Question

An internal audit team is performing a due diligence audit to assess plans for a potential merger/acquisition. Which of the following would be the least valid reason for a company to merge with or acquire another company?

A. To increase stock prices.
B. To reduce labor costs.
C. To respond to government policy.
D. To diversify risk.

Answer 1

The correct answer is option A. To increase stock prices.

Step-by-step explanation:

The least valid reason for a company to merge with or acquire another company among the options provided would be 'To increase stock prices.' While enhancing stock prices might be a byproduct of a merger or acquisition, it is not typically the primary motive. Significant reasons for mergers and acquisitions include becoming more efficient, acquiring a new product line, or reducing competition, and can also align with responding to governmental policies that might affect the industry. In contrast, stock prices are influenced by a wide array of factors and are more of a reflection of the market's perception of the company's value post-merger or acquisition.

Mergers and acquisitions often lead to a reduction in labor costs through the elimination of duplicate services within the two combined companies. Responding to government policy can also be a valid reason if, for example, new regulations make the merger beneficial or necessary for survival.

Diversifying risk could be another sound strategic reason, as it can create a more resilient organization by spreading out exposure to different markets or products.