Exam 21: Mergers and Acquisitions

Since a manager's central goal is to maximize the firm's stock price,any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Firms use defensive tactics to fight off undesired mergers.These tactics do NOT include

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

At the beginning of the year Ham Inc.'s management is considering making an offer to buy Egg Corporation.Egg's projected operating income (EBIT)for the current year is $25.0 million,but Ham believes that if the two firms were merged,it could consolidate some operations,reduce Egg's expenses,and raise its EBIT to $39.0 million.Neither company uses any debt,and they both pay income taxes at a 40% rate.Ham has a better reputation among investors,who regard it as better managed and also less risky,so Ham's stock has a P/E ratio of 18 versus a P/E of 12 for Egg.Since Ham's management will be running the entire enterprise after a merger,investors will value the resulting corporation based on Ham's P/E.Based on expected market values,how much synergy should the merger create? Do not round your intermediate calculations.

Simpson Inc.is considering a vertical merger with The Lachey Company.Simpson currently has a required return of 9%,while Lachey's required return is 14%.The market risk premium is 5.10% and the risk-free rate is 5%.Assume the market is in equilibrium.If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%),what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.Do not round your intermediate calculations.

Which of the following statements is most CORRECT?

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Gekko Properties is considering purchasing Teldar Properties.Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million,$4 million,$5 million,and $10 million over the next four years.The horizon value of the firm's operations,as of Year 4,is expected to be $108 million.Assume all cash flows occur at the end of the year.The acquisition would be made immediately,if it is undertaken.Teldar's post-merger beta is estimated to be 2.0,and its post-merger tax rate would be 35.00%.The risk-free rate is 6.00%,and the market risk premium is 5.70%.What is the value of Teldar to Gekko Properties? Do not round intermediate calculations.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired,selling off at bargain prices the assets that originally made the firm a desirable target,and granting huge "golden parachutes" that open if the firm is acquired are 3 procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Which of the following actions does NOT help managers defend against a hostile takeover?

Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Which of the following statements is most CORRECT?

At the beginning of the year Giant Inc.'s management is considering making an offer to buy Micro Corporation.Micro's projected operating income (EBIT)for the current year is $31.0 million,but Giant believes that if the two firms were merged,it could consolidate some operations,reduce Micro's expenses,and raise its EBIT to $37.0 million.Neither company uses any debt,and they both pay income taxes at a 35% rate.Giant has a better reputation among investors,who regard it as very well managed and not very risky,so its stock has a P/E ratio of 13 versus a P/E of 9 for Micro.Since Giant's management would be running the entire enterprise after a merger,investors would value the resulting corporation based on Giant's P/E.If Micro has 10 million shares outstanding,by how much should the merger increase its share price,assuming all of the synergy will go to its stockholders? Do not round your intermediate calculations.

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.