Reading 31: Mergers and Acquisitions-LOS a 习题精选 2010, activities, following, likely, center

土豆妮

Session 9: Corporate Finance: Financing and Control Issues
Reading 31: Mergers and Acquisitions

LOS a: Categorize merger and acquisition (M&A) activities based on forms of integration and types of mergers.

 

 

 

Which of the following is least likely a commonly used merger classification describing the type of merger?

A) Conglomerate merger.

B) Diagonal merger.

C) Vertical merger.

---

 

Diagonal merger is not a commonly used merger classification. Both remaining answers are commonly used to describe the type of merger that has occurred.

土豆妮

Burger World has purchased a large farming company so it can control the quality of the french fries it serves in its restaurants. This merger is best described as a:

A) horizontal merger.

B) vertical merger.

C) diversifying merger.

---

In a vertical merger, the acquiring company seeks to move up or down the product supply chain. The purchase of the farming company is a move backward in the supply chain towards the raw material inputs.

土豆妮

A combination of two firms in the same line of business is called a:

A) congeneric merger.

B) horizontal merger.

C) vertical merger.

---

A combination of two firms in the same line of business is a horizontal merger.

土豆妮

If a firm combines with one of its suppliers or customers, it is called a:

A) horizontal merger.

B) conglomerate merger.

C) vertical merger.

---

When a firm merges with a supplier or customer, it is a vertical merger.

土豆妮

A conglomerate is most likely to participate in which type of merger?

A) Diversifying merger.

B) Vertical merger.

C) Horizontal merger.

---

Conglomerates by definition invest in unrelated business lines.

土豆妮

Which of the following represents a vertical merger?

A) A hamburger chain purchasing a pizza chain.

B) An automobile manufacturer purchasing a tire manufacturer.

C) An automobile manufacturer divesting its tire manufacturing division.

---

In a vertical merger, the acquiring company seeks to move up or down the product supply chain. In purchasing a tire manufacturer, the automobile manufacturer is acquiring one of its inputs to production.

土豆妮

World Beaters, a maker of electric mixers and other kitchen appliances, is considering a hostile takeover of Gadgets ’N More, a catalog retailer specializing in products for the kitchen.

Lars Clausen, deputy chief financial officer for World Beaters, is preparing a report on the merger for senior management.

After a review of financial literature on mergers and extensive interviews with managers for both World Beaters and Gadgets ’N More, Clausen submits a report recommending against the merger. The reasons for his disapproval are listed below:

Gadgets ’N More has a higher growth rate than World Beaters, and a purchase will lower per-share profits.

Shareholders will not benefit from World Beaters’ new lower financing rates.

Shareholders of Gadgets ’N More are likely to see more market gains than shareholders of World Beaters.

Because the merger must be an acquisition of assets, World Beaters will need shareholder approval from Gadgets ’N More.

Which of Clausen’s arguments against the merger is least valid?

A) Gadgets ’N More has a higher growth rate than World Beaters, and a purchase will lower per-share profits.

B) Shareholders will not benefit from World Beaters’ new lower financing rates.

C) Because the merger must be an acquisition of assets, we will need approval from Gadgets ’N More shareholders.

---

In an acquisition of assets, the acquirer buys assets directly from the company, skirting shareholders. As such, the claim that World Beaters will need shareholder approval is false, and the argument is invalid. When a high-growth firm purchases a low-growth firm, per-share profits are temporarily boosted, thus lowering future growth prospects on a per-share basis. Since Gadgets ’N More has a higher growth rate than World Beaters, the effect will be just the opposite, depressing EPS in the near term. While the acquisition could boost the growth rate going forward because of the depression of current earnings and the integration of a faster-growth business, this could indeed be used as an argument against a merger, as in some cases, any one-time decline in EPS is unacceptable. As such, this argument is somewhat valid. Lower financing rates benefit the company, but usually not shareholders, because the company’s price likely reflects the fact that shareholders of both companies end up guaranteeing each other’s debt. Shares of acquired companies tend to rise more than those of acquirers, and Clausen’s criticism of the dichotomy of returns is valid.

---

World Beater’s proposed purchase of Gadgets ’N More is a:

A) horizontal merger.

B) conglomerate merger.

C) vertical merger.

---

In a vertical merger, the acquiring company moves up or down the supply chain. In this case, World Beaters wants to buy a retailer that sells its products, moving up the supply chain toward consumers.

土豆妮

Which type of merger is most likely when the motivation for merging is to bootstrap earnings per share (EPS), and what does this imply about the lifecycle stage of the acquirer and the target?

A) Conglomerate and same stage.

B) Horizontal and different stages.

C) Conglomerate and different stages.

---

In order for EPS bootstrapping to occur, the target must have a lower price-to-earnings (P/E) ratio than the acquirer. Since firms in the same industry are more likely to have similar P/Es, this makes a horizontal merger less likely. The differential in P/Es implies a differing level of expected growth. All else being equal, this suggests that the firms will be in different lifecycle stages.

土豆妮

Burger World is interested in obtaining a controlling interest in Snappy Auto Repair. This potential merger is best described as a:

A) conglomerate.

B) horizontal merger.

C) vertical merger.

---

Combining firms in separate industries represents a conglomerate merger.

土豆妮

A combination of two firms in entirely different industries is called a:

A) vertical merger.

B) conglomerate merger.

C) horizontal merger.

---

When two firms in entirely different industries merge, it is called a conglomerate merger.