Findings from several studies on corporate mergers and acquisitions

Hi rocky620,

For question 66:

What's mentioned the passage is: "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.". A is exactly opposite of what's mentioned in the passage. The mergers and acquisitions may benefit the national economy, but that's not what appeals to the executives, they arrange these deals as they see their own individual interest.
Thus A is incorrect.

Now coming to E.
E can be inferred from the lines: "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. "
True that we cannot explicitly infer the frequency/occurrence of these mergers, yet we cannot reject this option can what we can infer is that Factors other than economic benefit to the acquiring firm help to explain why the acquisitions occur. This option is best among other options.

Hope This Helps.
Thanks.

GMATNinja VeritasKarishma

Need help in Q70. Why are Options A and D are wrong?

Hi jack0997,

Please refer the below reply by expert:
https://gmatclub.com/forum/findings-from-several-studies-on-corporate-mergers-and-acquisitions-du-161474-20.html#p2402391


Let me know if you still have doubts.

Thanks.

I'm still not really grasping Q4 (67). I just don't see how the passage is using the "positive effects of garnered from diverting funds accross different sectors of the national economy" as an explanation as to why M&A were prevalent.

Good Afternoon Expert.

I need your expertise to explain question no 5 to me as the information in the passage states that " Following the announcement of a prospective merger, the stock of the prospective acquiring firm tends to increase in value much less than does that of the firm for which it bids." It means that the stock price of a firm is compared with the firm it acquires. It does not necessarily mean that the stock price of the company will fall.

THere is possiblity that stock price of the acquiring firm increases more as compared to when merger was announced.

Please help me on this. Many thanks in advance.

Hi fireagablast,

Please refer the below replies by experts here:
https://gmatclub.com/forum/findings-from-several-studies-on-corporate-mergers-and-acquisitions-du-161474.html#p1280035
https://gmatclub.com/forum/findings-from-several-studies-on-corporate-mergers-and-acquisitions-du-161474-20.html#p2549770


Let us know if you still have doubts.

Thanks.

Hi RahulHGGmat,

There is a possibility of what you are suggesting, but we need to consider only what's mentioned in the passage:

"A third demonstrated that, following the announcement of a prospective merger, the stock of the prospective acquiring firm 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.", thus implying that bidding firms experienced less of an increase in stock value when a prospective merger was announced.

I suppose you want to know, why is A incorrect? It is incorrect because no such inference can be drawn from the passage.

Let me know if you still have doubts.

Thanks.

I didn't pick the right answer in the first question (c) because nowhere in the passage is stated or suggested that the author is questioning a particular reason as to why the mergers and acquisitions are made:

"C) Report findings that raise questions about a reason for corporate mergers and acquisitions and suggest possible alternative reasons"

souldn't the answer read "Report findings that raise questions about some reasons for corporate mergers and acquisitions and suggest possible alternative reasons"?

Even the official explanation as to why C is correct reads "C Correct. The passage surveys reports that question the reasons given by firms when they acquire other firms and suggests other reasons for these acquisitions"

So, can someone help me understand why answer C isn't wrong?

jack0997

The passage gives the reasons why acquisitions happen in the second paragraph.

These factors may include:
the incentive compensation of executives,
lack of monitoring by boards of directors,
managerial error in estimating the value of firms targeted for acquisition.
Modeling: a manager does what other managers do.


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.

The passage tells us that one reason is imitation. Managers do it because other managers do it. The reason is not because they see how financially beneficial other firms’ acquisitions were.

(B) Managers miscalculated the value of firms that were to be acquired.

Correct. "managerial error in estimating the value of firms targeted for acquisition" is a reason given.

(C) Lack of consensus within boards of directors resulted in their imposing conflicting goals on managers.

Conflicting goals not given.

(D) Total compensation packages for managers increased during that period.

We know the executives get incentive compensation. Does it increase the total package, we don't know.

(E) The value of bidding firms’ stock increased significantly when prospective mergers were announced.

This is not given as a reason.

Answer (B)

Question 1

First, let’s consider the author’s purpose in each paragraph:

(1) Introduce studies showing that mergers and acquisitions (M&A) may not be as economically beneficial to acquirers as it seems.
(2) Detail alternative explanations for those acquisitions.

Whether (C) is incorrect depends on what we identify as the reason that the passage questions. It’s true that the passage identifies several possible reasons for M&A. But the primary purpose of the passage is to first question one of those reasons and then present alternative reasons.

