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Financial and strategic implications of mergers and acquisitions

1.3 Questionable reasons for merger/acquisition

The following reasons why entities merge are of questionable validity.

 Diversification, to reduce risk – acquiring an entity in a different line of

activity may diversify away risk for the entities involved, but this is irrelevant
to the shareholders. They could have performed exactly the same
diversification simply by holding shares in both entities.

 Shares of the target entity are undervalued – this would conflict with the
efficient markets theory and assumes that the acquirer entity’s management
are better at valuing shares than professional investors in the market place.

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