Findings from several studies on corporate mergers and acquisitions

Hi GMATNinja,

I have a concern regarding the answer D of question 6: The gains realized by most acquiring firms did not equal the amounts expended in acquiring target firms.

While the passage refers to premium which is the additional amount paid by the acquiring firm for the target company above its current market value, "the amounts expended in acquiring target firms" in answer D refers to total costs incurred by acquiring firms in the process of acquiring other companies ( market value + premium).

Therefore, according to the passage, I'm suspect that Answer D should be true

I suspect the confusion here might be more about terminology than anything else. The bidding firms are the ones making the acquisition. So we're asked to compare the bidding businesses (making the acquisitions) to the businesses they bid on (the acquired firms.)

The relevant sentence is in the first paragraph:

This tells us that increase in value for the acquiring, or bidding firm, was less than the increase in value for the acquired firm. That's exactly what (E) says, so we've got our answer.

I hope that clears things up!

Sorry GMATNinja,

I think I have the answer for my question: the gains < the premium, while the premium < the amounts expended...., then the gains < the amounts expended....

Get it thanks GMATNinja for your great explanation always
The word "prospective" got me into thinking wrongly that the acquiring firms are being bid on

Help for 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?

(B) Managers miscalculated the value of firms that were to be acquired.
(E) The value of bidding firms’ stock increased significantly when prospective mergers were announced.

My Ans D :
Q Why is D incorrect? Isnt this also implied in the passage :
" 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. "

I focused on 'implied' not taking it as 'infer' > B is directly given >> Is direct info in the passage to be given preference ? (dumb q sorry )

Q 'possible partial explanation' > because of author's use of word 'seems' >> is my understanding correct?

Also, Thanks in advance!

skmaan

If the question asks what's implied, it's asking what we can infer. Those are just two ends of the same thing. (The author implies; we infer.) Technically, an inference is just something that follows logically from the information given in the passage. It may be something that was stated directly, although that's unusual.

Notice that in the case of B, we still do have to combine a few things. We have to say that if managers made errors in estimating the value, then they miscalculated the value. Then we have to say that if this is one of the factors that the author thinks may explain m&a behavior, then it may be behind the m&a we're studying, namely m&a from the 70s and 80s. It's not much of a leap, but that's what makes it a good answer. We don't have to worry about "giving preference" to one kind of answer or another. One right answer will be inferable, and all 4 wrong answers will not be clearly inferable at all.

If you look at D, it talks about total compensation packages for managers. But the author's point is that managers may choose to acquire firms due to specific incentive compensation they might receive for the acquisition. If I'm paid $1 million a year, that doesn't give me a reason to do any m&a. I can just take my million and enjoy. But if I get a million-dollar BONUS for acquiring a firm, you can imagine that I might be incentivized to make that happen, even if the acquisition turns out not to make financial sense for my firm.

Thanks alot Dmitry, really helpful and well explained.

Posted from my mobile device

­You're assuming a pretty specific definition of "premium" -- one that isn't actually stated in the passage. You could likewise split hairs over the definition of "gains" -- are these just profits or total extra revenue from having acquired the firm?

Rather than get hyper-specific about definitions that aren't provided, take the second study for what it's worth: the juice wasn't worth the squeeze. That is, the amount you gained didn't cover what you paid, so it doesn't seem like it was a great investment.

More importantly, the other options are clearly not supported by the passage. So we have to choose between four anwers that are clearly wrong or one answer that's probably right unless we make some assumptions and interpret things a very specific way. That means that (D) is definitely the BEST answer out of the five.

I hope that helps!­

Q.64 The primary purpose of the passage is to

The correct answer is ✅ (C) report findings that raise questions about a reason for corporate mergers and acquisitions and suggest possible alternative reasons.
Here's why (C) is correct:

• The passage presents several studies from the 1970s and 1980s showing that mergers and acquisitions (M&As) do not typically lead to financial gains for acquiring firms.
• It then highlights the paradox: despite these findings, M&As continue, and firms insist on economic motives.
• Finally, the passage suggests alternative explanations—such as executive compensation, poor oversight, managerial error, or imitation—that may better explain why these acquisitions occur.

Now, let’s eliminate the wrong options one by one:

(A) review research demonstrating the benefits of corporate mergers and acquisitions and examine some of the drawbacks that acquisition behavior entails

• Wrong because the passage does not show benefits of mergers and acquisitions; it mainly shows negative findings or shortcomings of M&A activities.
• The focus is not a balanced pros-and-cons review; it's a critique.

(B) contrast the effects of corporate mergers and acquisitions on acquiring firms and on firms that are acquired

• Tempting but wrong: While the passage does mention that the stock value of the target firm increases more than that of the acquiring firm, this is just one observation, not the main structure of the passage.
• The primary goal isn’t to contrast effects between two types of firms.

(D) explain changes in attitude on the part of acquiring firms toward corporate mergers and acquisitions

• Wrong because the passage doesn’t discuss any historical or attitudinal change among acquiring firms.
• Firms are still saying their motives are economic; no change is noted or explained.

(E) account for a recent decline in the rate of corporate mergers and acquisitions

• Wrong: There is no mention of a decline in M&A activity.
• In fact, the passage explicitly says mergers and acquisitions remain common.

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?
✅ Correct Answer: (C) They do not fulfill the professed goals of most acquiring firms.
Why it’s correct:

• The passage reports that acquiring firms often fail to maintain pre-merger profitability, that the gains do not cover acquisition premiums, and that the acquiring firm's stock rises less than the target’s.
• These findings challenge the claim that such deals are economically beneficial to acquiring firms—which is the professed goal.
• So, the findings do not support the claimed economic benefits, making (C) the best fit.

