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

The use of a large amount of debt to finance the acquisition of other firms is a ________.

The overriding goal for merging is the maximization of the owners' wealth as reflected in the acquirer's share price.

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a ________.

Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.

A poison pill is a takeover defense in which a target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.

The combination of two or more companies that results in one of the corporations having a voting control of one or more of the other companies is a ________.

Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm's relatively high debt levels.

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, both the acquiring and the target companies have the same ________.

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially ________.

Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows of $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment? Calculate the net value of a second alternative that would allow Tangshan to purchase a better quality asset for $12,000,000 that would provide a $2,600,000 in after-tax inflows for the next 5 years. Which alternative would you choose?

The selling of some of a firm's assets for various strategic motives is called divestiture.

Technical insolvency occurs when a firm's liabilities exceed the book value of its assets.

Acquisitions are especially attractive when a target firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

Popular takeover defense methods include white knights, poison pills, greenmail, golden parachutes, and shark repellents.

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of a ________.

A firm in a merger transaction that is being pursued as a takeover potential is called the ________.

Leveraged buyouts are clear examples of ________.

Which of the following represents an advantage for holding companies?

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.