Asked by Paris Smith on Jul 11, 2024
Verified
Which of the following best describes a merger with true synergies?
A) In a merger with true synergies, the pre-merger value exceeds the sum of the separate companies' pre-merger values and the dollar cost of the firms' capital.
B) In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values
C) In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values plus a risk adjusted cash flow relative to the risk of the combined firm.
D) In a merger with true synergies, the post-merger value is less than the sum of the separate companies' pre-merger values.
True Synergies
The real and achievable benefits and efficiencies gained by combining companies, processes, or systems, often cited as a justification for mergers and acquisitions.
Pre-merger Value
The market value of a company before it enters into a merger or acquisition agreement.
Post-merger Value
The total market value of a company after a merger or acquisition has been completed, often examined to assess the financial success of the transaction.
- Understand the concept of synergies in mergers and how they affect the value of the combined companies.
Verified Answer
YN
Yukie NakamuraJul 17, 2024
Final Answer :
B
Explanation :
In a merger with true synergies, the post-merger value will be greater than the sum of the separate companies' pre-merger values due to the benefits of combining the two companies. This is the definition of true synergies, where the whole is greater than the sum of its parts. Option A is not correct because the pre-merger value is not relevant in assessing whether a merger has true synergies or not. Option C may also be true, but it is not necessary for a merger to have risk-adjusted cash flows to be considered a true synergy. Option D is incorrect because the post-merger value must be greater than the pre-merger value for it to be considered a synergy.
Learning Objectives
- Understand the concept of synergies in mergers and how they affect the value of the combined companies.