Concepts Review and Critical Thinking Questions

1. Merger Accounting Explain the difference between purchase and pooling of interests accounting for mergers. What is the effect on cash flows of the choice of accounting method? On EPS?

2. Merger Terms Define each of the following terms:

a. Greenmail b. White knight c. Golden parachute d. Crown jewels e. Shark repellent f. Corporate raider g. Poison pill h. Tender offer i. Leveraged buyout, or LBO

3. Merger Rationale Explain why diversification per se is probably not a good reason for merger.

4. Corporate Split In January 1996, Dun and Bradstreet Corp. announced plans to split into three entities: an information services core to include Moody's credit-rating agencies, a company that would include the Nielsen media-rating business, and a third entity that would focus on tracking consumer packaged-goods purchases. D&B was not alone, because many companies voluntarily split up in the 1990s. Why might a firm do this? Is there a possibility of reverse synergy?

5. Poison Pills Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?

6. Merger and Taxes Describe the advantages and disadvantages of a taxable merger as opposed to a tax-free exchange. What is the basic determinant of tax status in a merger? Would an LBO be taxable or nontaxable? Explain.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

25. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

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