Which of the following is true about motivations for takeovers?

Question

BlackTom AI · Accepted Answer

When evaluating motivations for takeovers, we need to assess each statement for accuracy in terms of strategic and financial logic.
Option 1: 'Buying for high target growth can be a legitimate motivation if you don’t overpay' This is partly true in that growth potential is a common motivation, but the crucial caveat is the price paid. If the acquirer overpays, the anticipated high growth may be offset by poor value creation, destroying shareholder value. Therefore, the statement is plausible but incomplete because it omits the important constraint that overpaying undermines the legitimacy of the motivation.
Option 2: 'Conglomerate acquisitions are justifiable when they help the acquirer diversify revenue streams' Diversification can be a rationale, but conglomerate deals often suffer from integration challenges and may fail to add value if the businesses are poorly related. This makes the justification weaker and not universally true, as diversification alone does not guarantee improved performance. Risk of overdiversification and agency problems can erode benefits.
Option 3: 'If there are strong synergies, the combined firm will benefit from the acquisition' This statement captures a central, widely recognized motive: synergistic gains from combining resources, capabilities, or markets can create value that exceeds what each firm could achieve alone. When synergies are genuine and realizable, economies of scale, complementary strengths, or enhanced bargaining power can lead to a superior post-merger outcome.
Option 4: 'Financial synergies such as co-insurance are not real synergies as they don’t lead to improvement' The claim discounts financial synergies, but in practice financial engineering (e.g., tax considerations, debt capacity, improved risk sharing) can contribute to value creation. Labeling them as non-beneficial is inaccurate, since financial synergies can improve capital structure and risk management, even if they are not the primary source of operating value.
In sum, Option 3 rightly emphasizes that genuine synergies underpin the motivation for a takeover by creating additional value for the combined entity, while the other options either overstate or misstate the conditions under which takeovers are valuable, or overlook important constraints and consequences.

Which of the following is true about motivations for takeovers?

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