Eliminating wrong options:

• (A): “They include a decrease in value of many acquiring firms’ stocks.”
  
  • The passage does not say acquiring firms' stock decreases—only that it increases less than the target firm's stock.
• (B): “They tend to be more beneficial for small firms than for large firms.”
  
  • No comparison is made between small and large firms in the passage.
• (D): “They tend to be beneficial in the long term...”
  
  • The passage does not mention long-term benefits for acquiring firms; in fact, it implies underperformance even after the merger.
• (E): “They discourage such firms from making future bids...”
  
  • The opposite is stated: M&A activity remains common, so acquiring firms are not deterred.

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?
✅ Correct Answer: (E) Factors other than economic benefit to the acquiring firm help to explain the frequency with which they occur.
Why it’s correct:

• The author clearly points out that economic justifications don't align with the outcomes.
• The final paragraph proposes non-economic motives: executive compensation, poor board oversight, errors in valuation, and “modeling” behavior.
• Therefore, other factors beyond economic benefit explain their frequency, making (E) a strong match.

Eliminating wrong options:

• (A): “Their known benefits to national economies explain their appeal...”
  
  • The passage questions the rationale behind M&As for firms—not that they’re driven by national benefit awareness.
• (B): “Despite their adverse impact... they are the best way...”
  
  • The author does not endorse M&As as the “best way” to reallocate resources—this goes beyond the passage’s tone.
• (C): “They are as likely to occur because of poor monitoring... as because of incentive compensation...”
  
  • The passage lists both as possibilities, but does not evaluate or weigh their likelihood equally.
• (D): “They will be less prevalent in the future...”
  
  • The passage says M&As remain common, and makes no prediction about decline.

67. The author of the passage mentions the effect of acquisitions on national economies most probably in order to
This refers to this sentence in the second paragraph:
That “but” is key—it signals the author is about to undermine or qualify this point.
✅ Correct Answer: (D) cite and point out the inadequacy of one possible explanation for the prevalence of mergers and acquisitions during the 1970s and 1980s

• The author acknowledges that acquisitions might help national economies but quickly shifts focus to say that individual executives pursue acquisitions for private interests, not national benefit.
• So the national benefit explanation is mentioned but then questioned or downplayed—that’s exactly what (D) says.

Eliminating wrong options:

• (A): “Provide an explanation... overlooked by the findings...”
  
  • The author isn’t providing this as a genuine explanation; they are undermining it.
• (B): “Suggest that national economic interests played an important role...”
  
  • The author does not suggest national interests were important; the whole point is that they probably weren’t motivating factors.
• (C): “Support a noneconomic explanation...”
  
  • No—this sentence actually brings up an economic explanation, only to then dismiss it.
• (E): “Explain how modeling affected decisions...”
  
  • The modeling explanation comes later, and this sentence doesn’t refer to it at all.

68. According to the passage, during the 1970s and 1980s bidding firms differed from the firms for which they bid in that bidding firms
This is based on a part of the first paragraph, specifically:
✅ Correct Answer: (E) experienced less of an increase in stock value when a prospective merger was announced

• This is a direct restatement of what the passage says: bidding firms’ stock rises less than that of the target firms.

Eliminating wrong options:

• (A): “tended to be more profitable before a merger than after...”
  
  • The passage says acquired firms’ profitability couldn’t be maintained—but that applies to the acquired, not necessarily a before-and-after comparison of bidders.
• (B): “more concerned about national economies...”
  
  • The passage rejects national interest as a motivation; there’s no comparison here between the two firm types on that basis.
• (C): “run by managers whose actions were modeled...”
  
  • While modeling is discussed, it applies to managers in general, not specifically in contrast to the target firms.
• (D): “anticipated greater economic advantages...”
  
  • The passage questions whether these deals had economic advantage—this is an assumption not stated.

69. According to the passage, which of the following was true of corporate acquisitions that occurred during the 1970s and 1980s?
Let’s match the options to the actual findings in the passage.
✅ Correct Answer: (D) The gains realized by most acquiring firms did not equal the amounts expended in acquiring target firms.
From the passage:
This is almost verbatim what option (D) says.
Eliminating wrong options:

• (A): “Few... were subsequently divested.”
  
  • No mention of divestitures is made at all.
• (B): “Only small increases in acquired firms’ levels of profitability.”
  
  • Actually, it says acquiring firms were unable to maintain the pre-merger profitability of the acquired firms—not that the acquired firms saw small increases.
• (C): “Most... were based on an overestimation...”
  
  • Managerial error in valuation is mentioned as one possible factor, but not that most acquisitions were based on it.
• (E): “About half... led to long-term increases...”
  
  • No such statistic or long-term stock trend is mentioned.

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?
We’re looking for something the author mentions as a contributing factor—even if only speculatively.
From the second paragraph:
✅ Correct Answer: (B) Managers miscalculated the value of firms that were to be acquired.
This directly corresponds to “managerial error in estimating the value...”
Eliminating wrong options:

• (A): “Managers wished to imitate... because they saw how beneficial...”
  
  • Imitation is mentioned (“modeling”), but not because the others were financially successful—in fact, the passage disputes that those mergers were successful.
• (C): “Lack of consensus... conflicting goals...”
  
  • This idea is not discussed anywhere.
• (D): “Compensation packages increased...”
  
  • While incentive compensation is mentioned, the increase in total compensation during that period is not.
• (E): “Value of bidding firms’ stock increased significantly...”
  
  • The passage says their stock increased less than the target firm’s, not that it increased significantly.