Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 20, Problem 5DQ
What is synergy? What might cause this result? Is there a tendency for management to over- or underestimate the potential synergistic benefits of a merger? (LO20-1)
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Why so many mergers fail to produce the expected synergistic gains?
The following are sensible motives for mergers EXCEPT:
a.
Economies of scope
b.
Reducing firm risk through diversification
c.
Reducing competition
d.
Eliminating inefficiencies
e.
All of the above
a) What is a conglomerate merger and why are they more likely to be approved?
b) Limit pricing is a strategy where a firm sets a low, but profitable, price to discourage entry. How does that differ from predatory pricing?
c) What is "Share the gain, share the pain" theory?
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- Which of the following risk response items would not be affected by an increase in the cost of managing a strategic alliance partnership that was formed to reduce a top organizational risk? a. Risk response net benefit b. Risk response cost c. Risk response benefit d. All of these. e. None of these.arrow_forwardWhy might one company have to complete more due diligence than another in a merger? A. None of these answers B. It is important for a company to know what it is buying C. Acquisitions can be risky D. If there is a large size discrepancy the merger seems more like an aquisarrow_forwardis this statement true or false and justify answer using logic and concepts Mergers inspired by vertical integration motives are very rare nowadays, as transaction costs have decreased substantially since the second merger wave.arrow_forward
- Hello, could you please answer the following question in details. Thank you very much! Are the following statements true or false? Justify your answer. Mergers inspired by vertical integration motives are very rare nowadays, as transaction costs have decreased substantially since the second merger wave. “It is always advisable for a company to diversify its activities, in order to limit the risk of being too exposed to one activity”arrow_forwardDiscuss the validity of risk diversification as a motivation for companies engaging in merger and acquisition activity?arrow_forwardWhy might the portfolio effect of a merger provide a higher valuation for the participating firms?arrow_forward
- What are some ways to limit the potential downsides of a strategic alliance? Group of answer choices Don’t do any strategic alliances to avoid the downsides. Rigorous contracting that addresses the potential for holdup, appropriability, moral hazard issues; also doing due diligence. Try to induce your partner to make transaction specific investments so that you can hold them up.arrow_forwardWhich of the following is NOT normally regarded as being a barrier to hostile takeovers? a. Abnormally high executive compensation. b. Targeted share repurchases. c. Poison pills. d. Shareholder rights provisions. e. Restricted voting rights.arrow_forwardWhich of the following situations would compel the management of a company to embark on acapital reduction/reorganisation scheme?A When it wants to make a rights issueB When the company is to be liquidatedC When the company makes persistent losses but management is optimistic about a positive turnaroundD When the company wants to reward the existing shareholders by he issue of bonus sharesarrow_forward
- When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain. (See Ch 12, Q4)arrow_forwardDiversification is considered a dubious reason for merger because:Select one: a. Risk reduction is achieved by more by bondholders than stockholders b. Personal diversification is possible by the shareholders themselves c. Diversification only minimizes unsystematic risk d. All of the abovearrow_forwardTwo large, publicly owned firms are contemplating a merger. No operating synergy isexpected. However, because returns on the two firms are not perfectly positively correlated,the standard deviation of earnings would be reduced for the combined corporation. Onegroup of consultants argues that this risk reduction is sufficient grounds for the merger.Another group thinks that this type of risk reduction is irrelevant because stockholders canhold the stock of both companies and thus gain the risk-reduction benefits without all thehassles and expenses of the merger. Whose position is correct? Explain.arrow_forward
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