• San Jose State University

• BUS1 21

CHAPTER 1

THEORIES | True or False

True 1. When two entities competing in the same industry combine, it is called a horizontal

business combination.

False 2. Horizontal business combinations are likely to occur when management is attempting

to dominate a geographic segment of the market.

Note: Management also attempts to dominate an industry.

True 3. One way that a horizontal business combination can increase sales for an entity is to

expand into new product markets.

True 4. A vertical business combination generally involves companies attempting to improve

the efficiency of operations by purchasing suppliers of inputs or purchasers of outputs.

False 5. When a retail clothing store purchases a competitor in another city, a vertical

combination has occurred.

Note: This is horizontal combination.

True 6. A vertical combination is one where the entities have a potential buyer-seller

relationship.

False 7. A business combination in which a supplier of raw materials is acquired is a

conglomerate combination.

Note: This is vertical combination.

True 8. A conglomerate combination is often undertaken to help increase income stability due

to diversifying the asset base of an entity.

True 9. Conglomerate combinations are easy for the government to challenge in court.

Note: True because of unrelated industries in conglomerate combinations.

True 10. If negotiation between management groups leads to a mutually agreeable business

combination, the process is called a friendly takeover.

Note: It may be acquisition of a 2/3 or ¾ positive vote.

True 11. An offer by an acquirer to buy the stock of another company is commonly called a

tender offer.

True 12. A tender offer that is opposed by the acquiree management is called a hostile bid.

False 13. Greenmail exists when a company is encouraged to buy a potential acquiree.

Note: Greenmail is the payment of a price above market value to acquire stock back

from a potential acquirer.

False 14. A poison pill is the term used to describe the issuance of a special kind of convertible

preferred stock to deter the acquisition of the company.

False 15. The sale of the crown jewels defensive maneuver involves the sale of more assets than

does the scorched earth defense.

True 16. The fatman defensive maneuver involved the acquisition of assets by the potential

acquiree.

False 17. Golden parachutes give a bonus to all employees if the company is acquired.

Note: Only the company executives will receive the bonus.

True 18. The packman defensive maneuver is where a potential acquiree attempts to purchase

the acquirer.

True 19. A business combination occurs when one entity gains control over the net assets of

another entity.

False 20. The only way to attain control over the net assets of another entity is to purchase the

net assets.

Note: It may also be by purchasing the acquiree’s voting common stock that represents

the ownership of the assets.

False 21. In an acquisition where the acquirer pays cash for the acquiree assets, the book value

of the acquirer increases.

Note: Amount of cash is equal to the net assets of the acquirer, or the book value is still

the same.

True 22. In an acquisition of assets for assets, the ownership structure of the acquiree does not

change.

False 23. In an acquisition of assets for assets, the ownership structure of the acquirer changes.

Note: No because there is no exchange of stocks.

True 24. There is an increase in the total capitalization of an acquirer when the acquirer issues