Findings from several studies on corporate mergers and acquisitions during the 1970s and 1980s raise questions about why firms initiate and consummate such transactions. One study showed, for example, that acquiring firms were on average unable to maintain acquired firms’ pre-merger levels of profitability. A second study concluded that postacquisition gains to most acquiring firms were not adequate to cover the premiums paid to obtain acquired firms. A third demonstrated that, following the announcement of a prospective merger, the stock of the prospective acquiring fi rm tends to increase in value much less than does that of the firm for which it bids. Yet mergers and acquisitions remain common, and bidders continue to assert that their objectives are economic ones.
Acquisitions may well have the desirable effect of channeling a nation’s resources efficiently from less to more efficient sectors of its economy, but the individual acquisitions executives arranging these deals must see them as advancing either their own or their companies’ private economic interests. It seems that factors having little to do with corporate economic interests explain acquisitions. These factors may include the incentive compensation of executives, lack of monitoring by boards of directors, and managerial error in estimating the value of firms targeted for acquisition. Alternatively, the acquisition acts of bidders may derive from
modeling: a manager does what other managers do.
Questions 64–70 refer to the passage above.
64. The primary purpose of the passage is to
(A) review research demonstrating the benefi ts of corporate mergers and acquisitions and examine some of the drawbacks that acquisition behavior entails
(B) contrast the effects of corporate mergers and acquisitions on acquiring firms and on firms that are acquired
(C) report findings that raise questions about a reason for corporate mergers and acquisitions and suggest possible alternative reasons
(D) explain changes in attitude on the part of acquiring firms toward corporate mergers and acquisitions
(E) account for a recent decline in the rate of corporate mergers and acquisitions
64. A The research cited in the passage calls into question whether mergers and acquisitions are beneficial to firms.
B Th e passage is not concerned with comparing the relative effects of mergers and acquisitions on the acquired and acquiring firms.
C Correct. Th e passage surveys reports that question the reasons given by firms when they acquire other firms and suggests other reasons for these acquisitions.
D Th e passage does not indicate that there has been a change in the attitude of acquiring firms toward mergers and acquisitions.
E The passage does not indicate that there has been a decline in the rate of mergers and acquisitions.
The correct answer is C.
65. The findings cited in the passage suggest which of the following about the outcomes of corporate mergers and acquisitions with respect to acquiring firms?
(A) They include a decrease in value of many acquiring firms’ stocks.
(B) They tend to be more benefi cial for small firms than for large firms.
(C) They do not fulfill the professed goals of most acquiring firms.
(D) They tend to be beneficial to such firms in the long term even though apparently detrimental in the short term.
(E) They discourage many such firms from attempting to make subsequent bids and acquisitions.
OA & OE
65 A The passage suggests that the stock of acquiring firms tends to increase in value (lines 12–13), albeit less than the firm it acquires.
B The three studies cited in the passage do contrast the effects of corporate mergers on acquiring firms and on acquired firms, but the effects in question are signifi cant only insofar as they contribute to the wider investigation into why mergers take place at all.
C Correct. The passage indicates that even while acquiring firms cite economic goals, the results of the studies indicate that these goals are not being met.
D The passage makes no comparison between the long-term and short-term gains of acquiring firms.
E The passage does not indicate that firms have been affected by the results of the studies cited.
The correct answer is C.
66. It can be inferred from the passage that the author would be most likely to agree with which of the following statements about corporate acquisitions?
(A) Their known benefi ts to national economies explain their appeal to individual firms during the 1970s and 1980s.
(B) Despite their adverse impact on some firms,they are the best way to channel resources from less to more productive sectors of a nation’s economy.
(C) They are as likely to occur because of poor monitoring by boards of directors as to be caused by incentive compensation for managers.
(D) They will be less prevalent in the future, since their actual effects will gain wider recognition.
(E) Factors other than economic benefit to the acquiring fi rm help to explain the frequency with which they occur.
OA & OE
66. A The passage indicates that while mergers and acquisitions may benefit the national economy, the appeal of mergers and
acquisitions must be tied to companies’ private economic interests (lines 19–22).
B The passage makes no judgment as to the best way for firms to help channel resources from less to more effi cient economic sectors.
C The passage makes no comparison between the influence of poor monitoring by boards and that of executive incentives.