The reason that the argument questions is that bidders are motivated by corporate economic interests. As we said above, the first paragraph is dedicated to presenting studies that question the economic benefits of M&A to acquiring companies. Then, in the second paragraph, the author presents alternative reasons for M&A, including executive compensation, lack of board monitoring, and managerial error. The passage never questions these reasons. He/she merely questions whether corporate economic interests really drive M&A.

For those reasons, (C) is correct.

I hope that helps!

Thank you GMATninja for your reply, I understand that the author lists a number of studies to call into question if the mergers and acquisitions made by companies truly have an economic advantage. Maybe I'm being too rigid with the language but my doubt arose from the fact that the author is using plural in the last sentence of the last paragraph: "Yet mergers and acquisitions remain common, and bidders continue to assert that their objectives are economic ones.". "their objectives are economic ones" sound to me like there are more than one reason, so, I guess we have to consider that these "objectives" are grouped into a single reason, as if to say: "The reason for the mergers and acquisitions is to safeguard the economic interests of the companies"?

Within the passage as a whole, the last sentence of the first paragraph serves as a transition to the second paragraph. In the first paragraph, the author has laid out why corporate economic interests may not be driving M&A. But, in the last sentence of the first paragraph, we learn that bidders still assert their motives are economic. This leads to the author’s point in the second paragraph that the economic motives may be those of the executives and NOT of the corporations.

I don’t think that you’re being too rigid with the language, but the fact that bidders assert their “objectives” are economic does not mean that the author is questioning all of those objectives. It simply means that the bidders claim to have economic objectives, and the author questions whether those economic objectives are corporate and suggests that they may be personal instead.

I hope that helps!

This is a lovely passage, and teaches you a lot. I just want to highlight an inconsistency I am having a hard time reconciling.

For Q68, while E of course seems quite the right one, I can't seem to ditch C clearly, given the info in the last line of the passage. Doesn't that indicate the bidders tend to exhibit herd behaviour (managers doing what other managers do)?

Hi wishmasterdj,


The last line of the passage, " Alternatively, the acquisition acts of bidders may derive from modeling: a manager does what other managers do.", is not comparing the managers of the bidding firms to the firms they bid for. It is simply a generic statement, but in Question 68, we are asked how did the bidding firms differed from the firms for which they bid, and for that E is the correct answer.

Hope This Helps.
Thanks.

Canyou please explain why A is not the answer, although I perfectly understand how B is qualifying to be the answer but why not A

Hi Poojita

Option (A) states: Managers wished to imitate other managers primarily because they saw how financially beneficial other firms’ acquisitions were.

However, the passage tells us only half of this statement ie; "a manager does what other managers do".

We do not know if a manager imitates because she sees the profitability of acquisitions done by other managers. The imitation could be due to any number of reasons. It could also be imitation just for the sake of imitation ie; a manager does acquisitions just because other managers do them and for no other reason (going by the passage, this last case is probably what is implied by the passage).

Hence, option (A) is not entirely true, and cannot be the correct answer. Hope this helps.

Hello AndrewN sir

This is a similar question toyesterday's post

I am little confused :
Whenever such question comes, I should focus on that part of context which is referred, meaning of the whole sentence or connect with overall intention of the passage.


Example : for this particular question:
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.

blue part is the specific context --> it introduces that national resources could be one reason for acquisition.
but-changes tone
pink part--> no no , channeling national resources was also not the reason. The overall intention was towards non-economic reasons.

As per my understanding, the author's intention comes with the overall meaning ( why part) . What key message he is trying to point out?
he is trying to rule out the possibility of other possible scenario--so D option looks good.

When I thought a deep more, I realized , actually he is writing to support the idea that non-economic reasons were main reasons for the acquisition but these acquisitions have nothing to do economic reasons. Even no reason related with national economy.
So I chose C ( it seems to support non-economic reason with his tone)

My query:
the sentence part that is pointed in the question ( actually what option A says) , But , following sentence <change in the tone > ( option D).
related this whole sentence with overall idea ( Option C)

Learning: Shall I keep my reasoning till the tone of that whole sentence . hence can get D.
A is wrong because it starts introduction but has not yet completed the overall tone( author's meaning) with this part of stance.
C is wrong because it is beyond what is mentioned in sentence.


is my understanding right?
Please confirm

2.) In yesterday question, language was soft for the correct answer. But here language is same ( means words such as may ,possible etc. are not used with verb ) . IN short, i can't take any hint from here, so I need to go back to previous reasoning.
Am i right?


Thanks AndrewN sir