LOS b: Explain the common motivations behind M&A activity.

Q1. Which of the following motives for mergers least likely makes economic sense?

A)   Surplus funds and vertical integration.

B)   Diversification and reduced borrowing costs.

C)   Complementary resources and eliminating inefficiencies.

Q2. Which of the following statements concerning M&A activity is most accurate? Mergers based upon a desire to diversify usually do:

A)   not make sense from the shareholders’ standpoint, but may make sense from the management’s standpoint.

B)   make sense from the shareholders’ standpoint, and also usually make sense from the management’s standpoint.

C)   not make sense from the shareholders’ standpoint, and do not make sense from the management’s standpoint.

Q3. Merger synergies are usually realized from:

A)   increasing market share.

B)   decreasing costs and/or increasing revenues.

C)   merger tax benefits.

Q4. Achieving international business objectives is sometimes used as the rationale for a merger. Which of the following are least likely to be valid objectives that can be realized from a cross-border merger? The merger:

A)   provides the ability to work around trade barriers.

B)   achieves a reduction in exchange rate exposure.

C)   gives the acquiring firm the ability to use technology in new markets.

Q5. Which of the following is least likely a criticism of merging purely for diversification purposes?

A)   Increasing the size of the firm helps provide job security for management.

B)   Diversification does not increase the overall value of the company.

C)   Empirical evidence finds a diversification discount to conglomerates.

LOS b: Explain the common motivations behind M&A activity. fficeffice" />

Q1. Which of the following motives for mergers least likely makes economic sense?

A)   Surplus funds and vertical integration.

B)   Diversification and reduced borrowing costs.

C)   Complementary resources and eliminating inefficiencies.

Correct answer is B)

Diversification does not make economic sense for company shareholders. It is much easier and cheaper for the shareholders to diversify simply by investing in the shares of unrelated companies themselves rather than expend the time and resources necessary to go through a merger. Similarly, merging to simply reduce financing costs is a misplaced argument since the lower cost of debt financing arises because of the greater security afforded bondholders.

Q2. Which of the following statements concerning M&A activity is most accurate? Mergers based upon a desire to diversify usually do:

A)   not make sense from the shareholders’ standpoint, but may make sense from the management’s standpoint.

B)   make sense from the shareholders’ standpoint, and also usually make sense from the management’s standpoint.

C)   not make sense from the shareholders’ standpoint, and do not make sense from the management’s standpoint.

Correct answer is A)

Mergers predicated upon the need to diversify are usually not sensible from the shareholders’ perspective, because they can easily diversify their investments by holding shares in multiple firms. Such mergers may make sense for management, because compensation is often positively correlated with firm size.

Q3. Merger synergies are usually realized from:

A)   increasing market share.

B)   decreasing costs and/or increasing revenues.

C)   merger tax benefits.

Correct answer is B)

The existence of synergies typically result in decreases in costs for the combined firm (e.g., the same distribution network can support both firms’ retail networks) and/or an increase in revenues (e.g., by cross-selling product lines). Both remaining responses are motivations for M&A activities, but do not result from the realization of synergies.

Q4. Achieving international business objectives is sometimes used as the rationale for a merger. Which of the following are least likely to be valid objectives that can be realized from a cross-border merger? The merger:

A)   provides the ability to work around trade barriers.

B)   achieves a reduction in exchange rate exposure.

C)   gives the acquiring firm the ability to use technology in new markets.

Correct answer is B)

In general, a cross-border merger is likely to increase the acquiring firm’s exchange rate exposure. Both remaining statements are valid arguments in support of a cross-border merger.

Q5. Which of the following is least likely a criticism of merging purely for diversification purposes?

A)   Increasing the size of the firm helps provide job security for management.

B)   Diversification does not increase the overall value of the company.

C)   Empirical evidence finds a diversification discount to conglomerates.

Correct answer is A)

Increasing the size of the firm does not necessarily benefit shareholders, but it would not be considered a valid criticism. Increasing the size of the firm is a potential benefit for managers because diversification reduces the threat of a takeover, and helps management further secure their employment. Both remaining reasons stated are each valid criticisms of a diversification merger.

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