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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

1–1. Discuss why mergers and acquisitions occur.
1–2. What are the advantages and disadvantages of holding companies in making M&As?
1–4. What is the role of the investment banker in the M&A process?
1–5. Describe how arbitrage typically takes place in a takeover of a publicly traded company.
1–6. Why is potential synergy often overestimated by acquirers in evaluating a target company?
1–7. What are the major differences between the merger waves of the 1980s and 1990s?
1–8. In your judgment, what are the motivations for two M&As currently in the news?
1–9. What are the arguments for and against corporate diversification through acquisition? Which do you support and why?
1–10. What are the primary differences between operating and financial synergy? Give examples to illustrate your statements.
1–11. At a time when natural gas and oil prices were at record levels, oil and natural gas producer, Andarko Petroleum, announced on June 23, 2006, the acquisition of two competitors, Kerr-McGee
1–12. On September 30, 2000, Mattel, a major toy manufacturer, virtually gave away The Learning Company, a maker of software for toys, to rid itself of a disastrous acquisition of a software
1–14. On July 15, 2002, Pfizer, a leading pharmaceutical company, acquired drug maker Pharmacia for $60 billion. The purchase price represented a 34 percent premium to Pharmacia’s preannouncement
1. Is this deal a merger or a consolidation from a legal standpoint? Explain your answer.
2. Is this a horizontal or vertical merger? What is the significance of this distinction from a regulatory perspective? Explain your answer.
3. What are the motives for the deal? Discuss the logic underlying each motive you identify.
4. Immediately following the announcement, P&G’s share price dropped by 2 percent and Gillette’s share price rose by 13 percent. Explain why this may have happened.
5. P&G announced that it would be buying back $18–22 billion of its stock over the 18 months following the closing of the transaction. Much of the cash required to repurchase these shares requires
6. Explain how actions required by antitrust regulators may hurt P&G’s ability to realize anticipated synergy. Be specific.
7. Identify some of the obstacles that P&G and Gillette are likely to face in integrating the two businesses. Be specific. How would you overcome these obstacles?
1. How have technological and regulatory change affected competition in the telecommunications industry?
2. How have technological and regulatory change affected the rate of innovation and customer choice in the telecom industry?
3. The process of “creative destruction” stimulated substantial consolidation in the U.S. telecom industry. Is bigger always better? Why or why not? (Hint: Consider the impact on a firm’s
4. To determine the extent to which industry consolidation is likely to lead to higher, lower, or unchanged product selling prices, it is necessary to consider current competitors, potential
5. What factors motivated Verizon and SBC to acquire MCI and AT&T, respectively?Discuss these in terms of the motives for mergers and acquisitions described in Chapter 1 of the textbook.
2–1. What were the motivations for the Federal Securities Acts of 1933 and 1934?
2–2. What was the rationale for the Williams Act?
2–3. What factors do U.S. antitrust regulators consider before challenging a transaction?
2–4. What are the obligations of the acquirer and target firms according to the Williams Act?
2–5. Discuss the pros and cons of federal antitrust laws.
2–6. Why is premerger notification (HSR filing) required by U.S. antitrust regulatory authorities?
2–7. When is a person or firm required to submit a Schedule 13D to the SEC? What is the purpose of such a filing?
2–8. What is the rationale behind state antitakeover legislation?
2–9. Give examples of the types of actions that may be required by the parties to a proposed merger subject to a FTC consent decree.
2–10. How might the growth of the Internet affect the application of current antitrust laws?
2–11. Having received approval from the Justice Department and the Federal Trade Commission, Ameritech and SBC Communications received permission from the Federal Communications Commission to
2–14. Comment on whether antitrust policy can be used as an effective means of encouraging innovation. Explain your answer.
1. What key challenges face regulators resulting from the merger of financial exchanges in different countries? How do you see these challenges being resolved?
2. In what way are these regulatory issues similar or different from those confronting the SEC and state regulators and the European Union and individual country regulators?
3. Who should or could regulate global financial markets? Explain your answer.
4. In your opinion, would the merging of financial exchanges increase or decrease international financial stability?
1. What are the important philosophical differences between U.S. and EU antitrust regulators? Explain the logic underlying these differences. To what extent are these differences influenced by
2. This is the first time that a foreign regulatory body prevented a deal involving only U.S. firms from occurring. What are the long-term implications, if any, of this precedent?
3. What were the major stumbling blocks between GE and the EU regulators? Why do you think these were stumbling blocks? Do you think the EU regulators were justified in their position?
4. Do you think that competitors are using antitrust to their advantage? Explain your answer.
5. Do you think the EU regulators would have taken a different position if the deal had involved a less visible firm than General Electric? Explain your answer.
3–1. What are the management entrenchment and shareholder interests hypotheses? Which seems more realistic in your judgment? Explain your answer.
3–3. What are proxy contests and how are they used?
3–4. What is a tender offer? How does it differ from open market purchases of stock?
3–5. How are target shareholders affected by a hostile takeover attempt?
3–6. How are the bidder’s shareholders affected by a hostile takeover attempt?
3–7. What are the primary advantages and disadvantages of commonly used takeover defenses?
3–10. How might recapitalization as a takeover defense help or hurt a target firm’s shareholders?
