Review Questions

True/False Questions
Introduction
6.1 Due diligence of the target firm takes place once it has been purchased. T or F?
6.2 Due diligence is simply an audit as required to be undertaken by companies each year for
reporting purposes. T or F?
6.3 A key focus of regulatory due diligence is on the future integration of the target. T or F?
6.4 A deal breaker is a clause in the purchase agreement allowing the buyer to walk away from the
transaction. T or F?
6.5 One of the major problems with due diligence is the time constraint under which the process is
carried out. T or F?
Critical Value Drivers
6.6 ritical !alue dri!ers are identified elements in the target firm that will form the basis of the
!alue enhancements from integrating the two companies or groups. T or F?
6. "ore mergers fail due to differences in culture# management and principles than through failures
to properly carry out the integration of the target company. T or F?
6.! $n the pharmaceutical industry# the mergers in the late %&'(s and %&&(s failed to realise !alue
because acquirers paid too little attention to differences in the target firm)s history# management
style and people. T or F?
6." The culture of acquisitions with its aggressi!e language promulgates a !ictor mentality among
the buyer)s management and a resistant attitude among the target)s management. T or F?
6.1# A takeo!er leads to change# some of which is seen as undesirable from the perspecti!e of the
target)s management and employees. T or F?
T$e Value o% &ew In%or'ation
6.11 The !alue of new information lies in how much it may alter the original decision
or assessment. T or F?
6.12 $f the original probabilities of a fa!ourable outcome were (.*+ and (.,+ respecti!ely and new
information pro!ides conditional information estimates of (.'% and (.%& respecti!ely# then the new
posterior probabilities will be (.&- and (.(* respecti!ely. T or F?
Due Dili(ence C$ec)lists
6.13 The due diligence checklist is a statutory obligation placed upon firms when acquiring other
firms. T or F?
6.14 hecklists are promoted by e.ternal ad!isors taking part in the due diligence process. T or F?
"ateriality
6.15 "ateriality is the tangible substance of the target firm)s assets and liabilities. T or F?
6.16 A common rule of thumb states that an item is material if it affects the results of the due
diligence process. T or F?
6.1 "ateriality can only be determined by the application of numerical thresholds. T or F?
6.1! $ndi!idual non/material items can be material when aggregated. T or F?
*ulti+le,C$oice Questions
Introduction
6.2 0hich of the following is correct? 1egulatory due diligence aims to2
A ensure that the target firm complies with the appropriate rules and regulations.
3 check that the target firm has the stated reported accounting !alues fromthe financial statements.
make certain it owns intellectual property and other non/physical assets.
D perform all of the actions A# 3 and .
6.2! The problems in adopting a stand/alone approach to the due diligence process are that it2
$ fails to recognise where !alue is being created.
$$ relies on e.ternal assessments of !alue.
$$$ ignores the problems of integration.
$4 fails to analyse the !alue enhancements from the acquisition.
4 relies on a going/concern !aluation.
0hich is correct?
A $# $$# $$$ and $4.
3 $# $$$# $4 and 4.
$$# and $$$.
D All of $# $$# $$$# $4 and 4.
6.2" 0hich of the following is correct? The due diligence team will include2
A managers from the acquiring company.
3 e.ternal ad!isors appointed by the acquiring company.
technical specialists appointed by the acquiring company.
D all of A# 3 and .
6.3# 0hich of the following is correct? The objecti!e of the due diligence process is to2
A !alidate the target)s e.isting assets and liabilities.
3 e.amine the target)s !alue dri!ers.
assess any integration problems between the two firms.
D perform all of the actions A# 3 and .
6.31 $n analysing an acquisition during the due diligence phase# the in!estigati!e
team will e.amine2
$ the target)s compliance with statutory requirements.
$$ the target)s assets and liabilities.
$$$ the target)s market and business conditions.
$4 contracts made by the target.
4 the target)s en!ironmental liabilities.
0hich of the abo!e does not require ha!ing access to proprietary information
at the target? $s it2
A $ and $$$?
3 $ and 4?
$$$ and 4?
D all of $# $$# $$$# $4 and 4?
6.32 omplete the following from the options pro!ided. $n making an acquisition of
a firm# an acquirer needs to be particularly concerned by as this can be a threat to . 0hich of the
following is correct?
A high technology compatible products business !iability
3 ser!ices compatible products integration
financial ser!ices compatible products business !iability
D manufacturing compatible products integration
ritical 4alue Dri!ers
6.33 $n analysing the critical !alue factors during the due diligence process# which of
the following is considered a soft !alue factor?
A the target firm)s remuneration policies.
3 incompatible technology or systems at the target firm.
the target firm)s management style.
D conflicting allegiances from combining the two firms.
6.34 5.tracting !alue from an acquisition is subject to a number of problems. These
include2
$ identifying redundant assets in the target.
$$ the target management)s attitude to the takeo!er.
$$$ poor integration planning.
$4 disappointed shareholders.
0hich of the following represents the two factors that cause the most problems
in an acquisition?
A $ and $$.
3 $$ and $$$.
$ and $$$.
D $$ and $4.
6.35 0hich of the following applies? orporate disruption following an acquisition can lead to
A the transfer of resources from the target firm to the acquirer.
3 a loss of focus and strategic direction from the combined group.
a dysfunctional corporate culture.
