CET 2026 Slot 5 · MBA CET 2026 Attempt 1 Slot 5 · Verbal

Study the following information carefully and answer the question given below.

When you are the chief executive of a public company, the temptation to opt for a merger or acquisition is great indeed. Many such bosses may get a call every week or so from an investment banker eager to offer the kind of deal that is sure to boost profits. Plenty of those calls are proving fruitful. In the first three quarters of 2017, just over $2.5trn-worth of transactions were agreed globally, according to Dealogic, a data provider. The total was virtually unchanged from the same period in 2016, but the number in Europe, the Middle East and Africa was up by 21%.

It is easy to understand why an executive opts for a deal. Buying another business looks like decisive action, and is a lot easier than coming up with a new, bestselling product. Furthermore, being the acquirer is far more appealing than being the prey; better to be the butcher than the cattle. A takeover may keep activist hedge funds off the management’s back for a while longer. And being in charge of a much bigger company is a more demanding task that will surely justify a larger salary for the executives in charge.

But these temptations, good and bad, should generally be resisted. S&P Global Market Intelligence, a research arm of the ratings agency, has updated a study on the impact of deals on the acquiring company’s share price. The study looked at M&A deals done by listed companies in America’s Russell 3000 index between January 2001 and August 2017; deals were only included if they cost more than 5% of the total enterprise value of the acquirer (5% of the equity value, for financial companies). The acquirers’ shares underperformed the market and those of rival firms in the same industry.

That share-price performance was understandable, in the light of what tended to happen to the fundamentals of the acquiring company’s business. The study finds that, relative to the company’s peer group, net profit margins fall, as do the returns on capital and on equity; earnings per share grow less quickly; and both debt and interest expenses increase. As the deal is done, however, the executives always sound bullish. Costs will be cut, the companies will benefit from selling a wide range of products and so on; a whole range of “synergies” will be achieved. Instead, the combined companies tend to suffer from clashes of culture and teething problems as systems prove hard to integrate. The AOL-Time Warner merger of 2000 is perhaps the most famous example of a dysfunctional deal; at the time, it was one of the biggest mergers in corporate history. Not every deal is that bad. But instead of two plus two equalling the promised five, all too often they add up to three-and-a-half.