Mergers And Acquisitions Quiz

1. What is a merger?

No difference

A merger is when one firm separates to become two.

A merger is when two firms combine and form a new legal entity.

A merger is when a firm changes its title.

A merger is a process in which two separate firms come together and form a new legal entity. This involves combining their resources, operations, and assets to create a single, unified company. The purpose of a merger is to achieve synergies and enhance market competitiveness by pooling together the strengths and capabilities of the two firms. This can result in cost savings, increased market share, expanded product offerings, and improved overall performance.

Explanation

A merger is a process in which two separate firms come together and form a new legal entity. This involves combining their resources, operations, and assets to create a single, unified company. The purpose of a merger is to achieve synergies and enhance market competitiveness by pooling together the strengths and capabilities of the two firms. This can result in cost savings, increased market share, expanded product offerings, and improved overall performance.

2. When British Airways merged with Iberia, the Spanish airline, what kind of merger was this?

Vertical

Horizontal

Joint venture

Conglomerate

This would be a horizontal merger, as the firms are in the same industry at the same stage of production.

Explanation

This would be a horizontal merger, as the firms are in the same industry at the same stage of production.

3. Which of the following would not be acquired from a target company in the event of a takeover?

Target company equity

Target company asset

Target company liabilities

Target company shares price premium

In this context, the share price premium is what is given to the target on top of the current share price in order to make sure the acquisition goes ahead.

Explanation

In this context, the share price premium is what is given to the target on top of the current share price in order to make sure the acquisition goes ahead.

4. What is a leveraged buyout?

It is a type of joint venture.

It is an acquisition in which a large acquirer has leverage through bargaining power over a small target.

It is an acquisition that is funded from a relatively large amount of debt.

It is an acquisition that is funded from a relatively low amount of debt.

A leveraged buyout (LBO) uses a high level of gearing in order to finance the acquisition of a target company. LBOs often accompany MBOs where managers buy out their own firm.

Explanation

A leveraged buyout (LBO) uses a high level of gearing in order to finance the acquisition of a target company. LBOs often accompany MBOs where managers buy out their own firm.

5. Which of the following would be a legitimate stated reason for an acquisition?

The acquisition of critical mass

Hubris

Empire building

The acquisition of monopoly

The acquisition of critical mass refers to a legitimate reason for an acquisition because it allows a company to increase its market share, expand its customer base, and gain a competitive advantage. By acquiring another company, the acquiring company can consolidate its resources, technologies, and expertise, resulting in economies of scale and improved efficiency. This can lead to increased profitability, growth opportunities, and enhanced market position. Therefore, the acquisition of critical mass is a strategic move that can benefit the acquiring company in terms of market dominance and long-term success.

Explanation

The acquisition of critical mass refers to a legitimate reason for an acquisition because it allows a company to increase its market share, expand its customer base, and gain a competitive advantage. By acquiring another company, the acquiring company can consolidate its resources, technologies, and expertise, resulting in economies of scale and improved efficiency. This can lead to increased profitability, growth opportunities, and enhanced market position. Therefore, the acquisition of critical mass is a strategic move that can benefit the acquiring company in terms of market dominance and long-term success.

6. Why do companies engage in M&A?

For better brand recognition

To grow in size and bounce their rivals

Because of increasing competition

All of these

Companies engage in M&A (mergers and acquisitions) for various reasons, including to grow in size and gain a competitive advantage over their rivals. By merging with or acquiring other companies, they can expand their operations, increase their market share, and access new markets or technologies. This allows them to achieve economies of scale, reduce costs, and enhance their profitability. Additionally, M&A can help companies strengthen their brand recognition and position in the market, making them more attractive to customers and investors. Therefore, all of the given options are valid reasons for companies to engage in M&A.

Explanation

Companies engage in M&A (mergers and acquisitions) for various reasons, including to grow in size and gain a competitive advantage over their rivals. By merging with or acquiring other companies, they can expand their operations, increase their market share, and access new markets or technologies. This allows them to achieve economies of scale, reduce costs, and enhance their profitability. Additionally, M&A can help companies strengthen their brand recognition and position in the market, making them more attractive to customers and investors. Therefore, all of the given options are valid reasons for companies to engage in M&A.

7. When the company is acquired, what difference does it make to contributions in an employee stock purchase plan (ESPP)?

Contributions are automatically rolled over into the ESPP of the current company.

Both A and B

None of these

When a company is acquired, the difference it makes to contributions in an employee stock purchase plan (ESPP) is that the offering and purchase periods are cut off early. This means that employees will not be able to contribute to the ESPP for the remainder of the offering period. Just before the closing of the deal, a purchase is made, allowing employees to receive the benefits of the ESPP before the acquisition is finalized.

Explanation

When a company is acquired, the difference it makes to contributions in an employee stock purchase plan (ESPP) is that the offering and purchase periods are cut off early. This means that employees will not be able to contribute to the ESPP for the remainder of the offering period. Just before the closing of the deal, a purchase is made, allowing employees to receive the benefits of the ESPP before the acquisition is finalized.

8. Which of the following is typically the most important economy or synergy which is sought from Mergers and Acquisitions' M&A activity?

Economies of scope from applying existing resources to new uses, at little additional cost.

Revenue and marketing synergies from new, enhanced, or more efficient distribution.

Economies of scale effects from organizational learning. d) Economies of scale from doing away with duplication of fund.

Economies of scale from doing away with duplication of function between the two firms.

Empirical evidence and typical business experience of M&A activity suggest that doing away with duplication is often the most important gain.

Explanation

Empirical evidence and typical business experience of M&A activity suggest that doing away with duplication is often the most important gain.

9. When the company is acquired, in what ways can vested stock options be handled?

Can be changed into restricted stock units or stock appreciation rights. It depends on the terms of the stock plan.

They can be occurred earlier to align their grant price with the grant price of the acquirer’s options.

According to an exchange ratio, they can be rolled over into options in the acquirer.

All of these options are correct.

Vested stock options can be handled by rolling them over into options in the acquirer, based on an exchange ratio. This means that the stock options from the original company can be converted into options in the acquiring company, allowing the employees to continue to benefit from their vested options. This option is commonly used during company acquisitions to ensure that employees' stock options are not lost or devalued.

Explanation

Vested stock options can be handled by rolling them over into options in the acquirer, based on an exchange ratio. This means that the stock options from the original company can be converted into options in the acquiring company, allowing the employees to continue to benefit from their vested options. This option is commonly used during company acquisitions to ensure that employees' stock options are not lost or devalued.

10. In an acquisition, what is the meaning of the typical tax treatment of stock options?

If stock options are still preserved after an acquisition, there would be no tax consequence. However, if the options are cashed out directly to the individual, the payment would be taxed as ordinary income.

Explanation

If stock options are still preserved after an acquisition, there would be no tax consequence. However, if the options are cashed out directly to the individual, the payment would be taxed as ordinary income.