managers can perform the required due diligence. Answer: D 122. The strategy of Citigroup under CEO Sanford Weill was to create a "financial supermarket" where customers shop for a variety of financial services within the same company. This strategy was executed via a series of acquisitions but ultimately failed. This situation was the result of A. Citigroup's managers focusing too much on acquisitions at the expense of managing their existing businesses. B. key managers leaving from the acquired firms, which left the firms with inferior management talent. C. the firm becoming too vertically integrated. D. the firm becoming too focused on its core businesses. Answer: A 123. All of the following were results of Citigroup's acquisition strategy EXCEPT (Chapter 7 Strategic Focus) A. overly diversified. B. a much smaller, though global, business financial service firm. C. too large. D. lacking in synergy. Answer: B 124. One problem with becoming too large is that large firms A. tend to have less market power. B. have less potential for economies of scale. C. become attractive takeover targets. D. usually increase bureaucratic controls. Answer: D 125. Thomas is an upper-middle level manager for a firm that has been actively involved in acquisitions over the last 10 years. The firm has grown much larger as a result. Thomas has been dismayed to find that recently the managerial culture of the firm has been turning more and more to _________ controls. A. bureaucratic B. strategic C. tactical D. organic Answer: A 126. A friendly acquisition A. raises the price that has to be paid for a firm. B. enhances the complementarity of the two firms' assets. C. facilitates the integration of the acquired and acquiring firms. D. allows joint ventures to be developed. Answer: C 127. _______ typically result(s) in the acquiring firm being able to prevent valuable human resources in the acquired firm from leaving. A. Financial slack B. Private synergy C. Friendly acquisitions D. High compensation Answer: C 128. Which of the following is NOT an attribute of a successful acquisition? A. The acquiring firm has a large amount of financial slack. B. The acquired and acquiring firms have complementary assets and/or resources. C. Innovation and R&D investments continue as part of the firm's strategy. D. Investments in advertising and image building are made quickly. Answer: D 129. Typically, in a failed acquisition, the organization will A. restructure. B. go into bankruptcy. C. focus on building private synergy. D. increase integration. Answer: A 130. Ambrose is a scientist working for a pharmaceutical company. His company was acquired by a rival pharmaceutical company, and now it is involved in downsizing and down scoping. Ambrose is concerned about his job security, since he is actively involved in amateur sports in his community and does not wish to disrupt his current lifestyle. Ambrose's job will be most likely to be secure if A. Ambrose's research is in a non-core activity. B. the acquisition has been financed by junk bonds. C. Ambrose is in a position to take a poison pill. D. Ambrose is a key employee in the firm's primary business. Answer: D 131. Magma, Inc., acquired Vulcan, Inc., 3 years ago. Effective integration of the two companies' culture was never achieved, and the two firms' assets were not complementary. It is very likely that Magma will A. go public through an IPO. B. review the due diligence information collected before the acquisition. C. restructure. D. review its tactical-level strategies. Answer: C 132. Which of the following is NOT one of the three main restructuring strategies? A. realigning B. downsizing C. down scoping D. leveraged buyouts Answer: A 133. _________ is often used when the acquiring firm paid too high a premium to acquire the target firm. A. Management buyout B. Leveraged buyout C. Down scoping D. Downsizing Answer: D 134. _________ may be necessary because acquisitions create a situation in which the newly formed form has duplicate organizational functions such as sales, manufacturing, distribution, and human resource management. A. Management buyout B. Leveraged buyout C. Downsizing D. Down scoping Answer: C 135. _______ refers to a divestiture, spin-off, or some other means of eliminating businesses that are unrelated to a firm's core business. A. Downsizing B. Hostile takeovers C. Shakeouts D. Down scoping Answer: D 136. Failing to _______ appropriately will result in too many employees doing the same work and prevent the new firm from realizing the cost synergies it anticipated. A. downsize B. spin-off C. down scope D. buyout Answer: A 137. An investor is analyzing two firms in the same industry. She is looking for long-term performance from her investment. Both firms are basically identical except one firm is involved in substantial downsizing and the other firm is undertaking aggressive down scoping. The investor should invest in the A. down scoping firm because the higher debt load will discipline managers to act in shareholders' best interests. B. down scoping firm because of reduced debt costs and the emphasis on strategic controls derived from focusing on the firm's core businesses. C. downsizing firm because it will be making decisions based on tactical strategies. D. downsizing firm because it is eliminating employees who are essentially "dead weight" and are dragging down the firm's profitability. Answer: B 138. Compared with downsizing, _________ has (have) a more positive effect on firm performance. A. reconfiguring