Chapter 11 – Mergers and Acquisitions

Consider the following statement: “A merger between a pharmaceutical firm with a strong research department and a pharmaceutical firm with a strong sales force is a typical example of mergers that aim to take advantage of economies of scale.” This statement is
1. True
2. False
Consider the following statement: “Mergers that help to provide low-cost financing to a financially constrained target are more likely to occur if the degree of information asymmetry between the target’s management and public capital markets is high.” This statement is
1. True
2. False
Consider the following statement: “In the EU, mergers that increase product-market rents are more likely to be disallowed by the European Commission than mergers that do not.” This statement is
1. True
2. False
Which of the following motivations for mergers is typically not valued by the acquirer’s shareholders?
1. Capturing tax benefits that arise from operating tax loss carryforwards
2. Improving target management
3. Increasing product-market rents
4. Reducing business risk through diversification of operations
Which of the following statements is not correct?
1. Acquisition premiums tend to be greater in hostile takeovers than in friendly takeovers
2. Acquisition premiums tend to be greater in share-for-share mergers (i.e., equity-financed takeovers) than in cash-financed takeovers
3. Acquisition premiums tend to be greater if the target company is located in a country with strict takeover rules than if the target company is located in a country with weak takeover rules
Consider the following statement: “An advantage of using price-earnings multiples to estimate the value of a target to the acquirer is that it focuses on the near-term benefits of the merger.” This statement is
1. True
2. False
Acquisitions financed with debt or surplus cash are more likely to occur if
1. The acquiring firm is close to financial distress
2. There is low information asymmetry regarding the acquisition benefits between the acquirer’s management and its shareholders
3. If the acquiring firm has a primary shareholder who controls between 40 and 60 percent of the equity votes
4. None of the above
Consider the following statement: “A potential acquisition is more likely to be completed if the target company has not implemented golden parachutes for its management.” This statement is
1. True
2. False
Which of the following mechanisms can be used as takeover defenses?
1. A voting cap
2. The issuance of depository receipts
3. Squeeze-out rules
4. A, B, and C
5. A and B
Which of the following rules have been included in the EU Takeover Directive to prevent management entrenchment and protect minority shareholders during European takeovers?
1. The board-neutrality rule
2. The equal-treatment rule
3. The maximum-bid rule
4. A and B
5. A and C
Which of the following variables is positively associated with a firm’s debt rating?
1. Net debt to net capital
2. Firm size
3. NOPAT to net capital
4. A, B and C
5. B and C
Company X has a significantly lower Altman Z score than company Y. This implies that
1. Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability
2. Company Y’s bankruptcy probability exceeds company X’s bankruptcy probability

Chapter 11 – Mergers and Acquisitions

Quiz