WPC 480 Final – Gomez Exam Questions
and Answers
merger ii- iiAnswers ii-a iistrategy iithrough iiwhich iitwo iifirms iiagree iito iiintegrate iitheir
iioperations iion iia iirelatively iicoequal iibasis
•AT&T iiand iiTime iiWarner ii-WarnerMedia ii(2018)
•Chrysler iiand iiFiat ii- iiFCA ii(2014)
•Chrysler iiand iiDaimler ii- iiDaimlerChrysler ii(1998)
•JP iiMorgan iiChase ii(2000)
•Exxon iiand iiMobil ii- iiExxonMobil ii(1996)
acquisition ii- iiAnswers ii-a iistrategy iithrough iiwhich iione iifirm iibuys iia iicontrolling, iior ii100
iipercent, iiinterest iiin iianother iifirm iiwith iithe iiintent iiof iimaking iithe iiacquired iifirm iia
iisubsidiary iibusiness iiwithin iiits iiportfolio
•Cisco
•Chase ii(Chemical iiBank ii1996, iiBanc iiOne ii1998, iiWashington iiMutual, ii2008)
takeover ii- iiAnswers ii-a iispecial iitype iiof iiacquisition iiwhere iithe iitarget iifirm iidoes iinot
iisolicit iithe iiacquiring iifirm's iibid; iithus, iitakeovers iiare iiunfriendly iiacquisitions
(Hostile)
•AOL iiand iiTime iiWarner
•Bayer iiand iiMonsanto ii(2018)
Reversing iiAcquisitions: iiRestructuring ii- iiAnswers ii-a iistrategy iithrough iiwhich iia iifirm
iichanges iiits iiset iiof iibusinesses iior iiits iifinancial iistructure
-Failure iiof iian iiacquisition iistrategy iioften iiprecedes iia iirestructuring iistrategy
-Restructuring iimay iialso iioccur iibecause iiof iichanges iiin iithe iiexternal iienvironment
•Downscoping, iiDownsizing, iiLeveraged iibuy-out
International iiStrategy ii- iiAnswers ii-a iistrategy iithrough iiwhich iithe iifirm iisells iiits iigoods
iior iiservices iioutside iiits iidomestic iimarket
multidomestic iistrategy ii- iiAnswers ii-an iiinternational iistrategy iiin iiwhich iistrategic iiand
iioperating iidecisions iiare iidecentralized iito iithe iistrategic iibusiness iiunits iiin iiindividual
iicountries iior iiregions iifor iiallowing iieach iiunit iithe iiopportunity iito iitailor iiproducts iito iithe
iilocal iimarket
,global iistrategy ii- iiAnswers ii-an iiinternational iistrategy iiin iiwhich iia iifirm's iihome iioffice
iidetermines iithe iistrategies iithat iibusiness iiunits iiare iito iiuse iiin iieach iicountry iior iiregion
transnational iistrategy ii- iiAnswers ii-an iiinternational iistrategy iithrough iiwhich iithe iifirm
iiseeks iito iiachieve iiboth iiglobal iiefficiency iiand iilocal iiresponsiveness
greenfield iiventure ii- iiAnswers ii-an iientry iimode iithrough iiwhich iia iifirm iiinvests iidirectly
iiin iianother iicountry iior iimarket iiby iiestablishing iia iinew iiwholly iiowned iisubsidiary
international iidiversification iistrategy ii- iiAnswers ii-a iistrategy iithrough iiwhich iia iifirm
iiexpands iithe iisales iiof iiits iigoods iior iiservices iiacross iithe iiborders iiof iiglobal iiregions
iiand iicountries iiinto iia iipotentially iilarge iinumber iiof iigeographic iilocations iior iimarkets
Corporate iiGovernance ii- iiAnswers ii-the iiset iiof iimechanisms iiused iito iimanage iithe
iirelationships iiamong iistakeholders iiand iito iidetermine iiand iicontrol iithe iistrategic
iidirection iiand iiperformance iiof iiorganizations
-Concerned iiwith iiidentifying iiways iito iiensure iithat iistrategic iidecisions iiare iimade iimore
iieffectively
-"how iifirms iishould iibe iirun"
agency iirelationship ii- iiAnswers ii-exists iiwhen iione iiparty iidelegates iidecision-making
iiresponsibility iito iia iisecond iiparty iifor iicompensation
Managerial iiOpportunism ii- iiAnswers ii-the iiseeking iiof iiself-interest iiwith iiguile ii(i.e.,
iicunning iior iideceit)
Prevents iithe iimaximization iiof iishareholder iiwealth ii(the iiprimary iigoal iiof
iiowner/principals) iiand iileads iito:
Agency iiCosts
- iiFinancial iilosses iifrom iiself-interested iidecision iimaking iiplus iithe iicosts iiof
iiincentivizing iiand iimonitoring iimanagers
How iito iilimit iiagency iicosts?
