Chapter 17: Mergers, Acquisitions, and Restructuring (CAIIB – Paper 3)
1. Which of the following is a characteristic of a horizontal merger?
A. Merger between firms at different stages of production
B. Merger between unrelated industries
C. Merger between firms in the same industry
D. Merger between parent company and subsidiary
A horizontal merger occurs between companies operating in the same industry and often in direct competition.
2. Which of the following is NOT a common reason for a merger?
A. Achieving economies of scale
B. Diversification of business
C. Tax benefits
D. Reducing employee morale
Reducing employee morale is a negative effect, not a reason for a merger. Common reasons include economies of scale, diversification, and tax benefits.
3. Which type of merger involves a company acquiring another company in its supply chain?
A. Horizontal merger
B. Vertical merger
C. Conglomerate merger
D. Reverse merger
A vertical merger occurs when a company merges with or acquires another company in its supply chain, either upstream or downstream.
4. Conglomerate mergers are primarily undertaken to:
A. Diversify business and reduce risk
B. Acquire direct competitors
C. Gain control over suppliers
D. Increase market share in the same industry
Conglomerate mergers involve companies from unrelated businesses to diversify operations and reduce overall business risk.
5. Which of the following is a financial reason for a merger?
A. Increasing market share
B. Expanding product lines
C. Tax benefits and better capital utilization
D. Improving employee satisfaction
Financial reasons for a merger include tax advantages, better use of capital, and access to cheaper finance.
6. Which of the following is an example of a reverse merger?
A. A parent company acquiring its subsidiary
B. A private company acquiring a publicly listed shell company
C. Two companies in the same industry merging
D. A company diversifying into unrelated business
A reverse merger occurs when a private company acquires a public company (often a shell company) to become publicly listed without an IPO.
7. In the mechanics of a merger, the first step typically involves:
A. Identifying potential merger candidates
B. Obtaining shareholder approval
C. Integrating operations
D. Valuing assets and liabilities
The first step in the mechanics of a merger is to identify potential merger candidates that align strategically and financially with the acquiring company.
8. Due diligence in a merger primarily aims to:
A. Announce the merger publicly
B. Verify financial, legal, and operational information
C. Merge the IT systems immediately
D. Select a new CEO for the merged company
Due diligence ensures that the acquiring company thoroughly reviews financial statements, legal obligations, contracts, and operational matters to avoid post-merger surprises.
9. One of the primary financial benefits of a merger is:
A. Higher employee turnover
B. Increased regulatory burden
C. Economies of scale and cost savings
D. Reduced product diversification
Mergers often result in cost savings through economies of scale, improved resource utilization, and operational efficiencies.
10. Which of the following is a potential cost or disadvantage of a merger?
A. Improved market share
B. Access to new technologies
C. Tax benefits
D. Integration challenges and cultural clashes
While mergers offer many benefits, they also carry costs such as cultural clashes, management conflicts, integration difficulties, and potential loss of key employees.
11. In a merger, goodwill is created when:
A. The purchase price exceeds the fair value of net assets acquired
B. Assets are undervalued on the balance sheet
C. Liabilities exceed the assets
D. Shareholders reject the merger proposal
Goodwill represents the excess of the purchase price paid in a merger over the fair value of the acquired company’s net identifiable assets.
12. Which step in the merger process involves combining operations and eliminating redundancies?
A. Due diligence
B. Post-merger integration
C. Identifying candidates
D. Valuation of assets
Post-merger integration is the stage where operations are combined, redundancies are removed, and synergies are realized.
13. The exchange ratio in a merger represents:
A. The ratio of market share of both companies
B. The ratio of liabilities to assets
C. The number of shares in the acquiring company to be exchanged for each share of the target company
D. The dividend ratio declared post-merger
The exchange ratio specifies how many shares of the acquiring company will be given in exchange for each share of the target company.
14. Which factor is most important in determining the exchange ratio?
A. Relative valuation of the two companies
B. Dividend declared in the previous year
C. Number of employees in each company
D. Age of the companies
The exchange ratio is based primarily on the relative valuation of the merging companies, considering factors like EPS, book value, and market value.
15. If Company A’s share is valued at ₹200 and Company B’s share at ₹100, and A acquires B, the fair exchange ratio would be:
A. 1:1
B. 1:2
C. 2:1
D. 3:1
Since Company A’s share is worth twice that of Company B, the fair exchange ratio is 1 share of A for 2 shares of B (1:2).
