WPC 480 Final Gomez UPDATED ACTUAL
Questions and CORRECT Answers
merger - CORRECT ANSWER - a strategy through which two firms agree to integrate
their operations on a relatively coequal basis
•AT&T and Time Warner -WarnerMedia (2018)
•Chrysler and Fiat - FCA (2014)
•Chrysler and Daimler - DaimlerChrysler (1998)
•JP Morgan Chase (2000)
•Exxon and Mobil - ExxonMobil (1996)
acquisition - CORRECT ANSWER - a strategy through which one firm buys a controlling,
or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary
business within its portfolio
•Cisco
•Chase (Chemical Bank 1996, Banc One 1998, Washington Mutual, 2008)
takeover - CORRECT ANSWER - a special type of acquisition where the target firm does
not solicit the acquiring firm's bid; thus, takeovers are unfriendly acquisitions
(Hostile)
•AOL and Time Warner
•Bayer and Monsanto (2018)
Reversing Acquisitions: Restructuring - CORRECT ANSWER - a strategy through which
a firm changes its set of businesses or its financial structure
-Failure of an acquisition strategy often precedes a restructuring strategy
,-Restructuring may also occur because of changes in the external environment
•Downscoping, Downsizing, Leveraged buy-out
International Strategy - CORRECT ANSWER - a strategy through which the firm sells its
goods or services outside its domestic market
multidomestic strategy - CORRECT ANSWER - an international strategy in which
strategic and operating decisions are decentralized to the strategic business units in individual
countries or regions for allowing each unit the opportunity to tailor products to the local market
global strategy - CORRECT ANSWER - an international strategy in which a firm's home
office determines the strategies that business units are to use in each country or region
transnational strategy - CORRECT ANSWER - an international strategy through which the
firm seeks to achieve both global efficiency and local responsiveness
greenfield venture - CORRECT ANSWER - an entry mode through which a firm invests
directly in another country or market by establishing a new wholly owned subsidiary
international diversification strategy - CORRECT ANSWER - a strategy through which a
firm expands the sales of its goods or services across the borders of global regions and countries
into a potentially large number of geographic locations or markets
Corporate Governance - CORRECT ANSWER - the set of mechanisms used to manage
the relationships among stakeholders and to determine and control the strategic direction and
performance of organizations
-Concerned with identifying ways to ensure that strategic decisions are made more effectively
-"how firms should be run"
,agency relationship - CORRECT ANSWER - exists when one party delegates decision-
making responsibility to a second party for compensation
Managerial Opportunism - CORRECT ANSWER - the seeking of self-interest with guile
(i.e., cunning or deceit)
Prevents the maximization of shareholder wealth (the primary goal of owner/principals) and
leads to:
Agency Costs
- Financial losses from self-interested decision making plus the costs of incentivizing and
monitoring managers
How to limit agency costs?
-Monitor managers (making sure they do what owners want)
Owners and board of directors
-Incentivize them
-Market for corporate control
Agency costs - CORRECT ANSWER - the sum of incentive costs, monitoring costs,
enforcement costs, and individual financial losses incurred by principals because governance
mechanisms cannot guarantee total compliance by the agent
Ownership Concentration - CORRECT ANSWER - defined by the number of large-block
shareholders and the total percentage of the firm's shares they own
Large-block shareholders - CORRECT ANSWER - typically own at least 5 percent of a
company's issued shares
, Institutional owners - CORRECT ANSWER - financial institutions, such as mutual funds
and pension funds, that control large-block shareholder positions
Board of directors - CORRECT ANSWER - a group of elected individuals whose primary
responsibility is to act in the owners' best interests by formally monitoring and controlling the
firm's top level managers
Executive compensation - CORRECT ANSWER - a governance mechanism that seeks to
align the interests of managers and owners through salaries, bonuses, and long-term incentives
such as stock awards and options
"market for corporate control - CORRECT ANSWER - an external governance mechanism
that is active when a firm's internal governance mechanisms fail.
composed of individuals and firms that buy ownership positions in or purchase all of potentially
undervalued corporations typically for the purpose of forming new divisions in established
companies or merging two previously separate firms.