-Monitor iimanagers ii(making iisure iithey iido iiwhat iiowners iiwant)
Owners iiand iiboard iiof iidirectors
-Incentivize iithem
-Market iifor iicorporate iicontrol
Agency iicosts ii- iiAnswers ii-the iisum iiof iiincentive iicosts, iimonitoring iicosts, iienforcement
iicosts, iiand iiindividual iifinancial iilosses iiincurred iiby iiprincipals iibecause iigovernance
iimechanisms iicannot iiguarantee iitotal iicompliance iiby iithe iiagent
,Ownership iiConcentration ii- iiAnswers ii-defined iiby iithe iinumber iiof iilarge-block
iishareholders iiand iithe iitotal iipercentage iiof iithe iifirm's iishares iithey iiown
Large-block iishareholders ii- iiAnswers ii-typically iiown iiat iileast ii5 iipercent iiof iia
iicompany's iiissued iishares
Institutional iiowners ii- iiAnswers ii-financial iiinstitutions, iisuch iias iimutual iifunds iiand
iipension iifunds, iithat iicontrol iilarge-block iishareholder iipositions
Board iiof iidirectors ii- iiAnswers ii-a iigroup iiof iielected iiindividuals iiwhose iiprimary
iiresponsibility iiis iito iiact iiin iithe iiowners' iibest iiinterests iiby iiformally iimonitoring iiand
iicontrolling iithe iifirm's iitop iilevel iimanagers
Executive iicompensation ii- iiAnswers ii-a iigovernance iimechanism iithat iiseeks iito iialign
iithe iiinterests iiof iimanagers iiand iiowners iithrough iisalaries, iibonuses, iiand iilong-term
iiincentives iisuch iias iistock iiawards iiand iioptions
"market iifor iicorporate iicontrol ii- iiAnswers ii-an iiexternal iigovernance iimechanism iithat iiis
iiactive iiwhen iia iifirm's iiinternal iigovernance iimechanisms iifail.
composed iiof iiindividuals iiand iifirms iithat iibuy iiownership iipositions iiin iior iipurchase iiall
iiof iipotentially iiundervalued iicorporations iitypically iifor iithe iipurpose iiof iiforming iinew
iidivisions iiin iiestablished iicompanies iior iimerging iitwo iipreviously iiseparate iifirms.
Acquiring iifirms ii- iiAnswers ii-About iizero iireturn iion iithe iiaverage
- iiToo iihigh iipremium ii(bidding iiwar, iioverconfidence, iiefficient iimarket iifor iicorporate
iicontrol)
Acquired iifirms ii- iiAnswers ii-Often iiearn iiabove-average iireturns
- iiPremium iipaid
So iiWhy iiAre iiAcquisitions ii(mergers) iiDone? ii- iiAnswers ii-•Increased iimarket iipower
•Overcome iientry iibarriers
•Substitute iifor iiproduct iidevelopment
•Change iiscope iiof iibusiness iiportfolio
•Managerial iiopportunism
Market iiPower ii- iiAnswers ii-Bigger iifirms iiwith iimore iiresources iiand iicapabilities ii(and
iicustomers) iimay iiachieve iiincreased iimarket iipower
-Can iisell iigoods iior iiservices iiat iiprices iiabove iicompetitive iilevels
-Can iidrive iicosts iibelow iithose iiof iicompetitors
, Horizontal iiand iiVertical iiAcquisitions
Horizontal iiAcquisitions ii- iiAnswers ii-Acquisition iiof iia iifirm iiin iithe iisame iiindustry
ii(bigger, iimore iiresources):
- iiCost-based iisynergies
----Buyer iipower
----Economies iiof iiscale
- iiRevenue-based iisynergies
----Supplier iiPower
----Monopoly-like iiadvantages
------Airlines ii(US iiAirways/American) ii------Cable ii(Comcast/AT&T iiBroadband, iiCharter
iiCommunications iibought iiTime iiWarner iiCable iiand iiBrighthouse)
Vertical iiAcquisitions ii- iiAnswers ii-Acquisition iiof iia iisupplier iior iidistributor iito iithe iifirm
- iiIncreases iia iifirm's iimarket iiIncreases iia iifirm's iimarket iipower iiby iicontrolling
iiadditional iipower iiby iicontrolling iiadditional iiparts iiof iithe iivalue iichain
How iidoes iithis iiwork iifor iiAT&T ii(cable, iiwireless) iiand iiTime iiWarner ii(content)?
