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OG - RC Passage1 - Q2

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fiza gupta Master | Next Rank: 500 Posts
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OG - RC Passage1 - Q2

Post Mon Oct 17, 2016 11:46 pm
Findings from several studies on corporate mergers and acquisitions during the 1970s and 1980s raise questions about why firms initiate and consummate such transactions. One study showed, for example, that acquiring firms were on average unable to maintain acquired firms’ pre-merger levels of profitability. A second study concluded that postacquisition gains to most acquiring firms were not adequate to cover the premiums paid to obtain acquired firms. A third demonstrated that, following the announcement of a prospective merger, the stock of the prospective acquiring fi rm tends to increase in value much less than does that of the firm for which it bids. Yet mergers and acquisitions remain common, and bidders continue to assert that their objectives are economic ones.

Acquisitions may well have the desirable effect of channeling a nation’s resources efficiently from less to more efficient sectors of its economy, but the individual acquisitions executives arranging these deals must see them as advancing either their own or their companies’ private economic interests. It seems that factors having little to do with corporate economic interests explain acquisitions. These factors may include the incentive compensation of executives, lack of monitoring by boards of directors, and managerial error in estimating the value of firms targeted for acquisition. Alternatively, the acquisition acts of bidders may derive from modeling: a manager does what other managers do.

Q) According to the passage, during the 1970s and 1980s bidding firms differed from the firms for which they bid in that bidding firms

(A) tended to be more profitable before a merger than after a merger
(B) were more often concerned about the impact of acquisitions on national economies
(C) were run by managers whose actions were modeled on those of other managers
(D) anticipated greater economic advantages from prospective mergers
(E) experienced less of an increase in stock value when a prospective merger was

down to A ad E, but picked A, why A is wrong?
OA:E

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fiza gupta Master | Next Rank: 500 Posts
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Post Thu Oct 20, 2016 11:08 pm
Thanku Marty Murray

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Marty Murray Legendary Member
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Post Thu Oct 20, 2016 10:34 pm
Perhaps you misinterpreted this statement.

"acquiring firms were on average unable to maintain acquired firms’ pre-merger levels of profitability."

The point of that statement is not that after the merger the profits of the bidding firms decreased, but rather that those of the acquired firms decreased.

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