16. A merger exchange ratio that gives more shares to the target company’s shareholders than justified is termed:
A. Fair ratio
B. Diluted ratio
C. Aggressive ratio
D. Over-generous ratio
When shareholders of the target company are given more shares than the valuation justifies, it is called an over-generous exchange ratio.
17. Which of the following methods is often used to calculate exchange ratios in mergers?
A. Payback Period Method
B. EPS and Market Price Comparison
C. Internal Rate of Return
D. Residual Income Method
Exchange ratios are usually calculated using valuation methods based on EPS, book value, and market price comparisons.
18. When a company purchases only a division or plant of another company, it is generally termed as:
A. Conglomerate merger
B. Reverse merger
C. Asset purchase
D. Hostile takeover
Buying a plant, division, or specific assets of another company is considered an asset purchase, not a full merger or takeover.
19. In a hostile takeover, the acquiring company:
A. Attempts to gain control without the consent of the target company's management
B. Always negotiates with the target company's board of directors
C. Acquires only the assets, not the liabilities
D. Can proceed only with RBI approval
A hostile takeover happens when the acquiring company bypasses the target company’s management and directly approaches shareholders to gain control.
20. Which of the following strategies is often used by companies to defend against hostile takeovers?
A. Asset purchase
B. Leveraged buyout
C. Exchange ratio adjustment
D. Poison pill strategy
A poison pill is a defense mechanism where the target company makes its stock less attractive to a hostile bidder, often by allowing existing shareholders to buy more shares at a discount.
21. A leveraged buyout (LBO) is characterized by:
A. Use of only equity financing
B. Acquisition financed mainly through debt
C. Acquisition by issuing bonus shares
D. Only government-owned companies can attempt it
A leveraged buyout (LBO) involves financing an acquisition primarily with borrowed funds, with the assets of the acquired company often used as collateral.
22. Which of the following is a potential risk in a leveraged buyout?
A. Improved operational efficiency
B. Higher return on equity
C. Excessive debt burden on the acquired company
D. Increased managerial ownership
The biggest risk in an LBO is the high debt load, which can strain the acquired company’s cash flows and increase bankruptcy risk if revenues decline.
23. Which of the following is a common source of acquisition financing?
A. Dividend reinvestment plans
B. Employee stock options
C. Bank loans and debt instruments
D. Donations and grants
Acquisition financing is typically done through bank loans, bonds, or other debt instruments, along with equity.
24. What is the main advantage of using debt in acquisition financing?
A. Interest payments are tax deductible
B. No obligation to repay
C. It increases equity ownership
D. It reduces leverage
Debt financing provides a tax shield because interest payments are tax deductible, lowering the effective cost of borrowing.
25. Which financing option allows acquirers to raise funds by issuing additional ownership stakes?
A. Leveraged loans
B. Debentures
C. Bonds
D. Equity financing
Equity financing involves issuing new shares to investors, thereby raising capital in exchange for ownership stakes.
26. In a strategic alliance, companies typically aim to:
A. Merge into a single legal entity
B. Cooperate while remaining independent
C. Compete aggressively in the same market
D. Eliminate all risks of business
Business alliances allow firms to collaborate on specific objectives (like R&D or distribution) while remaining separate entities.
27. A joint venture is best described as:
A. A takeover of one company by another
B. A temporary licensing arrangement
C. A separate entity formed by two or more firms for a specific project
D. A merger of equals
In a joint venture, two or more companies create a new entity to undertake a particular project or business activity.
28. Which of the following is NOT a benefit of business alliances?
A. Shared resources
B. Access to new markets
C. Risk sharing
D. Complete loss of independence
Business alliances allow collaboration without full loss of independence. Losing independence completely is a characteristic of mergers, not alliances.
29. What is the primary focus of post-merger integration in managing acquisitions?
A. Achieving cultural, operational, and strategic alignment
B. Only reducing the workforce
C. Maintaining separate systems indefinitely
D. Avoiding financial reporting changes
Post-merger integration focuses on combining people, processes, and strategy to achieve expected synergies and long-term success.
30. Which of the following is a key risk in managing acquisitions?
A. Increased market share
B. Improved resource allocation
C. Cultural clashes between merging entities
D. Access to new technologies
One of the biggest challenges in acquisitions is cultural clashes, which can hinder integration and reduce expected benefits.
31. In acquisition management, synergy is best described as:
A. Increase in costs due to integration
B. Additional value created when two firms combine
C. Replacement of assets by divestiture
D. Increase in debt financing
Synergy refers to the incremental value created when two entities combine, exceeding the sum of their individual values.