B. downscoping C. leveraged buyouts D. acquisitions Answer: B 139. A leveraged buyout refers to A. a firm restructuring itself by selling off unrelated units of the company's portfolio. B. a firm pursuing its core competencies by seeking to build a top management team that comes from a similar background. C. a restructuring action whereby a party buys all of the assets of a business, financed largely with debt, and takes the firm private. D. an action where the management of the firm and/or an external party buy all of the assets of a business financed largely with equity. Answer: C 140. The term "leverage" in leveraged buyouts refers to the A. firm's increased concentration on the firm's core competencies. B. amount of new debt incurred in buying the firm. C. fact that the employees are purchasing the firm for which they work. D. process of removing the firm's stock from public trading. Answer: B 141. Whole-firm LBOs tend to result in all the following negative outcomes EXCEPT A. large debt and increased financial risk. B. failure to invest in R&D. C. risk-averse management. D. inefficient operations. Answer: D 142. After a leveraged buyout, _________ typically occur(s). A. selling of assets B. further rounds of acquisitions C. due diligence D. private synergy Answer: A Essay 143. How have changing conditions in the external environment influenced the type of M & A activity firms pursue? Answer: During the recent financial crisis, tightening credit markets made it more difficult for firms to complete megadeals (those costing $10 billion or more). As a result, many acquirers focused on smaller targets with a niche focus that complemented their existing businesses. In addition, the relatively weak U.S. dollar increased the interest of firms from other nations to acquire U.S. companies. 144. How difficult is it for merger and acquisition strategies to create value and which firms benefit the most from M & A activity? Answer: Evidence suggests that using merger and acquisition strategies to create value is challenging. This is particularly true for acquiring firms in that some research results indicate that shareholders of acquired firms often earn above-average returns from acquisitions while shareholders of acquiring firms typically earn returns that are close to zero. In addition, in approximately two-thirds of all acquisitions, the acquiring firm's stock price falls immediately after the intended transaction is announced. This negative response reflects investor's skepticism about the likelihood that the acquirer will be able to achieve the synergies required to justify the premium. 145. Identify and explain the seven reasons firms engage in an acquisition strategy. Answer: (1) Increased market power. Market power allows a firm to sell its goods or services above competitive levels or when the costs of its primary or support activities are below those of its competitors. Market power is derived from the size of the firm and the firm's resources and capabilities to compete in the marketplace. Firms use horizontal, vertical, and related acquisitions to increase their size and market power. (2) Overcoming entry barriers. Firms can gain immediate access to a market by purchasing a firm with an established product that has consumer loyalty. Acquiring firms can also overcome economies of scale entry barriers through buying a firm that has already successfully achieved economies of scale. In addition, acquisitions can often overcome barriers to entry into international markets. (3) Reducing the cost of new product development and increasing speed to market. Developing new products and ventures internally can be very costly and time consuming without any guarantee of success. Acquiring firms with products new to the acquiring firm avoids the risk and cost of internal innovation. In addition, acquisitions provide more predictable returns on investments than internal new product development. Acquisitions are a much quicker path than internal development to enter a new market, and they are a means of gaining new capabilities for the acquiring firm. (4) Lower risk compared to developing new products internally. Acquisitions are a means to avoid internal ventures (and R&D investments), which many managers perceive to be highly risky. However, substituting acquisitions for innovation may leave the acquiring firm without the skills to innovate internally. (5) Increased diversification. Firms can diversify their portfolio of business through acquiring other firms. It is easier and quicker to buy firms with different product lines than to develop new product lines independently. (6) Reshaping the firm's competitive scope. Firms can move more easily into new markets as a way to decrease their dependence on a market or product line that has high levels of competition. (7) Learning and developing new capabilities. By gaining access to new knowledge, acquisitions can help companies gain capabilities and technologies they do not possess. Acquisitions can reduce inertia and help a firm remain agile. 