Which of the following statements 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 is generally not a valid motive for a publicly held firm.

Question

Quizplus · Accepted Answer

Option D provides the most accurate description of mergers. It highlights the motive of managers for mergers, which is diversification; however, it also mentions that this is not a valid reason for publicly held firms. The other options do not accurately describe mergers. Option A is incorrect because tax considerations are not the only factor that determines whether firms will undertake mergers, and excess cash can be utilized for other reasons. Option B incorrectly assumes that smaller synergistic benefits lead to a higher probability of the merger's completion. Option C is incorrect because the cost of debt and debt capacity are relevant considerations when companies plan to finance their mergers.

Which of the Following Statements Best Describes Mergers