Which statement best describes mergers?
A)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.
B)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.
C)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.
D)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.

Question

Quizplus · Accepted Answer

The statement accurately describes the common motive cited by managers for mergers and explains why it is not a valid motive for publicly held firms. Option A is incorrect as tax considerations can be a significant factor in mergers. Option B is incorrect as smaller synergistic benefits can lead to failed or unsuccessful mergers. Option C is incorrect as the cost of debt and debt capacity can be relevant considerations in mergers.

Which Statement Best Describes Mergers