GMAT Reading Comprehension

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Source: GWD

Level: 3

Findings from several studies on corporate mergers and acquisitions during the 1970's and 1980's 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 post-acquisition 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 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. 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.

Question List: 1 2 3

The author of the passage implies that which of the following is a possible partial explanation for acquisition behavior during the 1970's and 1980's?

  • 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.

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