Mergers & Acquisitions Self-Assessment... the Answers

TRUE or FALSE: M&A transactions deliver a premium return to shareholders of the target company, but buyers (on average) earn only a going rate of return.

  • TRUE

TRUE or FALSE: Whenever an investor acquires 5% or more of a U.S. public company, it must disclose its intentions, the identities of all investors, their occupation, sources of financing, and the purpose of the acquisition.

  • TRUE

TRUE or FALSE: Conventional wisdom that a diversification strategy destroys company value is currently being challenged.

  • TRUE

TRUE or FALSE: The consensus among academics and practitioners is that 5% is a good representation of the market risk premium that should be used in the CAPM model of valuation.

  • TRUE

TRUE or FALSE: Holding companies and their shareholders may be subject to triple taxation.

  • TRUE

TRUE or FALSE: In evaluating the impact of an acquisition, Wall Street tends to value potential revenue synergies more highly than cost synergies.

  • FALSE - Cost synergies are viewed to be more under management control than revenue synergies.

TRUE or FALSE: Effective merger integration progresses through a series of phases that begins with strategic planning and ends with post-merger integration efforts.

  • TRUE

TRUE or FALSE: Acquisition integration means effectively absorbing the target company into the culture and business systems of the acquirer.

  • FALSE - An absorption strategy (where culture and business control systems become that of the acquirer) is only one strategy for M&A integration.

TRUE or FALSE: Over the past few decades, over 25% of M&A transactions in the United States have been hostile or unfriendly takeover attempts.

  • FALSE - Hostile takeovers dropped to about 4% during the 1990s; however, they are running at a higher percentage during the 2000s.

TRUE or FALSE: Empirical evidence shows that unrelated diversification is an effective means of smoothing out the business cycle.

  • FALSE - Empirical studies have generally supported the conclusion that investors/firms do not benefit from unrelated diversification (new markets and new products), although there are some expectations.

TRUE or FALSE: In a triangular cash merger, the target firm may either be merged into an acquirer's operating or shell acquisition subsidiary with the subsidiary surviving, or the acquirer's subsidiary is merged into the target firm with the target survinging.

  • TRUE

TRUE or FALSE: A valuation estimation using the constant growth model involves the calculation of a terminal value.

  • FALSE - Terminal value is not a factor in the constant (or Gordon) growth model.