Please explain why chose what you choose. Which of the following statements is m
ID: 2754025 • Letter: P
Question
Please explain why chose what you choose.
Which of the following statements is most correct?
A. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
B. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
C. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits are generally not a valid motive for a publicly held firm.
D. Operating economies are never a motive for mergers.
E. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
Explanation / Answer
My answer is Option C
C. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits are generally not a valid motive for a publicly held firm.
Managers often cite diversification as a reason for mergers. They contend thatdiversification helps stabilize a firm’s earnings and thus benefits its owners. Stabilizationof earnings is certainly beneficial to employees, suppliers, and customers, but its valueto stockholders is less certain” Why should Firm A acquire Firm B to stabilize earnings when stockholders can simply buy the stocks of both firms? Indeed, research suggests that in most cases diversification does not increase the firm’s value. In fact, many studies find that diversified firms are worth significantly less than the sum of the individual parts
Of course, if you were the owner-manager of a closely held firm, it might be nearly impossible to sell part of your stock to diversify. Also, selling your stock would probably lead to a large capital gains tax. So, a diversification merger might be the best way to achieve personal diversification for a privately held firm.