Entry iiBarriers ii- iiAnswers ii-Factors iiassociated iiwith iimaking iiit iiexpensive iiand iidifficult
iifor iinew iifirms iito iigain iimarket iiaccess
Differentiated iiproducts-Differentiation ii(VW iibought iiBugatti, iiBentley, iiLamborghini,
iiPorsche, iiDucati)
Economies iiof iiscale ii(and iiscope)-Cost iileadership ii(buy iicompetitor, iilarger iifirm;
iiWalmart iiand iiJet.com)
Acquisitions iiTo iiOvercome iiEntry iiBarriers ii- iiAnswers ii-Entry iiBarriers
Also iioften iithe iireason iibehind iicross-border iiacquisitions
-Cultural iiand iipolitical iidifferences ii(need iilocal iiknowledge iiand iiinitial iifoothold iiin iinew
iimarket)
•ChemChina iibought iiPirelli ii(2015)
•PepsiCo iibought iiWimm-Bill-Dann iiFoods iiOAO ii(2011)
•Santander iibought iiPolish iiBank iiZachodni iiWBK iiSA ii(2011)
Acquisitions iiTo iiSubstitute iiFor iiNew iiProduct ii& iiCapability iiDevelopment ii- iiAnswers ii-
Gain iiaccess iito iinew iiproducts iiand iicapabilities ii
-Special ii(technological) iicapability ii
-Increase iiknowledge iibase
and Answers
merger ii- iiAnswers ii-a iistrategy iithrough iiwhich iitwo iifirms iiagree iito iiintegrate iitheir
iioperations iion iia iirelatively iicoequal iibasis
•AT&T iiand iiTime iiWarner ii-WarnerMedia ii(2018)
•Chrysler iiand iiFiat ii- iiFCA ii(2014)
•Chrysler iiand iiDaimler ii- iiDaimlerChrysler ii(1998)
•JP iiMorgan iiChase ii(2000)
•Exxon iiand iiMobil ii- iiExxonMobil ii(1996)
acquisition ii- iiAnswers ii-a iistrategy iithrough iiwhich iione iifirm iibuys iia iicontrolling, iior ii100
iipercent, iiinterest iiin iianother iifirm iiwith iithe iiintent iiof iimaking iithe iiacquired iifirm iia
iisubsidiary iibusiness iiwithin iiits iiportfolio
•Cisco
•Chase ii(Chemical iiBank ii1996, iiBanc iiOne ii1998, iiWashington iiMutual, ii2008)
takeover ii- iiAnswers ii-a iispecial iitype iiof iiacquisition iiwhere iithe iitarget iifirm iidoes iinot
iisolicit iithe iiacquiring iifirm's iibid; iithus, iitakeovers iiare iiunfriendly iiacquisitions
(Hostile)
•AOL iiand iiTime iiWarner
•Bayer iiand iiMonsanto ii(2018)
Reversing iiAcquisitions: iiRestructuring ii- iiAnswers ii-a iistrategy iithrough iiwhich iia iifirm
iichanges iiits iiset iiof iibusinesses iior iiits iifinancial iistructure
-Failure iiof iian iiacquisition iistrategy iioften iiprecedes iia iirestructuring iistrategy
-Restructuring iimay iialso iioccur iibecause iiof iichanges iiin iithe iiexternal iienvironment
•Downscoping, iiDownsizing, iiLeveraged iibuy-out
International iiStrategy ii- iiAnswers ii-a iistrategy iithrough iiwhich iithe iifirm iisells iiits iigoods
iior iiservices iioutside iiits iidomestic iimarket
multidomestic iistrategy ii- iiAnswers ii-an iiinternational iistrategy iiin iiwhich iistrategic iiand
iioperating iidecisions iiare iidecentralized iito iithe iistrategic iibusiness iiunits iiin iiindividual
iicountries iior iiregions iifor iiallowing iieach iiunit iithe iiopportunity iito iitailor iiproducts iito iithe
iilocal iimarket
,global iistrategy ii- iiAnswers ii-an iiinternational iistrategy iiin iiwhich iia iifirm's iihome iioffice
iidetermines iithe iistrategies iithat iibusiness iiunits iiare iito iiuse iiin iieach iicountry iior iiregion
