WPC 480 Final Gomez UPDATED
Questions and CORRECT Answers
Merger - CORRECT ANSWER - two firms agree to integrate their operations on a relatively
co-equal basis
ex:
at&t and time warner
JP morgan chase
Acquisition - CORRECT ANSWER - Controlling 100% interest to make acquired firm a
subsidiary business within its portfolio
ex:
Cisco
Chase
(Hostile) Takeover - CORRECT ANSWER - Target firm did not solicit the acquiring firm's
bid but they eventually agree
ex:
AOL and Time Warner
Bayer and Monsanto
Acquiring firms - CORRECT ANSWER - About zero return on the average
Acquired firms - CORRECT ANSWER - Often earn above-average returns
Advantages to acquisitions - CORRECT ANSWER - - it is a quick way to grow
- there can be synergistic gains
- acquire the necessary strategic capabilities
- overcomes barriers to entry
,- can choose a target that fits best
- Enhances reputation with finance providers
Disadvantages to acquisitons - CORRECT ANSWER - - can be very expensive
- synergies are not automatic
- can lead to cultural clashes
- there may be legal barriers to overcome
- All parts of the target are acquired (including its problems)
- requires good change management skills
Why are Acquisitions (mergers) done? - CORRECT ANSWER - - Increased market power
- Overcome entry barriers
- substitute for product development
- Change scope of business portfolio
- Managerial opportunism
Market power - CORRECT ANSWER - Bigger firms with more resources and capabilities
(and customers) may achieve increased market power
- can sell goods or services at prices above competitive levels
- can drive costs below those of competitors
Horizontal Acquisitions - CORRECT ANSWER - Acquisition of a firm in the same industry
(bigger, more resources)
Cost-based synergies - CORRECT ANSWER - - Buyer power
- economies of scale
Revenue-based synergies - CORRECT ANSWER - - Supplier Power
, - Monopoly-like advantages:
--Airlines
-- Cable
Vertical acquisitions - CORRECT ANSWER - Acquisitions of a supplier or distributor to the
firm
- Increases a firm's market power by controlling additional parts of the value chain
Entry barriers - CORRECT ANSWER - Factors associated with making it expensive and
difficult for new firms to gain market access
- Differentiated products
- Economies of scale
Differentiated products - CORRECT ANSWER - Differentiation (VW bought bugatti, bentley,
lamborghini, porsche, Ducati)
Economies of scale (and scope) - CORRECT ANSWER - Cost leadership (Buy competitor,
larger firm; walmart and jet.com)
Often reason behind cross-border acquisitions - CORRECT ANSWER - Cultural and political
differences (need local knowledge and initial foothold in new market)
Acquisitions to substitute for new product & capability development - CORRECT ANSWER -
Gain access to new products and capabilities
- Special (technological) capability
- Increase knowledge base:
-- Lower risk
Change firm scope - CORRECT ANSWER - Reduce dependence on one or more products or
markets (unattractive and mature markets)
Questions and CORRECT Answers
Merger - CORRECT ANSWER - two firms agree to integrate their operations on a relatively
co-equal basis
ex:
at&t and time warner
JP morgan chase
Acquisition - CORRECT ANSWER - Controlling 100% interest to make acquired firm a
subsidiary business within its portfolio
ex:
Cisco
Chase
(Hostile) Takeover - CORRECT ANSWER - Target firm did not solicit the acquiring firm's
bid but they eventually agree
ex:
AOL and Time Warner
Bayer and Monsanto
Acquiring firms - CORRECT ANSWER - About zero return on the average
Acquired firms - CORRECT ANSWER - Often earn above-average returns
Advantages to acquisitions - CORRECT ANSWER - - it is a quick way to grow
- there can be synergistic gains
- acquire the necessary strategic capabilities
- overcomes barriers to entry
,- can choose a target that fits best
- Enhances reputation with finance providers
Disadvantages to acquisitons - CORRECT ANSWER - - can be very expensive
- synergies are not automatic
- can lead to cultural clashes
- there may be legal barriers to overcome
- All parts of the target are acquired (including its problems)
- requires good change management skills
Why are Acquisitions (mergers) done? - CORRECT ANSWER - - Increased market power
- Overcome entry barriers
- substitute for product development
- Change scope of business portfolio
- Managerial opportunism
Market power - CORRECT ANSWER - Bigger firms with more resources and capabilities
(and customers) may achieve increased market power
- can sell goods or services at prices above competitive levels
- can drive costs below those of competitors
Horizontal Acquisitions - CORRECT ANSWER - Acquisition of a firm in the same industry
(bigger, more resources)
Cost-based synergies - CORRECT ANSWER - - Buyer power
- economies of scale
Revenue-based synergies - CORRECT ANSWER - - Supplier Power
, - Monopoly-like advantages:
--Airlines
-- Cable
Vertical acquisitions - CORRECT ANSWER - Acquisitions of a supplier or distributor to the
firm
- Increases a firm's market power by controlling additional parts of the value chain
Entry barriers - CORRECT ANSWER - Factors associated with making it expensive and
difficult for new firms to gain market access
- Differentiated products
- Economies of scale
Differentiated products - CORRECT ANSWER - Differentiation (VW bought bugatti, bentley,
lamborghini, porsche, Ducati)
Economies of scale (and scope) - CORRECT ANSWER - Cost leadership (Buy competitor,
larger firm; walmart and jet.com)
Often reason behind cross-border acquisitions - CORRECT ANSWER - Cultural and political
differences (need local knowledge and initial foothold in new market)
Acquisitions to substitute for new product & capability development - CORRECT ANSWER -
Gain access to new products and capabilities
- Special (technological) capability
- Increase knowledge base:
-- Lower risk
Change firm scope - CORRECT ANSWER - Reduce dependence on one or more products or
markets (unattractive and mature markets)