32. A divestiture occurs when a company:
A. Issues new equity to investors
B. Acquires another firm
C. Raises funds via debt instruments
D. Sells a part of its business or assets
Divestiture is the process of selling a division, subsidiary, or asset to streamline operations or raise capital.
33. Which of the following is NOT a reason for divestiture?
A. To increase diversification of business lines
B. To focus on core business areas
C. To raise cash and improve liquidity
D. To reduce operational complexity
Divestitures are generally undertaken to streamline business focus, reduce complexity, and raise capital, not to increase diversification.
34. Spin-offs, split-offs, and equity carve-outs are examples of:
A. Acquisition strategies
B. Types of divestitures
C. Defensive takeover measures
D. Forms of debt restructuring
Spin-offs, split-offs, and carve-outs are types of divestitures where a company separates or sells part of its business to unlock value.
35. A holding company is best defined as:
A. A company formed only for government contracts
B. A company that engages only in manufacturing
C. A company that owns controlling interest in other companies
D. A company that provides only financial services
A holding company is an entity that owns enough voting stock in other companies to control their policies and management.
36. Which of the following is an advantage of creating a holding company structure?
A. Increased tax liability
B. Centralized control with limited liability
C. Elimination of all business risks
D. Automatic monopoly in the market
Holding companies allow centralized control of subsidiaries while limiting liability to the invested amount.
37. Which of the following is NOT a typical feature of a holding company?
A. It controls subsidiaries through majority shareholding
B. It may not engage in direct production activities
C. It provides financial and managerial oversight
D. It always guarantees debt repayment of subsidiaries
A holding company does not necessarily guarantee subsidiary debt; liability is usually limited to its investment.
38. A demerger typically refers to:
A. Separation of one or more divisions of a company into a new entity
B. Acquisition of one company by another
C. Alliance between two companies
D. Purchase of controlling shares in another company
A demerger involves restructuring in which parts of a company are split to form a separate legal entity.
39. Which of the following is a common reason for demergers?
A. To reduce competition
B. To increase monopoly power
C. To unlock shareholder value by focusing on core business
D. To acquire unrelated businesses
Demergers often help companies streamline focus on core operations and enhance shareholder value.
40. Which of the following is a key difference between a demerger and divestiture?
A. Demerger involves selling assets for cash, while divestiture creates new entities
B. Demerger results in creation of a new company, while divestiture involves selling to an external party
C. Both involve acquisition of a new business
D. Both always involve compulsory government intervention
A demerger creates a new independent entity, while divestiture is selling part of the business to an external buyer.
41. Company A has earnings of ₹50 crore with 5 crore shares, and Company B has earnings of ₹20 crore with 2 crore shares. If Company A acquires Company B by issuing 1 share of A for every 2 shares of B, what will be the post-merger EPS of Company A?
42. Company X’s share price is ₹200 and EPS is ₹20. Company Y’s share price is ₹100 and EPS is ₹10. If the exchange ratio is 1 share of X for every 2 shares of Y, what is the implied value per share of Y?
A. ₹100
B. ₹120
C. ₹150
D. ₹200
Exchange ratio = 1:2 → each Y shareholder gets 0.5 share of X.
Value = 0.5 × ₹200 = ₹100.
43. A merger is expected to generate synergies of ₹50 crore. If Company A is valued at ₹300 crore and Company B at ₹150 crore, what should be the combined value post-merger (ignoring costs)?
A. ₹400 crore
B. ₹450 crore
C. ₹500 crore
D. ₹350 crore
Combined value = A + B + Synergy = 300 + 150 + 50 = ₹500 crore.
44. Company P has 10 lakh shares at a market price of ₹100 each. Company Q has 5 lakh shares at a market price of ₹60 each. If P acquires Q by offering 1 share of P for every 3 shares of Q, what is the cost of acquisition for P?
A. ₹2.0 crore
B. ₹1.67 crore
C. ₹3.0 crore
D. ₹1.5 crore
Shares of Q = 5 lakh. Exchange ratio = 1:3 → P issues (5 ÷ 3) = 1.67 lakh shares.
Cost = 1.67 lakh × ₹100 = ₹1.67 crore.
45. Company R’s pre-merger EPS is ₹15. After acquiring Company S, the combined EPS is expected to be ₹18. What is this situation called?
A. Dilution
B. Break-even EPS
C. Neutral EPS impact
D. Accretion
If post-merger EPS increases compared to pre-merger EPS, it is called **accretion**. If it decreases, it is dilution.