transnational iistrategy ii- iiAnswers ii-an iiinternational iistrategy iithrough iiwhich iithe iifirm
iiseeks iito iiachieve iiboth iiglobal iiefficiency iiand iilocal iiresponsiveness
greenfield iiventure ii- iiAnswers ii-an iientry iimode iithrough iiwhich iia iifirm iiinvests iidirectly
iiin iianother iicountry iior iimarket iiby iiestablishing iia iinew iiwholly iiowned iisubsidiary
international iidiversification iistrategy ii- iiAnswers ii-a iistrategy iithrough iiwhich iia iifirm
iiexpands iithe iisales iiof iiits iigoods iior iiservices iiacross iithe iiborders iiof iiglobal iiregions
iiand iicountries iiinto iia iipotentially iilarge iinumber iiof iigeographic iilocations iior iimarkets
Corporate iiGovernance ii- iiAnswers ii-the iiset iiof iimechanisms iiused iito iimanage iithe
iirelationships iiamong iistakeholders iiand iito iidetermine iiand iicontrol iithe iistrategic
iidirection iiand iiperformance iiof iiorganizations
-Concerned iiwith iiidentifying iiways iito iiensure iithat iistrategic iidecisions iiare iimade iimore
iieffectively
-"how iifirms iishould iibe iirun"
agency iirelationship ii- iiAnswers ii-exists iiwhen iione iiparty iidelegates iidecision-making
iiresponsibility iito iia iisecond iiparty iifor iicompensation
Managerial iiOpportunism ii- iiAnswers ii-the iiseeking iiof iiself-interest iiwith iiguile ii(i.e.,
iicunning iior iideceit)
Prevents iithe iimaximization iiof iishareholder iiwealth ii(the iiprimary iigoal iiof
iiowner/principals) iiand iileads iito:
Agency iiCosts
- iiFinancial iilosses iifrom iiself-interested iidecision iimaking iiplus iithe iicosts iiof
iiincentivizing iiand iimonitoring iimanagers
How iito iilimit iiagency iicosts?
-Monitor iimanagers ii(making iisure iithey iido iiwhat iiowners iiwant)
Owners iiand iiboard iiof iidirectors
-Incentivize iithem
-Market iifor iicorporate iicontrol
Agency iicosts ii- iiAnswers ii-the iisum iiof iiincentive iicosts, iimonitoring iicosts, iienforcement
iicosts, iiand iiindividual iifinancial iilosses iiincurred iiby iiprincipals iibecause iigovernance
iimechanisms iicannot iiguarantee iitotal iicompliance iiby iithe iiagent
,Ownership iiConcentration ii- iiAnswers ii-defined iiby iithe iinumber iiof iilarge-block
iishareholders iiand iithe iitotal iipercentage iiof iithe iifirm's iishares iithey iiown
Large-block iishareholders ii- iiAnswers ii-typically iiown iiat iileast ii5 iipercent iiof iia
iicompany's iiissued iishares
Institutional iiowners ii- iiAnswers ii-financial iiinstitutions, iisuch iias iimutual iifunds iiand
iipension iifunds, iithat iicontrol iilarge-block iishareholder iipositions
Board iiof iidirectors ii- iiAnswers ii-a iigroup iiof iielected iiindividuals iiwhose iiprimary
iiresponsibility iiis iito iiact iiin iithe iiowners' iibest iiinterests iiby iiformally iimonitoring iiand
iicontrolling iithe iifirm's iitop iilevel iimanagers
Executive iicompensation ii- iiAnswers ii-a iigovernance iimechanism iithat iiseeks iito iialign
iithe iiinterests iiof iimanagers iiand iiowners iithrough iisalaries, iibonuses, iiand iilong-term
iiincentives iisuch iias iistock iiawards iiand iioptions
"market iifor iicorporate iicontrol ii- iiAnswers ii-an iiexternal iigovernance iimechanism iithat iiis
iiactive iiwhen iia iifirm's iiinternal iigovernance iimechanisms iifail.
