CH 7 - T/F

Restructuring strategies are commonly used to correct or deal with the results of ineffective mergers and acquisitions

Evidence suggests that acquisitions usually lead to favorable financial outcomes, especially for the acquiring firm

Typical returns on acquisitions for acquiring firms are close to zero

A merger is defined as a strategy in which one firm purchases controlling interest in another firm.

A merger is a strategy through which two firms agree to integrate their operations on a relatively coequal basis

In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders

An acquisition occurs when one firm buys a controlling, or 100 percent, interest in another firm and the acquired firm becomes a subsidiary business within its portfolio.

Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry

Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June.

Research suggests that horizontal acquisitions of firms with dissimilar characteristics result in higher performance levels

Research suggests that horizontal acquisitions result in higher performance when the firms have similar characteristics, such as strategy, managerial styles, and resource allocation patterns.

A horizontal acquisition involves two firms in the same industry.

A related acquisition involves two firms in the same industry

An advantage of using horizontal, vertical, or related acquisitions is that they are not subject to regulatory review

Firms are more likely to enter a market through acquisition when high product loyalty is present in the industry.

The lower the barriers to entry, the more likely firms will use acquisition as a means to enter a market.

In the current global landscape, firms from North America and Europe use the acquisition strategy more frequently than firms from other nations

Junk bonds are used less frequently today and are now commonly called high-yield bonds

One reason for an acquisition is to increase market power.

Among the challenges associated with integration processes is the need to link different financial and control systems

Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy.

United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy

Research has shown that the more different the acquired firm is in terms of competencies and resources than the acquiring firm, the more likely the acquisition is to be successfu

Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions

The quickest and easiest way for a firm to diversify its portfolio of businesses is to make acquisitions.

It is relatively common for a firm to develop new products internally to diversify its product lines

The post-acquisition integration phase is less important for acquisition success than characteristics of the deal itself.

One of the attributes of a successful acquisition is that the acquiring firm conducts effective due diligence to select target firms and evaluate the target firm’s health

The reasons why a firm would overpay for a company that it acquires include inadequate due diligence.

Large or extraordinary debt is defined as overpaying for an acquired firm.

Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers

Junk bonds are a financing option through which risky acquisitions are financed with debt that provides a large potential return to bondholders

Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the businesses in the newly created firm’s portfolio

Private synergies are unique to the acquired and acquiring firms and could not be developed by combining either firm's assets with another company

Transaction costs resulting from an acquisition refer to the direct and indirect costs resulting from the use of acquisition strategies to create synergies.

Unrelated diversified firms become overdiversified with a smaller number of business units than do firms using a related diversification strategy

When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls

Top managers typically become overly focused on acquisitions because only they can perform most of the tasks involved, such as performing due diligence on the target firm

Company experiences show that participation in and overseeing the activities required for making acquisitions can divert managerial attention from other matters that are necessary for long-term competitive success.

Acquisitions can become a substitute for innovation in some firms and trigger future rounds of acquisitions.

One of the potential problems associated with acquisitions is that the additional costs required to manage the larger firm will exceed the benefits of the economies of scale and additional market power.

One of the most effective ways to test the feasibility of a future merger or acquisition is for the firms to first engage in a strategic alliance

Hostile acquisitions provide greater financial returns to the acquiring company as it is easier for managers to integrate the firms

Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself.

Wilberforce Press is a small book publishing firm in Iowa that has been owned by the same family since 1895. It is being purchased by Ozarka Publishing, another family-run business in Nebraska, which has been a specialty publisher for 77 years. Each company is known for its unique culture passed down from its founders. Executives and employees in both firms have "grown up" with their companies. Because both of these companies have a long, stable history in highly related industries, this acquisition has a high probability of success.

When the actual results of an acquisition strategy fall short of the projected results, firms consider using restructuring strategies

Restructuring is a strategy through which a firm changes its set of businesses or its financial structure.

Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio.

Downscoping makes management of the firm more effective because it allows the top management team to better understand and manage the remaining businesses.

Traditionally, leveraged buyouts were used as a restructuring strategy to correct for managerial mistakes or because the firm's managers were making decisions that primarily served their own interests rather than those of shareholders.

Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, and human resources management.

The outcome of downsizing, downscoping, and leveraged buyouts is higher firm performance

The intent of the owners in a whole-firm leveraged buyout may be to increase the efficiency of the bought-out firm and resell it in five to eight years. This tends to make the managers of the bought-out firm high risk takers, since they will probably not survive the resale and thus have little to lose.