Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 13

One CEO justified the merger of his soft-drink company with a machine tool company in the following manner: "This is a great merger. First the products are unrelated. Thus our company's earnings volatility is likely to decrease. Second, our management team has proved that we are better managers than the former management team of the tool company, and thus we are likely to discover new ways to create and capture value within the tool company." Evaluate this rationale.