Comprehension
The CEO of ABC Telecom Ltd. (ABC) is in a quandary since he received the telephone call in the morning from
his counterpart at LMN Telecom Ltd. (LMN). Both companies were engaged in a bitter experience a couple of
years ago when they had attempted to merge with the intention of creating a behemoth telecom company,
possibly the largest in the world. The merger had fallen through due to opportunistic behavior on the part of Mr.
Das, then CEO of LMN. During the time the merger talks were taking place, Mr. Das had also approached a few
other suitors for LMN in an attempt to force ABC to pay a higher price. Further, there were reports of attempts
by management of LMN to scuttle the deal. Back then, ABC had also faced stiff opposition to the deal from one
of its large shareholders.
Since then, a lot has changed for both companies. The bleak economic conditions due to recession had led to a drastic fall in the market value of both companies, with ABC comparatively losing much more in terms of market value. Raising money has become more di cult for both companies, especially for LMN. On the brighter side for ABC, the opposing shareholder had recently sold off his stake to another investor who earlier had supported the original merger deal with LMN a couple of years ago.
Since then, a lot has changed for both companies. The bleak economic conditions due to recession had led to a drastic fall in the market value of both companies, with ABC comparatively losing much more in terms of market value. Raising money has become more di cult for both companies, especially for LMN. On the brighter side for ABC, the opposing shareholder had recently sold off his stake to another investor who earlier had supported the original merger deal with LMN a couple of years ago.
Question: 1
Which of the following would be the most appropriate line(s) of thought for the CEO of ABC to adopt in response to the offer by LMN?
I. Once bitten twice shy. There is simply no way I can think of resuming talks with LMN after their unethical behaviour the previous time around. I would rather spend my time on merger discussions with other companies.
II. The deal may make less business sense this time around. However, if it goes through, I will become the CEO of the world’s largest telecom company. So let us try our luck once more.
III. I will resume talks only if they provide guarantees as to the reimbursement of our expenses incurred, in the event of the deal not materializing.
IV. Let me not be biased against dealing with LMN, if we can secure the deal at a reasonably low price, benefiting our shareholders, let us go ahead with it.
V. I am not sure if we can raise the money now. In any event, they are the ones facing greater financial problems. So let’s not hurry now. We might have an opportunity to buy them out at a cheaper price later.
Which of the following would be the most appropriate line(s) of thought for the CEO of ABC to adopt in response to the offer by LMN?
I. Once bitten twice shy. There is simply no way I can think of resuming talks with LMN after their unethical behaviour the previous time around. I would rather spend my time on merger discussions with other companies.
II. The deal may make less business sense this time around. However, if it goes through, I will become the CEO of the world’s largest telecom company. So let us try our luck once more.
III. I will resume talks only if they provide guarantees as to the reimbursement of our expenses incurred, in the event of the deal not materializing.
IV. Let me not be biased against dealing with LMN, if we can secure the deal at a reasonably low price, benefiting our shareholders, let us go ahead with it.
V. I am not sure if we can raise the money now. In any event, they are the ones facing greater financial problems. So let’s not hurry now. We might have an opportunity to buy them out at a cheaper price later.
I. Once bitten twice shy. There is simply no way I can think of resuming talks with LMN after their unethical behaviour the previous time around. I would rather spend my time on merger discussions with other companies.
II. The deal may make less business sense this time around. However, if it goes through, I will become the CEO of the world’s largest telecom company. So let us try our luck once more.
III. I will resume talks only if they provide guarantees as to the reimbursement of our expenses incurred, in the event of the deal not materializing.
IV. Let me not be biased against dealing with LMN, if we can secure the deal at a reasonably low price, benefiting our shareholders, let us go ahead with it.
V. I am not sure if we can raise the money now. In any event, they are the ones facing greater financial problems. So let’s not hurry now. We might have an opportunity to buy them out at a cheaper price later.
Show Hint
In decision-making questions, eliminate options driven by personal bias or ego. Focus instead on choices that maximize shareholder value and reduce risk.
Updated On: Dec 6, 2025
- i and iii
- ii and iv
- ii and iii
- i and iv
- iv and v
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The Correct Option is
Solution and Explanation
Step 1: Identify the CEO’s responsibility.
The CEO must act in the best interests of the company and its shareholders. Decisions should not be driven by personal ego, past resentment, or the desire for position. Profitability and timing matter most.
Step 2: Evaluate each statement.
- (I) Refusal due to past bitterness is an emotional reaction, not a rational business decision. ✗
- (II) The desire to become CEO of the largest telecom company is an ambition-driven motive, not necessarily aligned with shareholder interests. ✗
- (III) Asking for reimbursement guarantees is cautious, but it does not directly consider profitability or long-term benefit. Only partial relevance. ✗
- (IV) This is practical — if the deal is reasonably priced and benefits shareholders, it is worth pursuing. ✓
- (V) This is also rational — waiting could allow ABC to buy LMN at a cheaper price since LMN is in deeper financial trouble. ✓
Step 3: Select the best combination.
