A firm acquires a strategically related target after successfully fending off fo

Question

A firm acquires a strategically related target after successfully fending off four other bidding firms. Under what conditions, if any, can the firm that acquired this target expect to earn an economic profit from doing so?

A) There are no conditions

B) The bidding firm can realize an economic profit if the bid price is less than the value of the combined entity

C) The bidding firm can realize an economic profit if the bid price is more than the value of the combined entity

D) None of the above

A) There are no conditions

B) The bidding firm can realize an economic profit if the bid price is less than the value of the combined entity

C) The bidding firm can realize an economic profit if the bid price is more than the value of the combined entity

D) None of the above

Explanation / Answer

Answer: Option (B) - The bidding firm can realize an economic profit if the bid price is less than the value of the combined entity.

Explanation: In the given scenario, there are two firms - the bidding firm and the acquired firm. Suppose the value of bidding firm is $10,000 and the combined value of bidding firm and acquired firm is $20,000. The difference amount is ($20,000 — $10,000 = $10,000). Now, if the bidding firm acquires the acquired firm for less than $10,000, i.e. the difference amount, only then it is going to realize an economic profit.

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