The following information relates to Questions1-6.

Modern Auto, an automobile parts supplier, has made an offer toacquire Sky Systems, creator of software for the airline industry.The offer is to pay Sky Systems’ shareholders the current marketvalue of their stock in Modern Auto’s stock. The relevantinformation it used in those calculations is given below:

	Modern Auto	Sky Systems
Share price	$40	$25
Shares outstanding (millions)	40	15
Earnings (millions)	$100	$30

Although the total earnings of the combined company will notincrease and are estimated to be $130 million, Charles Wilhelm(treasurer of Modern Auto) argues that there are two attractivereasons to merge. First, Wilhelm says, “The merger of Modern Autoand Sky Systems will result in lower risk for our shareholdersbecause of the diversification effect.” Second, Wilhelm also says,“If our EPS increases, our stock price will increase in line withthe EPS increase because our P/E will stay the same.”

             Sky Systems managers are not interested in the offer by ModernAuto. The managers, instead, approach HiFly, Inc., which is in thesame industry as Sky Systems, to see if it would be interested inacquiring Sky Systems. HiFly is interested, and both companiesbelieve there will be synergies from this acquisition. If HiFlywere to acquire Sky Systems, it would do so by paying $400 millionin cash.

             HiFly is somewhat concerned whether antitrust regulators wouldconsider the acquisition of Sky Systems an antitrust violation. Themarket in which the two companies operate consists of eightcompetitors. The largest company has a 25 percent market share.HiFly has the second largest market share of 20 percent. Fivecompanies, including Sky Systems, each have a market share of 10percent. The smallest company has a 5 percent market share.

Note: For the multiple choice questions throughoutthe document, please bold and italicize the correctanswer.

1. The acquisition of Sky Systems by Modern Auto and theacquisition of Sky Systems by HiFly, respectively, would beexamples of a
   1. horizontal merger and a vertical merger.
   2. vertical merger and a horizontal merger.
   3. conglomerate merger and a vertical merger.
   4. conglomerate merger and a horizontal merger.
2. Are Wilhelm’s two statements about his share holders benefitingfrom the diversification effect of the merger and about theincrease in the stock price, respectively, correct?

	The Merger Will Result in Lower Risk forShareholders	Stock Price Will Increase in Line with the EPSIncrease
A.	No	No
B.	No	Yes
C.	Yes	No
D.	Yes	Yes

3. Which of the following defenses best describes therole of HiFly in the acquisition scenario?
   1. Crown jewel.
   2. Pac-Man.
   3. White knight.
   4. White squire.
4. If Sky Systems were to be acquired by Modern Auto under theterms of the original offer, the post-merger EPS of the new companywould be ______________

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5. Suppose HiFly acquires Sky Systems for the stated terms. Thegain to Sky Systems shareholders resulting from the mergertransaction would be ______________

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6. If HiFly and Sky Systems attempt to merge, what would be theincrease in the Herfindahl-Hirschman Index (HHI) and the probableaction by the Department of Justice and the FTC, respectively, inresponse to the merger announcement?

	Increase in the HHI	Probable Response of Department of Justice andFTC
A.	290	To challenge the merger
B.	290	To investigate the merger
C.	400	To challenge the merger
D.	400	To investigate the merger