146. Describe the seven problems in achieving a successful acquisition. Answer: Acquisition strategies present many potential problems. (1) Integration difficulties. It may be difficult to effectively integrate the acquiring and acquired firms due to differences in corporate culture, financial and control systems, management styles, and status of executives in the combined firms. Turnover of key personnel from the acquired firm is particularly negative. (2) Inadequate evaluation of target. Due diligence assesses where, when, and how management can drive real performance gains through an acquisition. Acquirers that fail to perform effective due diligence are likely to pay too much for the target firm. (3) Large or extraordinary debt. Acquiring firms frequently incur high debt to finance the acquisition. High debt may prevent the investment in activities such as research and development, training of employees, and marketing that are required for long-term success. High debt also increases the risk of bankruptcy and can lead to downgrading of the firm's credit rating. (4) Inability to achieve synergy. Private synergy occurs when the acquiring and target firms' assets are complementary in unique ways, making this synergy difficult for rivals to understand and imitate. Private synergy is difficult to create. Transaction costs are incurred when firms seek private synergy through acquisitions. Direct transaction costs include legal fees and investment banker charges. Indirect transaction costs include managerial time to evaluate target firms, time to complete negotiations, and the loss of key managers and employees following an acquisition. Firms often underestimate the indirect transaction costs of an acquisition. (5) Too much diversification. A high level of diversification can have a negative effect on the firm's long-term performance. For example, the scope created by diversification often causes managers to rely on financial controls rather than strategic controls because the managers cannot completely understand the business units' objectives and strategies. The focus on financial controls creates a short-term outlook among managers and they forego long-term investments. Additionally, acquisitions can become a substitute for innovation, which can be negative in the long run. (6) Managers overly focused on acquisitions. Firms that become heavily involved in acquisition activity often create an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing additional acquisitions. This detracts from other important activities, such as identifying and taking advantage of other opportunities and interacting with importance external stakeholders. Moreover, during an acquisition, the managers of the target firm are hesitant to make decisions with long-term consequences until the negotiations are completed. (7) Growing too large. Acquisitions may lead to a combined firm that is too large, requiring extensive use of bureaucratic controls. This leads to rigidity and lack of innovation, and can negatively affect performance. Very large size may exceed the efficiencies gained from economies of scale and the benefits of the additional market power that comes with size. 147. Describe how an acquisition program can result in managerial time and energy absorption. Answer: Typically, a substantial amount of managerial time and energy is required for acquisition strategies if they are to contribute to a firm's strategic competitiveness. Activities with which managers become involved include those of searching for viable acquisition candidates, completing effective due diligence processes, preparing for negotiations and managing the integration process after the acquisition is completed. Company experience shows that participating in and overseeing the acquisition activities can divert managerial attention from other matters that are linked with long- term competitive success (e.g., identifying and acting on other opportunities, interacting effectively with external stakeholders). 148. What are the attributes of a successful acquisition program? Answer: Acquisitions can contribute to a firm's competitiveness if they have the following attributes: (1) The acquired firm has assets or resources that are complementary to the acquiring firm's core business. (2) The acquisition is friendly. (3) The acquiring firm conducts effective due diligence to select target firms and evaluates the target firm's health (financial, cultural, and human resources). (4) The acquiring firm has financial slack. (5) The merged firm maintains low to moderate debt. (6) The acquiring firm has sustained and consistent emphasis on R&D and innovation. (7) The acquiring firm manages change well and is flexible and adaptable. 149. What is restructuring and what are its common forms? Answer: Restructuring refers to changes in a firm's portfolio of businesses and/or financial structure. There are three general forms of restructuring: (1) Downsizing involves reducing the number of employees, which may include decreasing the number of operating units. (2) Down scoping entails divesting, spinning-off, or eliminating businesses that are not related to the core business. It allows the firm to focus on its core business. (3) A leveraged buyout occurs when a party (managers, employees, or an external party) buys all the assets of a (publicly traded) business, takes it private, and finances the buyout with debt. Once the transaction is complete, the company's stock is no longer publicly traded. 