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Icarus Airway's decision to acquire Midas Fuels Inc. proved to be ill-fated because the Icarus managers overestimated their abilities and skills. They believed that they had the skills to manage such diversified businesses and create additional shareholder value. However, the acquisition failed to create the anticipated synergies because the managers' capabilities were restricted to the airline industry. What does this scenario best illustrate?


A) knowledge race
B) competitive feasibility
C) managerial hubris
D) unfettered free market

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Elegance Inc. is a large cosmetics company that made an initial small investment in a start-up company, Peace Planet, which was developing an organic face lotion. This gave Elegance controlling interests in the start-up company. However, Peace Planet soon began to have financial difficulties because of principal-agent problems. As a result, Elegance did not invest in the next stage of development and pulled out of the company. This approach to strategic alliance is referred to as a


A) break-even analysis.
B) partial joint venture.
C) credible commitment.
D) real-options perspective.

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Showstopper Inc. dominates the ladies' wig market and wants to expand into men's toupees. How can Showstopper's managers determine whether the company should develop a toupee division internally, ally with a toupee maker, or acquire a toupee-making firm?


A) To protect themselves, Showstopper's managers should choose the option that leads to the largest company with the most managerial positions.
B) The managers need to determine whether the skills needed to create wigs and toupees are similar and whether Showstopper creates better hairpieces than its competitors do.
C) The managers must determine whether wig making and toupee making require substantially different skills. If so, the company should pursue internal development.
D) Unless the market for toupees is booming, Showstopper should stick to what it knows and focus on creating the best ladies' wigs in the industry.

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Define horizontal integration and provide a successful or unsuccessful example.

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Student examples will vary. A sample ans...

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Judging from the Disney-Pixar merger, which of these is an effective way to create shareholder value from a merger?


A) Integrate the acquired company as fully as possible, merging staffs and locations, so that all employees have as similar an on-the-job experience as possible.
B) If the acquired company creates high-quality products or services, don't force it to mirror the management style of the acquiring company.
C) Cut prices at the acquired company but not the acquiring company so that the acquisition covers all consumer price points.
D) Raise consumer prices at the acquiring company and the acquired company to reflect the fact that the market is now less competitive.

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How has Kraft Foods benefited from its hostile takeover of Cadbury PLC?


A) Its main strategic focus is now on the domestic market.
B) It has opened a market that is growing slowly but has high profit margins.
C) It has access to convenience stores and a new distribution channel.
D) It gained a monopoly in the chocolate-manufacturing industry.

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Medequip Inc. is a large firm involved in the highly competitive market of high-tech medical equipment. In this market, smaller firms that focus on research are constantly making new technological developments. Which of the following approaches would best serve the needs of Medequip?


A) mergers
B) serial mergers
C) acquisitions
D) serial acquisitions

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Garrett is an executive vice president at Samm Hardware. He researches a proposal by a larger company, Maximum Hardware, to combine the two companies. By analyzing past performance, conducting focus groups, and interviewing Maximum employees, Garrett concludes that Maximum has poor profit margins, sells shoddy merchandise, and treats customers poorly. What actions should Garrett and Samm Hardware take?


A) Turn down the acquisition offer and prepare to resist a hostile takeover.
B) Attempt a friendly merger and use managerial hubris to improve results at Maximum.
C) Welcome the acquisition and use knowledge transfer to impart Sam Hardware's management practices.
D) Do nothing; the two companies cannot combine without Samm Hardware's explicit consent.

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Winter Wonder Inc. is a leader in producing winter sports equipment, including skis and skates. Recently, the firm decided to expand into the bobsled market and acquired Sleds by Bob Inc. This company produced bobsleds, but its sales had slowed. The managers of Winter Wonder convinced themselves that they were able to manage the business of Sleds by Bob more effectively even though they had no experience in the bobsled market. However, this move backfired and the sale of Sleds by Bob's bobsleds plummeted. Which of the following terms is often used to describe this scenario?


A) winner's curse
B) managerial hubris
C) winner's disadvantage
D) interdepartmental apathy

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The process of alliance management begins with


A) selecting the best possible partner.
B) choosing an appropriate governance mechanism.
C) designing the alliance.
D) creating resource combinations that obey the VRIO criteria.

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Which of the following best illustrates a merger between the two companies HQ Inc. and AV Inc.?


A) HQ Inc. purchases AV Inc. for $80 billion despite AV Inc. being against the purchase.
B) HQ Inc. and AV Inc. join together to form a third new entity, while they also operate separately.
C) HQ Inc. outsources a few of its business activities to AV Inc. for competitive advantage.
D) HQ Inc. and AV Inc. join together to form a single new company called HQAV Inc.

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Which of the following scenarios best illustrates horizontal integration?


A) King Autos Inc. enters into a licensing contract with a distributor in a new international market.
B) King Autos Inc. acquires a component parts manufacturer who previously supplied to King Autos' competitor.
C) King Autos Inc. sets up its own distribution channel and retail stores.
D) King Autos Inc. joins with Dimitra Motors Inc., one of its direct competitors.

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When large, incumbent firms buy start-up companies, the transaction is generally described as a(n)


A) joint venture.
B) partnership.
C) acquisition.
D) alliance.

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Explain how firms use strategic alliances to change the industry structure in their favor.

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Firms can use strategic alliances to cha...

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Which of the following is true of acquisitions?


A) They can be friendly or hostile.
B) They can occur only when the involved entities are of comparable size.
C) In acquisitions, two independent companies join to form a separate third entity.
D) Acquisitions increase the competitive intensity in an industry.

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Horizontal integration through mergers and acquisitions can help firms strengthen their competitive positions by increasing


A) perfect competition.
B) differentiation.
C) oligarchy.
D) natural monopoly.

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Which of the following accurately describes a common difference between a merger and an acquisition?


A) A merger tends to include mostly small firms; an acquisition can often involve large firms.
B) A merger involves the combination of three or more firms; an acquisition involved the combination of two firms.
C) A merger involves firms of different size; an acquisition involved firms of the same size.
D) A merger tends to be friendly; an acquisition can be friendly or unfriendly.

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How have strategic alliances helped big pharmaceutical firms hedge against uncertainty?

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In dynamic markets, strategic alliances ...

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Which of the following statements is true of an equity alliance?


A) An equity alliance is based on contractual agreements rather than partial ownership.
B) In an equity alliance, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible.
C) In an equity alliance, a standalone organization is created that is jointly owned by two or more parent companies.
D) An equity alliance creates weaker ties between the alliance partners when compared to a non-equity alliance.

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The main reason behind Alphabet's decision to acquire the Israeli start-up company Waze for $1 billion was probably to


A) preempt its competitors from buying Waze.
B) share its capabilities with Waze.
C) support start-up companies with venture capital.
D) gain access to technology that is alien to it.

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