Which statement best describes mergers?
A)If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.
B)A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
C)Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
D)Acquiring firms send a signal that their stock is overvalued if they choose to use cash and bonds to pay for the acquisition.

Question

Quizplus · Accepted Answer

A defensive merger is a merger where a firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. Option A is a horizontal merger, where two firms in the same industry merge, which is not described in the question. Option C and D are incorrect; acquiring firms do not necessarily send a signal about the valuation of their stock by choosing to use stock or cash/bonds for an acquisition, as the decision may be influenced by various factors beyond the stock's valuation.

Which Statement Best Describes Mergers