Q&A Hero

Q: Research has shown that maintaining a low or moderate level of firm debt is critical to the success of an acquisition, even when substantial leverage was used to finance the acquisition itself. a. True b. False

Q: Junk bonds are now used more frequently to finance acquisitions primarily because of the belief that debt disciplines managers. a. True b. False

Q: Downscoping makes management of the firm more effective because it allows the top management team to better understand the remaining businesses. a. True b. False

Q: Downscoping represents a reduction in the number of a firm's employees and sometimes in the number of its operating units, but it may or may not represent a change in the composition of businesses in the corporation's portfolio. a. True b. False

Q: Moon-in-June, a designer and manufacturer of wedding dresses, has decided to purchase a retail chain specializing in bridal wear. This purchase will be useful in gaining more market power for Moon-in-June. a. True b. False

Q: The current Chinese cross-border strategy is to focus on buying global brands, sales networks, and goodwill in branded products. a. True b. False

Q: In the final analysis, firms use merger and acquisition strategies to improve their ability to create value for all stakeholders, including stockholders. a. True b. False

Q: The relatively strong U.S. dollar has increased the interest of firms from other nations to acquire U.S. companies. a. True b. False

Q: It is relatively common for a firm to develop new products internally to diversify its product lines. a. True b. False

Q: Firms can increase their speed to market for new products by pursuing an internal product development strategy rather than an acquisition strategy. a. True b. False

Q: When a firm becomes highly diversified through acquisitions, managers often focus on financial controls rather than strategic controls. a. True b. False

Q: Horizontal acquisitions and related acquisitions tend to contribute less to a firm's competitiveness than do unrelated acquisitions. a. True b. False

Q: United Technologies Corp. (UTC) uses acquisitions of firms such as Otis Elevator Company (elevators, escalators, and moving walkways) and Carrier Corporation (heating and air conditioning systems) as the foundation for implementing its related diversification strategy. a. True b. False

Q: Most acquisitions that are designed to achieve greater market power entail buying a competitor, a supplier, a distributor, or a business in a highly related industry. a. True b. False

Q: Downsizing may be necessary because acquisitions often create a situation in which the newly formed firm has duplicate organizational functions such as sales, manufacturing, distribution, human resources, and management. a. True b. False

Q: The recent financial crisis made it difficult for firms to complete "megadeals" and the slowdown in merger and acquisition has continued in 2011. a. True b. False

Q: Describe how diversified firms can use activity sharing and transfer of core competencies to create value.

Q: What are the five categories of businesses based on level of diversification?

Q: Describe the primary reasons a firm pursues increased diversification.

Q: Differentiate between corporate-level and business-level strategies and give examples of each.

Q: What are the two ways that an unrelated diversification strategy can create value?

Q: What are the managerial motives to diversify?

Q: What is the effect of a firm's low performance on the pursuit of diversification?

Q: The ultimate test of the value of a corporate-level strategy is whether the: a. corporation earns a great deal of money. b. top management team is satisfied with the corporation's performance. c. businesses in the portfolio are worth more under the management of the company in question than they would be under any other ownership. d. businesses in the portfolio increase the firm's financial returns.

Q: Research has shown that horizontal acquisitions a. tend to have disappointing financial results in the long run. b. are being replaced by virtual acquisitions. c. result in lower levels of performance than unrelated acquisitions. d. are able to use activity sharing to successfully create economies of scope.

Q: Large diversified businesses often face a _______________, which results from analysts not knowing how to value a vast array of large businesses with complex financial reports. a. threat of regulation by the Securities and Exchange Commission b. high CEO turnover c. threat of takeover d. conglomerate discount

Q: PorkPride Foods produces hams and other meat products. It owns hog raising operations. This is an example of a business that is: a. reducing vertical integration. b. vertically integrated. c. totally integrated. d. horizontally integrated.

Q: Which acquisition would be considered the LEAST related? a. A candy manufacturer purchases a chemical laboratory specializing in food flavorings. b. A chain of garden centers acquires a landscape architecture firm. c. A hospital acquires a long-term care nursing home. d. An upscale "white-tablecloth" restaurant chain acquires a travel agency.

Q: Firms that have selected a related diversification corporate-level strategy seek to exploit: a. control shared among business-unit managers. b. economies of scope between business units. c. the favorable demand of buyers. d. market power.

Q: During the 1990s top executives of Titanic, Inc., followed a pattern of aggressive acquisitions and diversification. Now, Titanic is performing poorly and earning below average returns. Lusitania, a large conglomerate firm, is in the final stages of purchasing Titanic. Lusitania has announced that it will fire Titanic's current top executives. The Titanic executives may not be worried about their impending job loss if they: a. plan to take poison pills. b. have golden parachutes. c. have silver handcuffs. d. have ironclad contracts.