D The passage makes no prediction as to future trends in the market for mergers and acquisitions.
E Correct. The passage states that factors other than economic interests drive mergers and acquisitions.
The correct answer is E.
67. The author of the passage mentions the effect of acquisitions on national economies most probably in order to
(A) provide an explanation for the mergers and acquisitions of the 1970s and 1980s overlooked by the fi ndings discussed in the passage
(B) suggest that national economic interests played an important role in the mergers and acquisitions of the 1970s and 1980s
(C) support a noneconomic explanation for the mergers and acquisitions of the 1970s and 1980s that was cited earlier in the passage
(D) cite and point out the inadequacy of one possible explanation for the prevalence of mergers and acquisitions during the 1970s and 1980s
(E) explain how modeling affected the decisions made by managers involved in mergers and acquisitions during the 1970s and 1980s
67 A The passage does not mention national economies as part of an explanation for the occurrence of mergers and acquisitions.
B The passage suggests that the effect of acquisitions on national economies is not tied to any explanations for why acquisitions occur.
C The eff ect of acquisitions on national economies is not mentioned in the passage as an explanation for why acquisitions occur.
D Correct. Th e passage uses the mention of national economies as part of a larger point questioning the stated motivations behind firms’ efforts to acquire other firms.
E In the passage, modeling is unrelated to the idea that acquisitions may have a desirable effect on national economies.
The correct answer is D.
68. According to the passage, during the 1970s and 1980s bidding firms differed from the firms for which they bid in that bidding firms
(A) tended to be more profi table before a merger than after a merger
(B) were more often concerned about the impact of acquisitions on national economies
(C) were run by managers whose actions were modeled on those of other managers
(D) anticipated greater economic advantages from prospective mergers
(E) experienced less of an increase in stock value when a prospective merger was announced
68. A The passage does not indicate whether the profitability of acquiring firms tended to be greater or less after a merger.
B The passage does not indicate that acquiring firms were concerned about the impact of their actions on national economies.
C The passage does not mention the actions of managers at firms that are being acquired.
D The passage does not discuss whether acquiring firms tended to expect greater overall economic gains than actually occurred.
E Correct. The passage indicates that the stock value of acquiring firms grew less than that of the firms they were attempting to acquire.
The correct answer is E.
69. According to the passage, which of the following was true of corporate acquisitions that occurred during the
1970s and 1980s?
(A) Few of the acquisitions that f rms made were subsequently divested.
(B) Most such acquisitions produced only small increases in acquired firms’ levels of profitability.
(C) Most such acquisitions were based on an overestimation of the value of target firms.
(D) The gains realized by most acquiring firms did not equal the amounts expended in acquiring target firms.
(E) About half of such acquisitions led to long-term increases in the value of acquiring firms’ stocks.
69 A The passage does not discuss post - acquisition divesting.
B The passage indicates that on average, the profitability of acquired firms fell after being acquired (lines 5–7).
C The passage does not indicate whether most acquiring firms overestimated the value of the firms they acquired.
D Correct. The passage states that for most acquiring firms the costs of buying the acquired fi rm were greater than the gains derived from acquiring it.
E The passage does not indicate what percentage of acquiring firms, if any, experienced long-term gains in their stock value.
The correct answer is D.
70. The author of the passage implies that which of the following is a possible partial explanation for acquisition behavior during the 1970s and 1980s?
(A) Managers wished to imitate other managers primarily because they saw how financially beneficial other firms’ acquisitions were.
(B) Managers miscalculated the value of firms that were to be acquired.
(C) Lack of consensus within boards of directors resulted in their imposing conflicting goals on managers.
(D) Total compensation packages for managers increased during that period.
(E) The value of bidding firms’ stock increased significantly when prospective mergers were announced.
70 A While the passage indicates that managers may have modeled their behavior on other managers, it does not provide a reason for why this would be so.
B Correct. The author states that one explanation for acquisition behavior may be that managers erred when they estimated the value of firms being acquired.
C The author discusses a lack of monitoring by boards of directors but makes no mention of consensus within these boards.
D The author does not discuss compensation packages for managers.
E The passage does not state how significantly the value of the bidding firm’s stock increased upon announcing a merger but only that it increased less in value than did the stock of the prospective firm being acquired.
The correct answer is B