The merger of an oil refinery by a chain of gasoline stations is an example of a
Answer (C) is correct. A vertical merger is the combination of a firm with one or more of its suppliers or customers. The acquiring firm remains in business as a combination of the two merged firms. The chain of gasoline stations is acquiring an oil refinery, which is a supplier. Therefore, this is a vertical merger.
All of the following statements about acquisition of stock through tender offers is true except
Answer (D) is correct. An acquisition of stock by a corporation does not require a formal vote of the target firm’s shareholders. Thus, shareholder meetings do not need to be held. A tender offer is usually made in an acquisition of stock. This is a general invitation by an individual or corporation to the other corporation’s shareholders to tender their shares for a specified price. The acquiring firm or individual must directly deal with
the target firm’s shareholders. Minority shareholders are not required to tender their shares. Therefore, not all of the target firm’s stock is usually tendered.
Business combinations are accomplished either through a direct acquisition of assets and liabilities by a surviving corporation or by stock investments in one or more companies. A parent-subsidiary relationship always arises from a
Answer (D) is correct. A parent-subsidiary relationship arises from an effective investment in the stock of another enterprise in excess of 50%. The financial statements for the two companies ordinarily should be presented on a consolidated basis. To the extent the corporation is not wholly owned, a minority interest is presented.
An attempt to replace management in which a group of shareholders try to solicit votes is a
Answer (C) is correct. A proxy fight is an attempt by dissident shareholders to gain control of the corporation, or at least gain influence, by electing directors. A proxy is a power of attorney given by a shareholder that authorizes the holder to exercise the voting rights of the shareholder. The proxy is limited in its duration, usually for a specific occasion like the annual shareholders’ meeting. The issuer of a proxy statement must file a copy with the SEC 10 days prior to mailing it to shareholders. SEC rules require the solicitor of proxies to give shareholders all material information concerning the issues. A form that indicates the shareholder’s agreement or disagreement must be provided. Also, if the purpose is for voting for directors, proxies must be accompanied by an annual report.
Which of the following is a defensive tactic against a hostile takeover by tender offer?
Answer (A) is correct. A leveraged buyout (LBO) entails the company going private. A small group of investors, usually including senior management, purchases the publicly owned stock. The stock is then delisted because it will no longer be traded. Thus, a LBO competes with a hostile tender offer as an alternative.
Which of the following statements about the benefits and costs of mergers is correct?
Answer (A) is correct. Studies have been made to estimate the effect of mergers and takeovers on stock prices of the bidding and target firms. The results suggest that the shareholders of target firms that are acquired receive the greatest benefit. The gains tend to be larger for tender offers than in mergers. This effect is often due to increases in the tender offer because management of a target rejects the initial offer and uses defensive tactics to oppose the takeover. Shareholders of the acquiring firms appear to earn little from takeovers because the gains from the merger tend not to be achieved. Also, shareholders of target firms not acquired frequently receive negative returns.
A parent company sold a subsidiary to a group of managers of the subsidiary. The purchasing group invested $1 million and borrowed $49 million against the assets of the subsidiary. This
is an example of a
Answer (B) is correct. A leveraged buyout is a financing technique through which a company is purchased using very little equity capital. All of the company’s stock is purchased using mostly borrowed funds. The assets of the acquired company are used as collateral for the loans that financed the purchase.
Which of the following will reduce average production costs following a merger?
Answer (B) is correct. A reason to merge exists if the value of the combined firm exceeds the sum of the values of the separate firms. The combined firm may operate more efficiently. Following a merger, if the average cost of production falls as a result of production level increases, then there are economies of scale.
All of the following are potential sources of tax savings in an acquisition except
Answer (A) is correct. Net operating losses (NOLs) are a potential source of tax savings because NOLs can be used to offset an acquiring firms’ taxable income. The combined firm’s capital structure also may allow for increased use of debt financing, which results in tax savings from greater interest reductions. Furthermore, a combination may be the best use of surplus cash from a tax perspective. Dividends received by individual shareholders are fully taxable, whereas the capital gains from a combination are not taxed until the shares are sold. In addition, amounts remitted from the acquired to the acquiring firm are not taxable. However, economies of scale are not a source of tax savings. They are economic savings from joint
operation of companies involved in a business combination.
A firm is most likely to be a bargain for an acquirer if
Answer (B) is correct. Undervaluation of the firm to be acquired may result if the market focuses on short-term earnings rather than long-term prospects. Such a firm may be a bargain for the acquirer. Another aspect of undervaluation is that a firm’s q ratio (market value of the firm’s securities ÷ replacement cost of its assets) may be less than one. Hence, an acquiring firm that wishes to add capacity or diversify into new product lines may discover that a combination is less expensive than internal expansion.