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ACCA Strategic Professional · Advanced Financial Management · Acquisitions and mergers versus other growth strategies

A company acquires a target mainly because the target's shares trade below the replacement cost of its assets, giving a Tobin's q of well under 1. Which motive is this?

This is the undervalued-assets motive. When a target's market value is below the replacement cost of its assets (Tobin's q below 1), buying the company is cheaper than building equivalent capacity, so the acquirer gains value from the price gap.

  1. ABuying undervalued assets cheaper than building themCorrect
  2. BEliminating inefficient management
  3. CAchieving market power
  4. DVertical integration

Explanation

A q ratio below 1 means market value is less than replacement cost, so acquiring the firm is cheaper than creating equivalent assets internally. This is the undervalued-assets motive. The other motives involve management quality, pricing power or supply chain control, none stated.

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