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.

---

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

Merger synergies are usually realized from:

A) increasing market share.

B) merger tax benefits.

C) decreasing costs and/or increasing revenues.

---

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

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.

---

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

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.

---

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

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.

---

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

hariRaj

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

A) horizontal merger.

B) congeneric merger.

C) vertical merger.

---

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

hariRaj

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.

hariRaj

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

A) Vertical merger.

B) Diversifying merger.

C) Horizontal merger.

---

Conglomerates by definition invest in unrelated business lines.

hariRaj

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.

hariRaj

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. 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.

---

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

A) vertical merger.

B) horizontal merger.

C) conglomerate 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.