Question

Studies have shown that acquiring firm shareholders tend to realize minimal gains, if any, due to 0 the target firm and acquiring firm being too similar in size 0 O the target firm's being acquired for less than their true value S 3 w 0 merger gains being underestimated 0 overinflated synergy estimates 0 negative purchase premiums.

Answer 1

Negative purchase premiums basically means the acquisition premium is negative. This happens when the acquiring company purchases the target company for discount i.e. less than its fair market value. There are many reasons for the discount in value offered. The target company has been insolvent and is in auction, the target company is at long term declining performance, the cash flows and profits are constantly declining, the target company having no leadership at top.

These tends to give reason that acquiring company has to reinvigorate the target company. This takes toll on the operating profitability in the short term. These types of negative premiums happen in cyclical based commodity companies.

Hence, the correct option is e.negative purchase premiums