hariRaj

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

A) horizontal merger.

B) congeneric merger.

C) vertical merger.

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

soverby

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

A) Diagonal merger.

B) Conglomerate merger.

C) Vertical merger.

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

soverby

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

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

B) Empirical evidence finds a diversification discount to conglomerates.

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

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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.

soverby

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

C) achieves a reduction in exchange rate exposure.

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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.

soverby

Merger synergies are usually realized from:

A) increasing market share.

B) merger tax benefits.

C) decreasing costs and/or increasing revenues.

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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.

soverby

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

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

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

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

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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.

soverby

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.

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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.

soverby

Use the following data to calculate the EPS of the combined firm following the merger. Topeka Industries has EPS of $4.00, a market price of $90 per share, and 500,000 shares outstanding. Omaha Company has EPS of $2.00, a market price of $25, and 500,000 shares outstanding. If Topeka acquires Omaha in an all-stock transaction, what is the EPS of the combined company?

A) $4.70.

B) $3.00.

C) $3.57.





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The total value of Omaha is $25 × 500,000 = $12,500,000. Topeka will need to issue 12,500,000 / 90 = 138,889 new shares to acquire Omaha. The combined firm will have total earnings of ($4 × 500,000) + ($2 × 500,000) = $3,000,000. The combined firm will have EPS = $3,000,000 / (138,889 + 500,000) = $4.70. Note that the pre-merger P/E ratio for Topeka was 90 / 4 = 22.5, vs. 25 / 2 = 12.5 for Omaha.

soverby

When Firm A acquires Firm B, and, even though there are no real economic gains resulting from the merger, Firm A’s earnings per share increase, this is called:

A) synergies.

B) bootstrapping.

C) compression.

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When a firm acquires another firm and its earnings per share increase, even though there are no economic gains from the merger, this is called earnings per share bootstrapping.

soverby

When bootstrapping, the acquiring firm:

A) decreases current earnings per share (EPS) because of the increases in the total number of shares outstanding.

B) increases current and historical earnings per share (EPS) by the amount of the synergy created between the companies.

C) increases current earnings per share (EPS) without creating any economic gains.

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The technique of bootstrapping increases EPS for the acquiring firm without creating any economic gains. Any synergy between the companies will only increase future earnings and is not relevant to bootstrapping.