150. What are the differences between down scoping and downsizing and why are each used? Answer: Downsizing is a reduction in the number of employees. It may or may not change the composition of businesses in the company's portfolio. In contrast, the goal of downs coping is to reduce the firm's level of diversification. Downsizing is often used when the acquiring form paid too high a premium to acquire the target firm or where the acquisition created a situation in which the newly formed form had duplicate organizational functions such as sales or manufacturing. Down scoping is accomplished by divesting unrelated businesses. Down scoping is used to make the firm less diversified and allow its top-level managers to focus on a few core businesses. A firm that down scopes often also downsizes at the same time. 151. What is an LBO and what have been the results of such activities? Answer: Leveraged buyouts (LBOs) are a restructuring strategy. Through a leveraged buyout, a (publicly traded) firm is purchased so that it can be taken private. In this manner, the company's stock is no longer publicly traded. LBOs usually are financed largely through debt, and the new owners usually sell off a number of assets. There are three types of LBOs: management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts. Because they provide managerial incentives, MBOs have been the most successful of the three leveraged buyout types. MBOs tend to result in down scoping, an increased strategic focus, and improved performance. 152. What are the results of the three forms of restructuring? Answer: Downsizing usually does not lead to higher firm performance. The stock markets tend to evaluate downsizing negatively, as investors assume downsizing is a result of problems within the firm. In addition, the laid-off employees represent a significant loss of knowledge to the firm, making it less competitive. The main positive outcome of downsizing is accidental, since many laid-off employees become entrepreneurs, starting up new businesses. In contrast, down scoping generally improves firm performance through reducing debt costs and concentrating on the firm's core businesses. LBOs have mixed outcomes. The resulting large debt increases the financial risk and may end in bankruptcy. The managers of the bought-out firm often have a short-term and risk-averse focus because the acquiring firm intends to sell it within 5 to 8 years. This prevents investment in R&D and other actions that would improve the firm's core competence. But, if the firms have an entrepreneurial mindset, buyouts can lead to greater innovation if the debt load is not too large. Subjective Short Answer Case Scenario 1: Syco Inc. (SI). Syco, Inc. (SI) was founded the late 1800s and grew through acquisition from being primarily a large discount retailer into a highly diversified firm. Beyond retailing (still SI's dominant business), by the middle of the 1990s its lines of business included significant market positions in insurance, consumer credit cards, stock brokerage, commercial and residential real estate brokerage, and an online Internet portal. Each of the non-retail businesses was average in its relative industry performance. Consistent with the decentralized structure at SI and arms-length corporate oversight, each of these businesses was also rapidly developing their own unique brands and customer following. However, within a short period of time it became apparent that the retail business was failing. SI's vast mall-based department store holdings were suffering from deferred maintenance and merchandising that did not appear to be popular with its once large consumer base. At the same time, highly efficient and focused low-cost competitors like Walmart were beginning to take significant market share from SI. On the verge of bankruptcy by early 2000, SI's management chose to sell off its insurance, real estate, and stock brokerage units; it also spun off its credit card and portal businesses in separate public offerings. 153. (Refer to Case Scenario 1). Why do you suppose SI entered the non-retail businesses through acquisition? Is this a cheaper route than starting up these businesses from scratch? Answer: The best answers may begin by noting that SI had no real prior experience in these non-retail businesses so they needed to either buy the relevant operations and skills or start them up from scratch. Absent such experience it is considerably more expedient to enter these businesses through acquisition, since they are likely to be able to acquire both the business and an experienced management team. The second question gets to the fact that SI would also likely have to pay a premium for the acquired firms since it brought no industry-specific knowledge to the bargaining table. 154. Part 1: (Refer to Case Scenario 1). Why do you suppose that SI sold off or spun-off its non-retail businesses? Part 2: What should SI do after selling off the non-retail businesses? Answer: Part 1: The best answers will note that SI was probably in too many and too many different businesses. Each of these businesses had to compete in their respective industries while at the same time dealing with SI's corporate ownership. By getting out of the non-retail business, SI is able to get back to its roots in retail. While of course speculative, students can debate whether or not SI chose the right business to focus its future on. From a resource-based perspective, retail had the strongest history, which would likely give SI the richest and most defensible set of valuable, rare, and costly to imitate resources in the retailing business. Part 2: This is a natural follow-on to Part 1 above. Students could begin this answer by suggesting that SI's diversification strategy diverted its attention from the needs of its core retailing business. Future efforts should be directed toward turning the retailing business around and aggressively trying to outmaneuver emerging and existing retailing