Discussion
The following reasons are good motives for mergers except:
(I) Economies of scale
(II) Complementary resources
(III) Diversification
(IV) Eliminating Inefficiencies
Answer: C
Correct answer: III only
Diversification is the dubious motive here, because shareholders can diversify their own portfolios far more cheaply than a company can by acquisition - so the merger creates no value they could not obtain themselves. The other three are genuine sources of value: economies of scale, resources that complement each other, and the removal of inefficiency from a badly run target.
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