Q: Which of the following is NOT a governance mechanism that may limit managerial tendencies to over-diversify? a. The market for corporate control b. The Board of Directors c. Surveillance technologies d. Executive compensation practices

Q: The risk for firms that follow the unrelated diversification strategy in developed economies is that: a. external investors tend to dump the stocks of conglomerates during economic downturns. b. conglomerates are typically owned by one powerful entrepreneur and do not survive his/her retirement or death. c. government regulations, especially in Europe, have periodically forced the dissolution of conglomerates. d. competitors can imitate financial economies more easily than they imitate economies of scope.

Q: As the threat of corporate failure increases due to relatedness between a firm's business units, firms may decide to: a. increase the firm's level of retained resources. b. diversify into less risky environments. c. reduce the level of diversity in its investments. d. pursue unproven product lines.

Q: The purchasing of firms in the same industry is called: a. unrelated diversification. b. vertical integration. c. networking the organization. d. horizontal acquisition.

Q: Specialty Steel, Inc., needs a particular type of brick to line its kilns in order to safely achieve the high temperatures needed for the unusually strong steel it produces. The clay to make this brick is very rare and only two brick plants in the United States make this type of brick. Specialty Steel has decided to buy one of these brick plants. This is an example of: a. backward integration. b. forward integration. c. horizontal integration. d. virtual integration.

Q: When a firm simultaneously practices operational relatedness and corporate relatedness: a. it is difficult for investors to observe the value created by the firm. b. the firm is likely to be overvalued by investors. c. the firm will suffer from diseconomies of scope that outweigh cost savings generated. d. the firm is seeking to create value through financial economies.

Q: The value of the assets of a firm using a diversification strategy to create both operational and corporate relatedness tend to be: a. discounted by investors. b. inflated by investors. c. completely ignored by investors. d. highly valued by investors.

Q: Research suggests that _______________has decreased while ___________has increased possibly due to the restructuring that took place in the 1990s and early twenty-first century. a. forward vertical integration; backward vertical integration b. backward vertical integration; forward vertical integration c. related diversification; unrelated diversification d. unrelated diversification; related diversification

Q: Firms seek to create value from economies of scope through all of the following EXCEPT: a. activity sharing. b. skill transfers. c. transfers of corporate core competencies. d. de-integration.

Q: Usually a company is classified as a single business firm when revenues generated by the dominant business are greater than ____ percent. a. 99 b. 95 c. 90 d. 70

Q: Equator, a U.S. manufacturer of pharmaceuticals, has acquired a firm in the same industry in Ireland. It plans to transfer one of its key managers from its plant in St. Louis to Ireland. What is the major threat to Equator's plan to transfer competencies from itself to the Irish firm? a. The St. Louis manager may quit Equator in order to remain in St. Louis. b. American pharmaceutical manufacturing techniques may not transfer to Ireland. c. Irish managers will refuse to take direction from a foreign executive. d. The cost of transferring U.S. managers overseas is usually not cost-effective.

Q: A noted professional art academy has founded an "artists and friends" travel company specializing in tours for artists to scenic locales, using its faculty as traveling teachers. In addition, the art academy has purchased a framing company to make frames for academy art works, and to sell museum-quality framing services to the public. The art academy is engaging in diversification based on ____ relatedness. a. operational b. corporate c. intellectual d. constrained

Q: Wm. Wrigley Jr. Company once made only chewing gum. When Wrigley bought Life Savers (a line of candy mints) and Altoids (a line of breath mints) from Kraft, chewing gum then constituted less than 95 percent of revenues. Thus, Wrigley: a. was moving away from its traditional single-business strategy toward a dominant strategy. b. was moving away from its traditional dominant strategy toward a related linked strategy. c. became a conglomerate since Life Savers and Altoids are unrelated businesses. d. probably planned to restructure these companies and sell them off.

Q: The drawbacks to transferring competencies by moving key people into new management positions include all of these EXCEPT: a. the people involved may not want to move. b. managerial competencies are not easily transferable to different organizational cultures. c. managers with these skills are expensive. d. top-level managers may resist having these key people transferred.

Q: An ability to efficiently allocate capital through an internal market may help the firm protect the competitive advantages it develops: a. through reduced disclosure to outside parties. b. by the ability to not report losses to investors. c. by the ability to increase pay to managers without shareholders being aware. d. through the ability to reinvest cash in dividends to shareholders.

