Question

Studies conducted on mergers and acquisitions have generally concluded that:

Multiple Choice

• acquiring firm's shareholders gain at the expense of the target firm's shareholders.

• these transactions are financially beneficial to target shareholders.

• all involved shareholders tend to neither gain nor lose much as a result of these transactions.

• only highly leveraged acquisitions produce any shareholder gains.

• both acquiring and target firm's shareholders benefit approximately equally in most situations.

Answer 1

Answer: Mergers and Acquisitions are generally undertaken by the companies to unearth the value of the companies thru synergised operations or leveraged benefits coming from both the companies. These help in poteential value creation for both the companies' (merged in to one) stakeholders. However, this value creation and economic benefits shall take a good amount of time, as there need to be business mergers, cultural mergers, operations synchronisations, etc to work at full load on the merged company.

Studies conducted on mergers and acquisitions have generally concluded that:

Multiple Choice

• acquiring firm's shareholders gain at the expense of the target firm's shareholders. This is incorrect statement as there shall no gain for the acquiring firm's shareholder from the valuation of the target firm; the real gain starts flowing in when the potential of the merged company starts delivering requried economic benefits.

• these transactions are financially beneficial to target shareholders. This is incorrect statement as there might be certain initial flip ups on the share price and the share offering given by the acquiring firm to the target shareholders, however, the long term benefit depends on the potential of the emrged company

• all involved shareholders tend to neither gain nor lose much as a result of these transactions. This is incorrect statement as these mergers and acquistions are done for value creation of the potential business and for the shareholders involved in the same; There might be certain exceptional cases of mergers, guided by regulatory norms, which is a different scenario.

• only highly leveraged acquisitions produce any shareholder gains. This is incorrect statement as in general, the mergers and acquistions are done for value creation of the potential business and for the shareholders involved in the same; The leveraged benefits might not be immediately visible, however, the same need to be looked from long term perpspective.

• both acquiring and target firm's shareholders benefit approximately equally in most situations. This is the correct statement as the stakeholders of the merged firm (acquiring & target) shall start benefitting from the value creation evolved from the synergies of the merger or acquisition over a long period of time.