3–11. Anheuser-Busch rejected InBev’s all-cash offer price of $65 per share on June 30, 2008, saying it undervalued the company, despite the offer representing a 35 percent premium to AB’s
3–12. What do you believe are the primary factors a target firm’s board should consider when evaluating a bid from a potential acquirer?
3–13. If you were the CEO of a target firm, what strategy would you recommend to convince institutional shareholders to support your position in a proxy battle with the bidding firm?
3–14. Anheuser-Busch reduced its antitakeover defenses in 2006, when it removed its staggered board structure. Two years earlier, it did not renew its poison pill provision. Speculate as to why the
1. Identify the takeover tactics employed by Mittal. Explain why each was used.
2. Identify the takeover defenses employed by Arcelor. Explain why each was used.
3. Using the information in this case study, discuss the arguments for and against encouraging hostile corporate takeovers. Be specific.
4. Was Arcelor’s board and management acting to protect their own positions(i.e., the management entrenchment hypothesis) or the best interests of the shareholders (i.e., the shareholder interests
1. Discuss how changing industry conditions have encouraged consolidation within the telecommunications industry.
2. What alternative strategies could Verizon, Qwest, and MCI have pursued? Was the decision to acquire MCI the best alternative for Verizon? Explain your answer.
3. Who are the winners and losers in the Verizon-MCI merger? Be specific.
4. What takeover tactics were employed or threatened to be employed by Verizon?By Qwest? Be specific.
5. What specific takeover defenses did MCI employ?
6. How did the actions of certain shareholders affect the bidding process? Be specific.
7. In your opinion, did the MCI board act in the best interests of their shareholders? Of all their stakeholders? Be specific.
8. Do you believe that the potential severance payments that could be paid to Capellas were excessive? Explain your answer. What are the arguments for and against such severance plans for senior
9. Should the antitrust regulators approve the Verizon-MCI merger? Explain your answer.
10. Verizon’s management argued that the final purchase price from the perspective of Verizon shareholders was not $8.45 billion but rather $7.05. This was so, they argued, because MCI was paying
4–2. How does planning facilitate the acquisition process?
4–3. What major activities should be undertaken in building a business plan?
4–4. What is market segmentation and why is it important?
4–5. What basic types of strategies do companies commonly pursue and how are they different?
4–6. What is the difference between a business plan and an acquisition plan?
4–8. Why is it important to understand the assumptions underlying a business plan or an acquisition plan?
4–9. Why is it important to get senior management heavily involved early in the acquisition process?
4–10. In your judgment, which of the acquisition plan tactical limits discussed in this chapter are the most important and why?
4–13. In your opinion, what market need(s) was Dell Computer able to satisfy better than its competition? Be specific.
4–14. Discuss the types of analyses inside GE that may have preceded GE’s 2008 announcement that it would spin off its consumer and industrial business to its shareholders.
4–15. Ashland Chemical, the largest U.S. chemical distributor, acquired chemical manufacturer, Hercules Inc., for $3.3 billion in 2008. This move followed Dow Chemical Company’s purchase of Rohm
1. How did the acquisition of Countrywide fit BofA’s business strategy? Be specific.What were the key assumptions implicit the BofA’s business strategy? How did the existence of BofA’s mission
2. How would you classify the BofA business strategy (cost leadership, differentiation, focus, or some combination)? Explain your answer.
3. Describe what the likely objectives of the BofA acquisition plan might have been.Be specific. What key assumptions are implicit in BofA’s acquisition plan? What are some of the key risks
4. What capabilities did the acquisition of FleetBoston Financial and MBNA provide BofA? How did the acquisition of Countrywide complement previous acquisitions?
5. What alternatives to outright acquisition did BofA have? Why do you believe BofA chose to acquire Countrywide rather than to pursue an alternative strategy? Be specific.
1. How would you characterize the Oracle business strategy (i.e., cost leadership, differentiation, niche, or some combination of all three)? Explain your answer.
2. What other benefits for Oracle, and the remaining competitors such as SAP, do you see from further industry consolidation? Be specific.
3. Conduct an external and internal analysis of Oracle. Briefly describe those factors that influenced the development of Oracle’s business strategy. Be specific.
4. In what way do you think the Oracle strategy was targeting key competitors?Be specific.
5–1. What resources are commonly used to conduct a search for potential acquisition targets?
5–4. What are the advantages and disadvantages of a letter of intent?
5–7. What is the purpose of the buyer and seller performing due diligence?
5–8. What is the purpose of a financing plan? In what sense is it a “reality check”?
5–9. Why is preclosing integration planning important?
5–10. What key activities make up a typical closing?
5–11. In a rush to complete its purchase of health software producer HBO, McKesson did not perform adequate due diligence but rather relied on representations and warranties in the agreement of
5–13. In mid-2008, Fresenius, a German manufacturer of dialysis equipment, acquired APP Pharmaceuticals for $4.6 billion. The deal includes an earn-out, under which Fresenius would pay as much as
1. How did K2’s acquisition plan objectives support the realization of its corporate mission and business plan objectives?
2. What alternatives to M&As could K2 have employed to pursue its growth strategy? Why were the alternatives rejected?

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