Question

"The imperfect correlation between the operating cash flows of the combining firms results in decreases to the value of pre-merger debt to the benefits of the shareholders." True or false?

Answer 1

False

Assume company A and B, are involved in 2 different segments , while company A having positive operating cash flow, while company B having negative operating cash flows. Thus in this case if both companies merges, not necessarily the synergy impact of combination will lead to decrease in value of pre-merger debts which might benefit the shareholders, in fact there is possibility that after combining operating cash flows of the resultant company becomes negative and value of debt increases, but cash flow from other components like from financing activities increases. Thus the company might earn reasonable profits but not from core activities