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

Research on acquisitions generally finds that, on announcement, the shareholders of the target company typically gain while the acquirer's shareholders on average gain little or lose value. Which explanation best accounts for this pattern?

Target shareholders gain because the acquirer pays a substantial premium, which passes much of the expected synergy to them up front. If synergies are overestimated or poorly integrated, the acquirer's shareholders gain little or lose value.

  1. AThe acquirer usually pays a substantial premium that transfers much of the expected synergy to target shareholdersCorrect
  2. BTargets are normally valued below their market price by the acquirer
  3. CAcquirers are legally required to pay the target's book value
  4. DSynergies are always realised in full within the first year

Explanation

Competitive bidding and the need to win board and shareholder acceptance lead to a control premium. This hands much of the synergy value to the target's shareholders in advance. If synergies are overestimated or integration is poor, the acquirer's shareholders bear the loss. Paying book value is not a legal rule.

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