A merger which is expected to produce synergy
A) Should be rejected because the synergy will dilute the combined firm's earnings per share
B) Should be rejected because the first year's cash flow is negative
C) Has a negative NPV
D) Should be pursued because it creates value
E) Reduces target firm revenues

Question

Quizplus · Accepted Answer

A merger that is expected to produce synergy should be pursued because it creates value for the combined firm. Synergy refers to the additional value that can be created through the combination of two firms, such as improved operational efficiency, increased market power, or cost savings. While there may be short-term costs or negative cash flows, the potential long-term benefits of synergy can make the merger worthwhile. Option A is incorrect because synergy should actually increase the combined firm's earnings per share. Option B is not necessarily true and is not a sufficient reason to reject the merger. Option C is incorrect because a merger with positive synergy should have a positive NPV. Option E is also incorrect because a merger with positive synergy should increase target firm revenues.

A Merger Which Is Expected to Produce Synergy