Exam 18: Mergers, Lbos, Divestitures, and Business Failure

Strategic mergers seek to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

Bankruptcy is business failure that occurs when a firm's liabilities exceed the fair market value of its assets.

If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firm's EPS increases and the acquiring firm's EPS decreases.

The synergy of mergers is the economies of scale resulting from the merged firm's lower overhead.

Recent divestitures seem to suggest that many operating units are worth much more to others than to the firm itself.

A combination of companies where the former corporations cease to exist is ________.

The various causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

The acquisition of a "cash-rich" company allows the acquiring company ________.

The overriding goal for merging is to ________.

A stock swap transaction is an acquisition method in which an acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

A ________ is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.

A spin-off is a form of divestiture in which an operating unit becomes an independent company by issuing shares in it, on a pro rata basis to the parent company's shareholders.

The greater the leverage, the smaller the risk involved.

The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns of sales or earnings is a key benefit of ________.

A ________ is a method of structuring a financial merger, whereas a ________ involves the sale of the firm's assets.

A congeneric merger is a merger in which a firm acquires a supplier or a customer.

In ________, an assignment may be made by the creditors of an insolvent firm to a third party who then has the power to liquidate the firm's assets.

If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be ________.

Which of the following represents a disadvantage for holding companies?

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a stock swap transaction.