Q: Large diversified businesses often face what is known as the "conglomerate discount." This discount means that investors: a. understand that the financial efficiencies of this strategy automatically make these stocks worth more than their current market valuation. b. believe that the value of conglomerates is less than the value of the sum of their parts. c. increase the expected future earnings of conglomerates. d. have found that over time, conglomerates earn more than the component companies would have earned independently.

Q: Which of the following is a value-reducing reason for diversification? a. Enhancing the strategic competitiveness of the entire company b. Expanding the business portfolio in order to diversify managerial employment risk c. Gaining market power relative to competitors d. Conforming to antitrust regulation

Q: Which of the following is TRUE? a. Conglomerates no longer exist in the U.S. business scene, but are common in emerging markets. b. Unrelated diversified firms seek to create value through economies of scope. c. The sharing of intangible resources, such as know-how, between firms is a type of operational sharing in related diversifications. d. Related constrained firms share more tangible resources and activities between businesses than do related linked firms.

Q: Hutchison Whampoa Limited (HWL) has businesses in ports and related services, telecommunications, property and hotels, retail and manufacturing, and energy and infrastructure. HWL makes no efforts to share activities or transfer core competencies among the businesses. HWL is following a strategy of__________diversification. a. dominant business b. related constrained c. related linked d. unrelated

Q: What is the similarity between high-technology firms and service-based firms that makes them risky as restructuring candidates? a. They are dependent on human resources. b. They have few tangible assets. c. Both types of firm rely on financial economies. d. The demand for their products is highly sensitive to economic downturns.

Q: A firm that earns less than 70 percent of revenue from its dominant business and has direct connections between its businesses is engaging in ____ diversification. a. unrelated b. related constrained c. related linked d. dominant business

Q: In making a decision to diversify, managers should use value-creating reasons or face the risk that their firms will be acquired and they could lose their jobs. Which of the following is a value-creating reason to diversify? a. Economies of scope b. Desire for increased compensation c. Reduced managerial risk d. Low performance

Q: The more sharing of resources and activities among businesses, the more ____ is the relatedness of the diversification. a. linked b. constrained c. integrated d. intense

Q: The main difference between the related constrained level of diversification and the related linked level of diversification is: a. the percentage of total organizational profitability that comes from the dominant business. b. the level of resources and activities shared among the businesses. c. whether the diversification is vertical or horizontal. d. whether the diversification is value-creating or value-neutral.

Q: Firms use corporate-level diversification strategies for all the following reasons EXCEPT: a. value-creating. b. value-neutral. c. value-reducing. d. value-diversifying.

Q: The term "conglomerates" refers to firms using the ____ diversification strategy. a. unrelated b. related constrained c. related linked d. global

Q: Dragonfly, publishers of children's books, has purchased White Rabbit, another publisher of children's books. Both companies' books are sold to the same retail stores and schools. Their content is different because Dragonfly produces children's literature, whereas White Rabbit focuses on child-level nonfiction scientific and nature topics. Which of the following statements is probably TRUE about this acquisition? a. This is a horizontal acquisition. b. This is an example of virtual integration. c. Dragonfly is beginning to build a conglomerate. d. Economies of scope are unlikely to result from this acquisition.

Q: When diversification results in two companies, such as UPS and FedEx, simultaneously competing in the same product areas or geographic markets, this is called ____ competition. a. multiple b. multiportal c. multipoint d. multiplicit

Q: A company pursuing vertical integration can gain market power over its competitors through all of the following EXCEPT: a. improved adjustment to technological changes. b. savings on operations costs. c. improved product quality. d. avoidance of market costs.

Q: The Cherrywood Fine Furniture Company finds itself with excess capacity in its plant and equipment for furniture manufacturing. This excess capacity will be useful in: a. unrelated diversification. b. related diversification projects. c. corporate restructuring. d. multipoint competition

Q: Operational relatedness is created by ___________ of ___________. a. sharing; core competencies b. sharing; activities c. transferring; core competencies d. transferring; activities

Q: Revenues for United Parcel Service (UPS) come from the following business segments: 60 percent from U.S. package delivery operations, 22 percent from international package delivery, and 18 percent from non-packaging operations. Which best describes the corporate level strategy of UPS? a. single business b. dominant business c. related constrained d. related linked

Q: Multipoint competition occurs when: a. firms have multiple retail outlets. b. firms have multiple products in their primary industry. c. diversified firms compete against each other in several markets. d. firms have diversified portfolios of companies.