competitors. The instructor can use this dialogue to point out that after establishing a strong industry position, SI probably viewed its retailing business as stable and unthreatened, and thus used it as means of financing its broad diversification efforts. In contrast, emerging companies like Walmart viewed retailing as a growth vehicle and developed novel and lower cost structures that eventually undermined the advantages established earlier by SI. 155. (Refer to Case Scenario 1). Syco's acquisition strategy was appropriate since it would allow the firm to have market power over its competitors. Answer: False Case Scenario 2: Raptec Raptec was incorporated in 1991 and went public on the Nasdaq Stock Market in 1996. Raptec's strategy is to become the global leader in innovative storage solutions. Raptec is an S&P 500 and a Nasdaq Stock Market 100 member. The company's hardware and software solutions for eBusiness and Internet applications move, manage, and protect critical data and digital content. Raptec operates in three principal business segments: Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS") and Software. These hardware and software products are found in high-performance networks, servers, workstations, and desktops from the world's leading OEMs, and are sold through distribution channels to Internet service providers, enterprises, medium and small businesses, and consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable operations. In early 2007, the company announced its plan to spin-off the software segment, subsequently incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec's most profitable and fastest growing segment. By mid-2007 Raptec had completed the initial public offering of approximately 15 percent of Axio's stock, and then distributed the remaining Axio stock to Raptec's stockholders in a tax-free distribution. 156. (Refer to Case Scenario 2). Why would a successful firm like Raptec spin off its most promising business? Answer: The best answers will begin by noting that both hardware and software are industries characterized by fast cycle times, which requires management to be both focused and nimble. With this background, students can then argue that the spin-off provides the management teams of Raptec and the newly formed Axio with greater focus (on hardware and software respectively), better alignment of employee incentives, and greater managerial accountability. The spin-off also provides Axio direct access to capital markets. 157. (Refer to Case Scenario 2). Prior to the spin-off, how would you go about identifying the respective boundaries of the Raptec and Axio businesses? Answer: The purpose of this question is to point out how blurry the lines may be between businesses in a diversified firm—the best answers will revolve around this point. While Raptec operated in three business segments, this does not guarantee that each operated as independent organizations within Raptec. In fact, Raptec likely benefited from tremendous operational and market synergies among its three primary lines of business, and such synergies are typically accomplished through formal coordination and integration mechanisms like organizational structure, systems, and processes. A useful analogy here can be drawn to Palm, Inc., and its PDA product the Palm Pilot. Given that consumers view the Palm PDA as a monolithic product (they don't think of it as separate hardware and software), where would you begin to draw the dividing line if Palm wanted to split up its hardware and software businesses? 158. (Refer to Case Scenario 2). What risks does Raptec run in spinning off Axio? Answer: The best answers will point out that the spin-off strategy makes sense only to the extent that the benefits described in the answer to question 1 considerably outweigh the costs arising from breaking up the firm and its lost opportunities for within-firm synergies. If Raptec has been successful because of its ability to uniquely couple hardware and software, along with the fact that it possesses inside knowledge about the technological advances in each business, then breaking up the firm may actually break up and destroy a potential core competency. Also, once a firm has broken itself up into distinct legal entities there is nothing to prevent one of the players from preying on the others' most profitable related businesses. For instance, Axio may start moving into parts of the hardware business that, from its inside experience with Raptec, it knows are highly profitable when combined with Axio's proprietary software. 159. (Refer to Case Scenario 2). Leveraged buyouts such as the Axio spinoff is a form of restructuring strategy that is only used to correct for managerial mistakes or because the firm's managers were making decisions that only served their own interests rather than those of the shareholders. Answer: False Case Scenario 3: Barracuda Inc. Barracuda Inc. has diversified beyond its early base as a lamp fixture manufacturer into multiple hardware and plumbing fixture products that it sells to professionals (i.e., plumbers and electricians) and through the large volume do-it-yourself (DIY) stores like The Home Depot and Lowe's. While this successful growth has been achieved primarily through acquisition, the company tends to let the acquired businesses run independently. It has done so by looking to fragmented industries to acquire small firms with efficient operations and good management teams. It then grows these businesses through