Acquiring firms - CORRECT ANSWER - About zero return on the average
- Too high premium (bidding war, overconfidence, efficient market for corporate control)
Acquired firms - CORRECT ANSWER - Often earn above-average returns
- Premium paid
So Why Are Acquisitions (mergers) Done? - CORRECT ANSWER - •Increased market
power
•Overcome entry barriers
•Substitute for product development
Questions and CORRECT Answers
merger - CORRECT ANSWER - a strategy through which two firms agree to integrate
their operations on a relatively coequal basis
•AT&T and Time Warner -WarnerMedia (2018)
•Chrysler and Fiat - FCA (2014)
•Chrysler and Daimler - DaimlerChrysler (1998)
•JP Morgan Chase (2000)
•Exxon and Mobil - ExxonMobil (1996)
acquisition - CORRECT ANSWER - a strategy through which one firm buys a controlling,
or 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary
business within its portfolio
•Cisco
•Chase (Chemical Bank 1996, Banc One 1998, Washington Mutual, 2008)
takeover - CORRECT ANSWER - a special type of acquisition where the target firm does
not solicit the acquiring firm's bid; thus, takeovers are unfriendly acquisitions
(Hostile)
•AOL and Time Warner
•Bayer and Monsanto (2018)
Reversing Acquisitions: Restructuring - CORRECT ANSWER - a strategy through which
a firm changes its set of businesses or its financial structure
-Failure of an acquisition strategy often precedes a restructuring strategy
,-Restructuring may also occur because of changes in the external environment
•Downscoping, Downsizing, Leveraged buy-out
International Strategy - CORRECT ANSWER - a strategy through which the firm sells its
goods or services outside its domestic market
multidomestic strategy - CORRECT ANSWER - an international strategy in which
strategic and operating decisions are decentralized to the strategic business units in individual
countries or regions for allowing each unit the opportunity to tailor products to the local market
global strategy - CORRECT ANSWER - an international strategy in which a firm's home
office determines the strategies that business units are to use in each country or region
transnational strategy - CORRECT ANSWER - an international strategy through which the
firm seeks to achieve both global efficiency and local responsiveness
greenfield venture - CORRECT ANSWER - an entry mode through which a firm invests
directly in another country or market by establishing a new wholly owned subsidiary
international diversification strategy - CORRECT ANSWER - a strategy through which a
firm expands the sales of its goods or services across the borders of global regions and countries
into a potentially large number of geographic locations or markets
Corporate Governance - CORRECT ANSWER - the set of mechanisms used to manage
the relationships among stakeholders and to determine and control the strategic direction and
performance of organizations
-Concerned with identifying ways to ensure that strategic decisions are made more effectively
-"how firms should be run"
,agency relationship - CORRECT ANSWER - exists when one party delegates decision-
making responsibility to a second party for compensation
Managerial Opportunism - CORRECT ANSWER - the seeking of self-interest with guile
(i.e., cunning or deceit)
Prevents the maximization of shareholder wealth (the primary goal of owner/principals) and
leads to:
Agency Costs
- Financial losses from self-interested decision making plus the costs of incentivizing and
monitoring managers
How to limit agency costs?
-Monitor managers (making sure they do what owners want)
Owners and board of directors
-Incentivize them
-Market for corporate control
Agency costs - CORRECT ANSWER - the sum of incentive costs, monitoring costs,
enforcement costs, and individual financial losses incurred by principals because governance
mechanisms cannot guarantee total compliance by the agent
Ownership Concentration - CORRECT ANSWER - defined by the number of large-block
shareholders and the total percentage of the firm's shares they own
Large-block shareholders - CORRECT ANSWER - typically own at least 5 percent of a
company's issued shares
, Institutional owners - CORRECT ANSWER - financial institutions, such as mutual funds
and pension funds, that control large-block shareholder positions
Board of directors - CORRECT ANSWER - a group of elected individuals whose primary
responsibility is to act in the owners' best interests by formally monitoring and controlling the
firm's top level managers
Executive compensation - CORRECT ANSWER - a governance mechanism that seeks to
align the interests of managers and owners through salaries, bonuses, and long-term incentives
such as stock awards and options
"market for corporate control - CORRECT ANSWER - an external governance mechanism
that is active when a firm's internal governance mechanisms fail.
composed of individuals and firms that buy ownership positions in or purchase all of potentially
undervalued corporations typically for the purpose of forming new divisions in established
companies or merging two previously separate firms.
Acquiring firms - CORRECT ANSWER - About zero return on the average
- Too high premium (bidding war, overconfidence, efficient market for corporate control)
Acquired firms - CORRECT ANSWER - Often earn above-average returns
- Premium paid
So Why Are Acquisitions (mergers) Done? - CORRECT ANSWER - •Increased market
power
•Overcome entry barriers
•Substitute for product development