Q: Isidore Crocker, CEO of Gotham Engines, is strongly in favor of acquiring Carolina Textiles, a firm in an unrelated industry. Some members of the Board of Directors are questioning Crocker's motives for the acquisition. They argue that it is not uncommon for CEOs to push for acquisitions because: a. a successful acquisition will increase the CEO's power over the Board of Directors. b. making an acquisition is an easier route to increased firm value than is improving the firm's core competencies. c. higher CEO pay is related to larger organization size. d. CEOs nearing retirement seek to create empires to continue their legacy.

Q: Which of the following is NOT a limitation directly relating to vertical integration? a. Bureaucratic costs b. The loss of flexibility through investment in specific technologies c. Capacity balance and coordination problems from changes in demand d. Imitation of core technology by potential competitors

Q: Procter & Gamble (P&G) has a paper towel and baby diaper business, both of which use paper products. The firm's paper production plant produces inputs for both businesses. P&G most likely uses the _____________ diversification strategy to create ___________. a. related constrained; operational relatedness b. related linked; corporate relatedness c. related constrained; corporate relatedness d. related linked; operational relatedness

Q: Which type of diversification is most likely to create value through financial economies? a. Related constrained b. Operational and corporate relatedness c. Unrelated d. Related linked

Q: A firm practicing unrelated diversification can make better capital allocations to its subsidiary businesses than the external capital market can for all the following reasons EXCEPT: a. corporate headquarters can allocate capital according to more specific criteria than is possible with external market allocations. b. corporate headquarters has more complete information about the subsidiary businesses than the external capital market. c. the firm can acquire other firms with innovative products instead of allocating capital to research and development. d. corporate headquarters can more effectively discipline underperforming management teams through resource allocation than can the external market.

Q: Compared with diversification based on intangible resources, diversification based on financial resources is: a. less imitable and less likely to create value on a long-term basis. b. more imitable and less likely to create value on a long-term basis. c. less imitable and more likely to create value on a long-term basis. d. more imitable and more likely to create value on a long-term basis.

Q: Synergy exists when: a. cost savings are realized through improved allocations of financial resources based on investments inside or outside the firm. b. two units create value by utilizing market power in their respective industries. c. firms utilize constrained related diversification to build an attractive portfolio of businesses. d. the value created by business units working together exceeds the value the units create when working independently.

Q: Backward integration occurs when a company: a. produces its own inputs. b. owns its own source of distribution of outputs. c. is concentrated in a single industry. d. is divesting unrelated businesses.

Q: Which of the following reasons for diversification is most likely to increase the firm's value? a. Increasing managerial compensation b. Reducing costs through business restructuring c. Taking advantage of changes in tax laws d. Conforming to antitrust regulation

Q: Successful unrelated diversification through restructuring is typically accomplished by: a. focusing on mature, low-technology businesses. b. a "random walk" of good luck in picking firms to buy. c. seeking out high technology firms in high-growth industries. d. a top management team that is not constrained by pre-established ideas of how the firm's portfolio should be developed.

Q: The lowest level of diversification is the ____ level. a. single-business b. dominant business c. related constrained d. unrelated

Q: Corporate-level strategy is concerned with ____ and how to manage these businesses. a. whether the firm should invest in global or domestic businesses b. what product markets and businesses the firm should be in c. whether the portfolio of businesses should generate immediate above-average returns or should be troubled businesses which will create above-average returns only after restructuring d. whether to integrate backward or forward.

Q: The Publicis Groupe uses the digital technology from its digital business to enhance the advertising products in its advertising group. This sharing of activities is characteristic of the _____________ diversification strategy. a. related constrained b. related linked c. unrelated d. dominant

Q: Free cash flows are: a. liquid financial assets for which investments in current businesses are no longer economically viable. b. liquid financial assets that for tax purposes must be reinvested in the firm if not distributed as dividends to shareholders. c. the profits resulting after a restructured firm has been sold. d. dividends that have been distributed to shareholders that are taxed as capital gains.

Q: The _________________diversification strategy creates value in two ways. First, because the core competency has already been developed in one business, the firm does not have to allocate resources to develop it. Second, because the resource is intangible, competitors cannot easily imitate it. a. related constrained b. unrelated c. related linked d. dominant business

Q: Among the value-neutral incentives to diversify, some come from the firm's external environment while others are internal to the firm. External incentives to diversify include: a. the fact that other firms in an industry are diversifying. b. pressure from stockholders who are demanding that the firm diversify. c. changes in antitrust regulations and tax laws. d. a firm's low performance.

Q: Acquisitions to increase market power require that the firm have a(n) ____ diversification strategy. a. unrelated b. related c. dominant-business d. single-business