a combination of internal cash flow and debt, and directs new sales to the professional and DIY channels. Barracuda has been particularly successful in the faucet segment, which it practically reinvented though such technological innovations as the washerless faucet, and marketing innovations like branding and good-better-best merchandising. Barracuda has leveraged this merchandising strategy across its businesses and, coupled with the explosive growth of the DIY channel, is spectacularly profitable with a net profit after tax (NPAT) of 18 percent. The firm's management is looking to broaden its revenue base and has identified the home furnishings business as sharing many characteristics with faucets, prior to Barracuda's entry into faucets. It plans to enter this industry through large-scale acquisitions. The landscape of the U.S. home furnishings manufacturing industry consists of many players, none with controlling share, and serious issues of overcapacity. There are presently 2500 home furnishings firms, and only 600 of those have over 15 employees. Average NPAT is between 4 and 5 percent, which also reflects the fact that few firms have good managers. While the industry is still primarily composed of single-business family-run firms, which manufacture furniture domestically, imports are increasing at a fairly rapid rate. Some of the European imports are leaders in contemporary design. Relatively large established firms are also diversifying into the home furnishings industry via acquisition. Supplier firms to the home furnishings industry are in relatively concentrated industries (like lumber, steel, and textiles), and therefore typically offer fewer accommodations to the small furniture manufacturers. Retailers, the intermediate customer of the home furnishings industry, are becoming increasingly concentrated and the few large, successful furniture companies actually have their own stores or have dedicated showrooms in the larger department stores. Customers have many products to choose from, at many different price points, and few home furnishing products beyond those of the larger companies have established brands. Also, customers can switch easily among high and low-priced furniture and other discretionary expenditures (spanning plasma TVs to the choice of postponing any furniture purchase entirely). 160. (Refer to Case Scenario 3). Why would Barracuda consider acquisition as its preferred mode of entry into furniture? Answer: The best answers will identify several factors, including but not limited to the observation that the company has grown primarily through acquisition. Thus, acquisition is Barracuda's preferred growth strategy. Also, since the industry is fragmented and suffering from over-capacity, the company may be able to buy up several firms much more cheaply than it would cost to start up a furniture company from scratch. Finally, Barracuda's management may view the lack of brand awareness and low average industry profitability as a sign that it can create the same success it has reaped in the plumbing goods sector. 161. (Refer to Case Scenario 3). Given the history of Barracuda, what guidelines would you suggest to management regarding their acquisition strategy in the home furnishings industry? Answer: If Barracuda is to repeat its prior success then the best answers will suggest that it should look to companies with stronger management teams and product portfolios that could benefit from an aggressive branding strategy. Also, since most of the incumbent firms don't appear to have much power over supplier industries, any acquisition strategy should consider building up scale in a particular segment so that suppliers then have more incentive to offer better terms, prices, selection, and delivery of raw materials. Also, to the extent possible, Barracuda should seek out furniture companies whose products it can sell through its existing channels like cabinetry or knock-down furniture. 162. (Refer to Case Scenario 3). Given Barracuda's history, what threats does Barracuda face in entering the furniture industry through acquisition? Answer: The best answers here should probably start out by noting that a strategy that worked in one context (faucets) is not typically likely to work in another. At the very least, furniture and faucets have different physical characteristics and price points. A couch is much bigger than a faucet, and hence requires different logistics and merchandising practices. Good-better-best in faucets can mean a spread of perhaps $100 between the top and bottom quality product; such a spread for furniture can amount to thousands of dollars. Beyond the product, Barracuda has typically left its acquisitions alone under the guidance of good management. If it cannot acquire firms with these managers in place, which the scenario suggests, then it will likely need to take a more hands on role in either direct management or the replacement of management in an industry in which it has little experience. Finally, this industry is presently not very profitable and Barracuda will have to change this profit structure in order for this move to extend its current high margins. 163. (Refer to Case Scenario 3). Barracuda's acquisitions have been driven by the need to increase market power and hence have been mostly horizontal and vertical acquisitions. Answer: False Test Bank for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781285425177, 9780538753098, 9781133495239, 9780357033838, 9781305502208, 9781305502147