Question

An acquisition creates value for a shareholder when:

a) By acquiring a business whose fundamental value is lower than the purchase price

b) When a company acquires a business whose fundamental value is higher than the purchase price

c) As long as the fundamental value of the target plus the present value of the synergies is less than the purchase price

d) None

Answer 1

An acquisition creates value for a shareholder when:

c) As long as the fundamental value of the target plus the present value of the synergies is less than the purchase price

Explanation:

Acquisition creates value for the shareholder when benefits received is more than what we paid to acquire the other business. While acquiring the target we get the assets and also we get some synergy benefits such as increase in market share, market leadership, increase in profit, reduction in cost of production etc. Since we are getting the assets of the target as well as synergy benefit due to the acquisition, As long as the fundamental value of the target plus the present value of the synergies is less than the purchase price acquisition will create value for shareholder.