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During negotiations over the method of payment to be made by the acquirer, which of the following issues would least likely be considered?

A) The relative tax-effect on the acquiring firm’s shareholders.

B) The relative valuations of the firms involved.

C) The distribution of the risk and reward from the transaction.

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The method of payment is not likely to have any direct tax-effect on the acquiring firm’s shareholders, but may on the target’s shareholders. Both remaining answers are issues that should be considered during the determination of payment method.

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The difference between a white knight defense and a white squire defense is that the white knight:

A) is a post-offer defense, whereas the white squire is pre-offer.

B) takes a minority interest, whereas a white squire takes over the entire firm.

C) takes over the entire firm, whereas a white squire only takes a minority interest.

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When a firm subject to an unwanted takeover attempt seeks out a friendly third party to purchase the entire firm, this is known as a white knight defense. If the firm seeks out a friendly third party to take a minority interest, this is a white squire defense. Both are post-offer defenses.

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Toulouse Tempered Steel Industries (TTS) is weighing its strategic options following a wave of mergers in the industry across Europe and worldwide. Pascal LaPage, managing director of TTS is wondering whether it makes sense for the firm to position itself as a standalone entity, or if the firm should be pursuing a merger/acquisition of another firm that would provide a good strategic fit. Lyon Bank has been the firm’s primary lender for many years, and Alaine Clamon, CFA, from Lyon’s corporate finance department is due to meet with LaPage and other members of the firm’s finance group to discuss some strategic options.
Clamon begins his presentation with the underlying rationale for even considering a merger or acquisition as a strategic alternative. Some reasons cited by Clamon that can be used to justify a merger are the pursuit of economies of scale, the elimination of operating inefficiencies, and diversification of the firm’s assets. In general, the underlying rationale helps to determine what type of merger the firm will be undertaking. LaPage asks his staff to keep these in mind as they seek suitable candidates for evaluation.
A member of the staff asks Clamon about types of takeover defenses that might by employed by either Aragon or Brittany. Clamon replies that these fall broadly into two categories, pre-offer and post-offer defenses. As examples of pre-offer defenses he describes staggered boards and supermajority voting provisions. As an example of post-offer defenses he describes the crown jewel defense. He notes that, obviously, TTS must take care to account for the ramifications of the presence of any takeover defenses.Which of the following is not a traditional type of merger between two firms?

A) Conglomerate.

B) Syndicate.

C) Horizontal.

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The traditional types of mergers are horizontal, vertical, and conglomerate. Syndicate is not a term that is traditionally used to describe mergers.

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With regard to the list of sensible motives for undertaking a merger cited by Clamon, he is:

A) correct with regard to operating inefficiencies, but incorrect with regard to diversification.

B) correct with regard to operating inefficiencies, and correct with regard to diversification.

C) incorrect with regard to operating inefficiencies, but correct with regard to diversification.

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Pursuing a merger where the underlying rationale is to eliminate operating inefficiencies is generally considered sensible. A merger in pursuit of diversification is generally not seen as sensible, since it is ordinarily much more cost-effective for shareholders to diversify on their own.

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With respect to the takeover defenses described by Clamon, he is:

A) correct with regard to the pre-offer defenses listed, and correct with regard to the post-offer defense listed.

B) correct with regard to the pre-offer defenses listed, but incorrect with regard to the post-offer defense listed.

C) incorrect with regard to the pre-offer defenses listed, but correct with regard to the post-offer defense listed.

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In both cases, Clamon has correctly provided examples of pre-offer and post-offer takeover defenses.

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Which of the following takeover defenses are considered pre-offer defenses?

A) Fair price amendments, poison puts and staggered boards.

B) Liability restructuring, poison pills and supermajority voting provisions.

C) Poison pills, staggered boards and litigation.

