For an acquisition to make economic sense, which of the following must occur?

For an acquisition to make economic sense, which of the following must occur?

• A. There will be no financial incentive to make the acquisition.
• B. There must be a resulting economic gain.
• C. The target's assets must be liquid.
• D. The buyer must have a cash-rich balance sheet.

Answer: (B)

An acquisition makes economic sense only when it is expected to create value for the buyer, meaning the combined entity should generate more cash flows than the buyer could on its own after paying the purchase price and any integration costs. In practice this is about positive net present value: the present value of expected synergies, revenue growth, cost savings, and other benefits should exceed the price paid for the target. This can be achieved through various sources of value, such as economies of scale, expanded market share, cross-selling opportunities, improved pricing power, or tax efficiencies. The financing mix (whether you have lots of cash or borrow) is a separate consideration from whether the deal itself is value-adding. That’s why a deal with no financial incentive or no expected economic gain wouldn’t be pursued, and why liquidity of the target’s assets or the buyer’s cash reserves aren’t prerequisites for economic sense. The key criterion is the expected economic gain from the acquisition.

An acquisition makes economic sense only when it is expected to create value for the buyer, meaning the combined entity should generate more cash flows than the buyer could on its own after paying the purchase price and any integration costs. In practice this is about positive net present value: the present value of expected synergies, revenue growth, cost savings, and other benefits should exceed the price paid for the target.

This can be achieved through various sources of value, such as economies of scale, expanded market share, cross-selling opportunities, improved pricing power, or tax efficiencies. The financing mix (whether you have lots of cash or borrow) is a separate consideration from whether the deal itself is value-adding.

That’s why a deal with no financial incentive or no expected economic gain wouldn’t be pursued, and why liquidity of the target’s assets or the buyer’s cash reserves aren’t prerequisites for economic sense. The key criterion is the expected economic gain from the acquisition.