composed iiof iiindividuals iiand iifirms iithat iibuy iiownership iipositions iiin iior iipurchase iiall
iiof iipotentially iiundervalued iicorporations iitypically iifor iithe iipurpose iiof iiforming iinew
iidivisions iiin iiestablished iicompanies iior iimerging iitwo iipreviously iiseparate iifirms.
Acquiring iifirms ii- iiAnswers ii-About iizero iireturn iion iithe iiaverage
- iiToo iihigh iipremium ii(bidding iiwar, iioverconfidence, iiefficient iimarket iifor iicorporate
iicontrol)
Acquired iifirms ii- iiAnswers ii-Often iiearn iiabove-average iireturns
- iiPremium iipaid
So iiWhy iiAre iiAcquisitions ii(mergers) iiDone? ii- iiAnswers ii-•Increased iimarket iipower
•Overcome iientry iibarriers
•Substitute iifor iiproduct iidevelopment
•Change iiscope iiof iibusiness iiportfolio
•Managerial iiopportunism
Market iiPower ii- iiAnswers ii-Bigger iifirms iiwith iimore iiresources iiand iicapabilities ii(and
iicustomers) iimay iiachieve iiincreased iimarket iipower
-Can iisell iigoods iior iiservices iiat iiprices iiabove iicompetitive iilevels
-Can iidrive iicosts iibelow iithose iiof iicompetitors
, Horizontal iiand iiVertical iiAcquisitions
Horizontal iiAcquisitions ii- iiAnswers ii-Acquisition iiof iia iifirm iiin iithe iisame iiindustry
ii(bigger, iimore iiresources):
- iiCost-based iisynergies
----Buyer iipower
----Economies iiof iiscale
- iiRevenue-based iisynergies
----Supplier iiPower
----Monopoly-like iiadvantages
------Airlines ii(US iiAirways/American) ii------Cable ii(Comcast/AT&T iiBroadband, iiCharter
iiCommunications iibought iiTime iiWarner iiCable iiand iiBrighthouse)
Vertical iiAcquisitions ii- iiAnswers ii-Acquisition iiof iia iisupplier iior iidistributor iito iithe iifirm
- iiIncreases iia iifirm's iimarket iiIncreases iia iifirm's iimarket iipower iiby iicontrolling
iiadditional iipower iiby iicontrolling iiadditional iiparts iiof iithe iivalue iichain
How iidoes iithis iiwork iifor iiAT&T ii(cable, iiwireless) iiand iiTime iiWarner ii(content)?
Entry iiBarriers ii- iiAnswers ii-Factors iiassociated iiwith iimaking iiit iiexpensive iiand iidifficult
iifor iinew iifirms iito iigain iimarket iiaccess
Differentiated iiproducts-Differentiation ii(VW iibought iiBugatti, iiBentley, iiLamborghini,
iiPorsche, iiDucati)
Economies iiof iiscale ii(and iiscope)-Cost iileadership ii(buy iicompetitor, iilarger iifirm;
iiWalmart iiand iiJet.com)
Acquisitions iiTo iiOvercome iiEntry iiBarriers ii- iiAnswers ii-Entry iiBarriers
Also iioften iithe iireason iibehind iicross-border iiacquisitions
-Cultural iiand iipolitical iidifferences ii(need iilocal iiknowledge iiand iiinitial iifoothold iiin iinew
iimarket)
•ChemChina iibought iiPirelli ii(2015)
•PepsiCo iibought iiWimm-Bill-Dann iiFoods iiOAO ii(2011)
•Santander iibought iiPolish iiBank iiZachodni iiWBK iiSA ii(2011)
Acquisitions iiTo iiSubstitute iiFor iiNew iiProduct ii& iiCapability iiDevelopment ii- iiAnswers ii-
Gain iiaccess iito iinew iiproducts iiand iicapabilities ii
-Special ii(technological) iicapability ii
-Increase iiknowledge iibase
