Which of the following is “least likely” a “criticism” of merging purely for diversification purposes? A) Diversification does not increase the overall value of the company. B) Empirical evidence finds a diversification discount to conglomerates. C) Increasing the size of the firm helps provide job security for management.
C? On the basis that A is correct unless more information is given… B sounds like it should be true as diversifying does not add sinergyes… What was the answer?
C ? (pure guesswork)
A? In my opinion, B and C justify as criticism of merging purely for diversification purposes. How can diversification not increase overall value of company? Then the concept of benefitting out of perfect negative correlation is redundant.
diversification on the basis on M&A doesnt increase the value of the company. Investors can buy stocks in different companies and can get their portfolio diversified in very inexpensive way. Diversification through M&A is not recommended as it incurs huge cost.
cfaboston28, Thanks, get your point. But would that not defeat the purpose of a conglomerate merger. I thought it was undertaken to diversify in the first place.
but M&A should not take place only for diversification. There should be synergy in the form of cost reduction, increase in market position and which increases the shareholder’s stock value.
A - the question is tricky because of the double negative type of deal.
I think C is the right answer. A and B are criticisms of Diversification mergers C is a criticism of m&a done in the interest of management job security
C.
dlpicket - So C is a criticism of m&a, right? because Management want to secure their job by merging and making the company big in terms of market cap. That’s looks like the MAJOR criticisms to me and the question is asking for “least likely” a “criticism” --> not a critisism --> a good thing. [grrr… double negatives] Still give you all some time to change your answers.
C
B
B.
A
b
it is C. Just got the internal news from Swap
b
Answer is C as per Schweser. Can someone explain why the answer is C? A) Diversification is always under criticism because investor could add different stocks to portfolios, rather than company doing it for them by merging - which might take yrs B) ??? C) That’s the motivation why managers would try to merge - so that they have bigger firm to manage and bigger team under them and SECURE their positions. It sure is a criticism to diversification just for managers interest.
was this in the ‘Easy’ bin? if yes, maybe its C because Schweser is dumb and expects less in-depth (albeit correct) thought process.