- CFA Exams
- CFA Level I Exam
- Study Session 8. Corporate Finance (2)
- Reading 23. Mergers and Acquisitions
- Subject 2. Motives for merger
CFA Practice Question
The following reasons are good motives for mergers except:
A. Complementary resources.
B. Diversification.
C. Unused tax shields.
Explanation: It is much cheaper and easier for individual shareholders to diversify than having company go through the expensive process of becoming a conglomerate.
User Contributed Comments 4
User | Comment |
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malawyer | that's funny - coming from the business I can say that tax reasons are the worst for buying a company (except in very rare liquidation, i.e. "free lunch" szenarios). but I accept the answer "diversification" nonetheless |
dream007 | Depends on the perspective you are looking at this from....diversification from shareholders point of view is wrong, so i accept the answer. but diversification from the business point of view is surely a good thing. Ambiguous me thinks... |
SMcalister | Dream007, if the reason is diversification and nothing else then yes, there are all the legal fees and broker fees which make the acquisition expensive. If the business thinks the merger will have other benefits along with diversification, then it's a different story. |
LoCo83 | Diversification may only be a benefit to an extent, no? In my mind, more diversification in business operations means fewer synergies to take advantage of, and relatively larger costs to sustain. |