Statements IV and V both emphasize maximizing shareholder benefit and strategic timing, making them the most appropriate. \[ \boxed{\text{iv and v}} \]
The CEO must act in the best interests of the company and its shareholders. Decisions should not be driven by personal ego, past resentment, or the desire for position. Profitability and timing matter most.
Step 2: Evaluate each statement.
- (I) Refusal due to past bitterness is an emotional reaction, not a rational business decision. ✗
- (II) The desire to become CEO of the largest telecom company is an ambition-driven motive, not necessarily aligned with shareholder interests. ✗
- (III) Asking for reimbursement guarantees is cautious, but it does not directly consider profitability or long-term benefit. Only partial relevance. ✗
- (IV) This is practical — if the deal is reasonably priced and benefits shareholders, it is worth pursuing. ✓
- (V) This is also rational — waiting could allow ABC to buy LMN at a cheaper price since LMN is in deeper financial trouble. ✓
Step 3: Select the best combination.
Statements IV and V both emphasize maximizing shareholder benefit and strategic timing, making them the most appropriate. \[ \boxed{\text{iv and v}} \]
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Question: 2
The merger of ABC and LMN has been confirmed after detailed negotiation with LMN holding the majority share of the resultant entity. LMN has financed the merger by taking debt at higher-than-market interest rates from its bankers, in the hope that it would be able to streamline operations and reduce costs in the resultant entity which will allow it to repay the loan.
If you were an investor looking to invest in telecom companies, which of the following could be the strongest reason for staying away from investing in the resultant entity?
The merger of ABC and LMN has been confirmed after detailed negotiation with LMN holding the majority share of the resultant entity. LMN has financed the merger by taking debt at higher-than-market interest rates from its bankers, in the hope that it would be able to streamline operations and reduce costs in the resultant entity which will allow it to repay the loan.
If you were an investor looking to invest in telecom companies, which of the following could be the strongest reason for staying away from investing in the resultant entity?
If you were an investor looking to invest in telecom companies, which of the following could be the strongest reason for staying away from investing in the resultant entity?
Show Hint
When evaluating mergers, focus on whether the combined entity gains real competitive advantage. If a merger only adds debt without solving structural problems, it becomes a clear warning sign for investors.
Updated On: Aug 23, 2025
- The new entrants in the telecom market were coming with better offers for the customers.
- The market would be as competitive as ever for the resultant entity, thus providing no guarantee for success.
- The combined management did present any grand strategies to the investors.
- ABC’s management was giving in to Mr. Das who was a known opportunist.
- LMN was using high-cost debt to purchase another company in the same industry facing similar problems with no visible advantage for the combined entity over competitors.
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The Correct Option is
Solution and Explanation
Step 1: Investor’s viewpoint.
An investor evaluates risk, profitability, and sustainability. High debt burden, lack of competitive edge, or weak strategy are red flags that discourage investment.
Step 2: Assess each option.
- (A) New entrants may offer better deals, but that does not necessarily make the merger unattractive by itself. ✗
- (B) Market competitiveness is always a factor, but by itself it is too generic — does not provide a strong reason to avoid investment. ✗
- (C) Absence of “grand strategies” is vague; investors look for concrete disadvantages rather than presentation style. ✗
- (D) Blaming opportunism of an individual (Mr. Das) is personal, not a solid financial reason. ✗
- (E) This highlights the most critical issue: LMN financed the merger with \emph{high-cost debt}, and the combined entity still faces the same structural problems as before. There is no new advantage, but higher liabilities, making this a strong reason to avoid investing. ✓
Step 3: Final conclusion.
Since the company now carries expensive debt while offering no competitive edge, investing is risky. Thus, option E is the strongest reason. \[ \boxed{\text{E}} \]
An investor evaluates risk, profitability, and sustainability. High debt burden, lack of competitive edge, or weak strategy are red flags that discourage investment.
Step 2: Assess each option.
- (A) New entrants may offer better deals, but that does not necessarily make the merger unattractive by itself. ✗
- (B) Market competitiveness is always a factor, but by itself it is too generic — does not provide a strong reason to avoid investment. ✗
- (C) Absence of “grand strategies” is vague; investors look for concrete disadvantages rather than presentation style. ✗
- (D) Blaming opportunism of an individual (Mr. Das) is personal, not a solid financial reason. ✗
- (E) This highlights the most critical issue: LMN financed the merger with \emph{high-cost debt}, and the combined entity still faces the same structural problems as before. There is no new advantage, but higher liabilities, making this a strong reason to avoid investing. ✓
Step 3: Final conclusion.
Since the company now carries expensive debt while offering no competitive edge, investing is risky. Thus, option E is the strongest reason. \[ \boxed{\text{E}} \]
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