Which of the following is the main reason that most mergers and acquisitions negatively affect shareholder value?

• A. Mergers always result in increased market competition, reducing profits.
• B. Synergies are often overestimated, leading to disappointing post-merger performance.
• C. The Herfindahl-Hirschman Index (HHI) always decreases after a merger, lowering firm value.
• D. Shareholders typically lose voting rights after a merger.

Answer: (B)

Verified step by step guidance

1. Understand the concept of mergers and acquisitions (M&A) and their intended purpose, which is often to create synergies that increase the combined firm's value beyond the sum of the separate firms.
2. Recognize that synergies refer to cost savings, increased revenues, or other efficiencies expected from combining two firms, which are a key justification for M&A activity.
3. Analyze why synergies might be overestimated: managers may have overly optimistic projections or fail to account for integration difficulties, cultural clashes, or regulatory hurdles.
4. Consider the impact of overestimating synergies on shareholder value: if the expected benefits do not materialize, the combined firm's performance may disappoint, leading to a decline in shareholder value.
5. Evaluate the other options and understand why they are less likely to be the main reason: increased competition usually does not result from mergers, the Herfindahl-Hirschman Index (HHI) typically increases (not decreases) after mergers, and loss of voting rights is not a primary factor affecting shareholder value.