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Pre-offer defense mechanisms to avoid a hostile takeover include poison pills, poison puts, reincorporating in a state with restrictive takeover laws, staggered board elections, restricted voting rights, supermajority voting, fair price amendments, and golden parachutes

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When the target of an unwanted takeover turns the table and attempts to take over the firm attempting to acquire it, this is a:

A) post-offer defense and is called greenmail.

B) post-offer defense and is called the pac-man defense.

C) post-offer defense and is called the white squire defense.

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When the target of a takeover turns the table and attempts to take over the firm making the offer, this is called a pac-man defense. This is a post-offer defense.

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A takeover defense that allows the firm’s existing shareholders to purchase additional shares of the company’s stock at attractive prices is a:

A) post-offer defense and is called greenmail.

B) pre-offer defense and is called a poison put.

C) pre-offer defense and is called a poison pill.

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When the firm’s existing shareholders are allowed to purchase additional shares of stock at a significant discount to the current market price in an attempt to thwart a takeover, this is called a poison pill defense. This is a pre-offer defense.

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Froogal Inc. operates in an industry where the current Herfindahl-Hirschman Index (HHI) is at 1,500. The company is considering merging with a competitor that would increase the HHI by 75. Is the merger likely to attract anti-trust action?

A) Not enough information about the number of competitors.

B) Yes, because the industry pre-merger is considered highly concentrated and the change in HHI is greater than 50.

C) No, because the industry pre-merger is considered moderately concentrated and the change in the HHI is less than 100.

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If the post-merger HHI is less than 1,000, the industry is considered competitive and an antitrust challenge is unlikely. A post-merger HHI value between 1,000 and 1,800 will place the industry in the moderately concentrated category. In this case, regulators will compare the pre-merger and post-merger HHI. If the change is greater than 100 points, the merger is likely to be challenged on antitrust grounds. A post-merger HHI calculation greater than 1,800 implies a highly concentrated industry. Regulators will again compare the pre-merger and post-merger HHI calculations, but in this case, if the change is greater than 50, the merger is likely to be challenged.

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In the advanced widget industry, there are 10 firms, each with the same market share. Two of the firms are contemplating a merger. What is the likely antitrust action, and which U.S. federal regulatory agency is responsible for taking any action deemed necessary?

A) Possible challenge; Federal Trade Commission.

B) Certain challenge; Federal Trade Commission.

C) Possible challenge; Commerce Department.

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Before the merger, the HHI is 1000. After the proposed merger, the HHI would be 1200. The value and the magnitude of the change indicate that a challenge is possible, but not certain. The Federal Trade Commission, along with the Department of Justice, is responsible for reviewing and approving/challenging proposed mergers.

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There are 12 firms in an industry, 10 of them have a market share of 7% each, and 2 of them have a market share of 15% each. If 2 of the 7% market share firms agree to merge, calculate the pre- and post-merger Herfindahl-Hirschman Index, and evaluate the likelihood that the merger will be challenged on antitrust grounds.

A) Pre-merger HHI = 940; Post-merger HHI = 1038; Unlikely.

B) Pre-merger HHI = 940; Post-merger HHI = 1038; Possible.

C) Pre-merger HHI = 833; Post-merger HHI = 972; Unlikely.

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The pre-merger HHI = 940 = ((7 × 7 × 10) + (15 × 15 × 2)), the post-merger HHI = 1038 = ((7 × 7 × 8) + (14 × 14 × 1) + (15 × 15 × 2)). Since the change is less than 100, a challenge is unlikely.

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The three broad index value categories for the post-merger competitiveness of an industry, based upon the Herfindahl-Hirschman Index, are:

A) Less than 1000, between 1000 and 1800, and greater than 1800.

B) Less than 1000, between 1000 and 2000, and greater than 2000.

C) Less than 900, between 900 and 1800, and greater than 1800.

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The three broad value categories for the post-merger competitiveness of an industry, based upon the HHI index are less than 1000 (competitive), between 1000 and 1800 (moderately concentrated), and greater than 1800 (highly concentrated).