D all of A# 3 and .
T$e Value o% &ew In%or'ation
6.36 6iTec $nc. is re!iewing the potential for making an acquisition. 7ooking ahead# the company
considers it has two potential strategies2 organic growth which would work well if the market for its
product remains relati!ely static and an acquisition# which would allow the company to buy/in
capacity and hence e.pand rapidly. $f the market for its UrbanBlasters turns out to be high growth#
the organic growth strategy will yield a net gain of 8*( million9 but if the market turns out to be low
growth it will yield a loss of 8%( million. 0ith the acquisition strategy# 6iTec $nc. will gain a net
8,+( million if the market is high growth# but a loss of 8:( million if it is low growth. The
company)s managers consider there is a :+ per cent likelihood of high growth in the demand for
;rban3lasters. 0hat are the e.pected !alues of the two strategies?
A organic growth 54 < 8:( million# acquisition 54 < 8%&( million.
3 organic growth 54 < 8=, million# acquisition 54 < 8%=, million.
organic growth 54 < 8%= million# acquisition 54 < 8-- million.
D organic growth 54 < 8%- million# acquisition 54 < 8=( million.
6.3 During due diligence of the target company# 6iTec $nc. disco!ers that# without
new technology# the technicians at the company consider there is little prospect
of the ;rban3laster ha!ing high growth without the inclusion of the target
firm)s proprietary technology.
0hat will be the re!ised e.pected !alue for the acquisition gi!en in question
:.-:# if 6iTec $nc. obtains the following new information from the target
company?
A 54 < 8%&' million
3 54 < 8%*+ million
54 < 8%+* million
D 54 < 8%=, million
6.3! 0hat is the efficiency of the new information deri!ed from questions :.-: and :.-*? $s it?
A ,'.% per cent.
3 -&.% per cent.
=,., per cent.
D '+.* per cent.
6.3" $f the initial estimate in a gi!en uncertain decision is for A < (.:+ and 3 < (.-+#
gi!en new information about the likelihood of A and 3 is (.* and (.- respecti!ely#
which of the following are the posterior probabilities for A and 3?
A A < (.+- and 3 < (.=*.
3 A < (.+: and 3 < (.==.
A < (.:+ and 3 < (.-+.
D A < (.'% and 3 < (.%&.
6.4# Arbuthnot Technology is considering whether to pursue a target firm it has identified as a
potential acquisition. $t has two possible strategies2 continue to grow as a stand/alone business#
which would work well if the market for its product remains relati!ely stable or pursue the
acquisition of 3lume Technologies# which would allow Arbuthnot Technology to buy/in capacity
and hence e.pand rapidly. $f the market for its new communicator# the AT/=( is high growth# the
organic growth strategy will yield a net gain of >%(( million# but if it is low growth it will yield only
>:( million. 3y buying 3lume Technology Arbuthnot will gain a net >,(( million if the market
turns out to be high growth# but a loss of >,( million if it is low growth. The company)s managers
consider there is only a -( per cent likelihood of high growth in demand in the future for its AT/=(
product. 0hat are the e.pected !alues of the two strategies?
A organic growth 54 < >=( million# acquisition 54 < >*, million.
3 organic growth 54 < >=+ million# acquisition 54 < >,( million.
organic growth 54 < >,' million# acquisition 54 < >&( million.
D organic growth 54 < >*, million# acquisition 54 < >=( million.
6.41 0hich of the following will be the re!ised e.pected !alue for the acquisition gi!en in question
:.=( if Arbutnot Technology obtains the following new information from the target company?
A 54 < >%&' million
3 54 < >%&% million
54 < >%': million
D 54 < >%*, million
6.42 6owe!er# new information is made a!ailable about the growth prospects should Arbuthnot
Technology acquire 3lume Technology and obtains the target firm)s new technology for its AT/=(
product. The new information is gi!en in the table below and suggests that
0hat will be the re!ised e.pected !alue for the decision to pursue the acquisition of 3lume
Technology gi!en in question :.=% gi!en the new information abo!e about the new technology
benefits a!ailable from the target company?
A 54 < >+ million
3 54 < >-: million
54 < >&% million
D 54 < >%(= million
6.43 0hat is the efficiency of the new information deri!ed from questions :.=% and
:.=,? $s it?
A ,:.= per cent.
3 :-.- per cent.
*&.% per cent.
D '&., per cent.
*aterialit-
6.44 0hich of the following is correct? ?uantitati!e materiality in!ol!es2
A counting indi!idual items within the conte.t of the acquisition as a whole.
3 setting error limits in terms of quantities or monetary !alue.
ignoring items that ha!e small monetary !alues.
D all of the abo!e.
6.45 0hich of the following is correct? An item can be considered material if2
A knowledge of the item will alter a decision.
3 its misstatement would lead to significant financial loss.
its re!elation would lead to further in!estigation.
D All of A# 3 and .
6.46 The factors to be considered when determining materiality are
$ the monetary !alue of the item.
$$ whether the error arises from irregularities in reporting.
$$$ its financial impact.
$4 its effect on the acquirer)s strategy.
4 its additi!e effect on he total position.
0hich of the following is correct?
A $# $$# $$$ and $4.
3 $# $$$# $4 and 4.
$# $$# $$$.
D All of $# $$# $$$# $4 and 4.