Mergers and Acquisitions Questions and Answers

Answer: B

Correct answer: II only

AT&T provided telephone service and TCI owned cable systems reaching into homes, so the acquisition bought AT&T the last mile of distribution it lacked - a vertical merger, integrating backwards into the network that would carry its service. Both were American, so it was not cross-border, and the two were not competitors, so it was not horizontal.

Answer: D

Correct answer: I, II, and III

All three bear on the choice. A stock acquisition deals with shareholders directly, bypassing a board that may be hostile. It leaves a minority who do not tender, so complete absorption may not be achieved. And resistance by target management, while it may be overcome, usually drives the price up by inviting competing bids and forcing a higher offer.

Answer: A

Correct answer: I only

The Garn-St. Germain Act of 1982 was banking deregulation, chiefly concerning savings and loan institutions, and has nothing to do with competition law. The Clayton Act and the Hart-Scott-Rodino Act are both antitrust statutes - the first prohibiting acquisitions that substantially lessen competition, the second requiring pre-merger notification so that the authorities can review a deal before it closes.

Answer: D

Correct answer: I, II, III, and IV

All four are shark repellents, adopted in advance to make an unwanted bid harder. A supermajority provision raises the vote required, a waiting period delays the bidder, a poison pill dilutes a hostile stake by issuing shares cheaply to everyone else, and a staggered board means only a third of the directors can be replaced each year, so control takes two annual meetings to win.

Answer: B

Correct answer: $20 million

The gain from a merger is the value created, that is the synergy: PV(AB) minus PV(A) minus PV(B), which is given here as the $20 million present value of the cost savings. It is quite separate from what was paid, which determines how the gain is divided rather than how large it is.

Answer: A

Correct answer: taxable

Receiving cash is a realisation event: the selling shareholders have disposed of their shares and must recognise the capital gain or loss immediately. Only an exchange of shares can qualify as tax-free, because the seller’s investment continues in another form. This is one of the main reasons a target’s shareholders may prefer paper to cash even at a lower headline price.

Answer: C

Correct answer: Herfindahl Index (HI)

The Herfindahl index sums the squares of the shares, so it weights large segments far more heavily than small ones. A firm with one dominant business and several small ones therefore scores close to a single-segment firm, while a genuinely diversified firm scores much lower, and the gap between the two is wider than the underlying difference in diversification. That squaring is what exaggerates the contrast.

Answer: C

Correct answer: $15 million

A’s shareholders receive the gain less the cost:

NPV = 20 - 5 = $15 million.

The $20 million created is split $15 million to the acquirer and $5 million to the target, and the split is decided entirely by the price negotiated. Had A paid $90 million, the cost would have been $20 million and A’s shareholders would have gained nothing.

Answer: A

Correct answer: I only

Pfizer and Pharmacia were both pharmaceutical companies, so combining them joined two firms at the same stage of the same industry - the definition of a horizontal merger. A vertical merger would join a supplier to a customer, and a conglomerate merger firms in unrelated businesses; neither describes two drug makers.

Answer: D

Correct answer: a firm comes under the authority of a bankruptcy court

Bankruptcy is a legal status, not an economic condition. A firm may be economically failing, illiquid, or insolvent on a balance sheet test without being bankrupt, and it becomes bankrupt only when a court takes jurisdiction over it. The three other options describe economic failure, a liquidity crisis and balance sheet insolvency respectively - each a possible cause of a bankruptcy filing rather than the thing itself.