Risk reduction and mergers

Reference no: EM1343788

Two large, publicly owned firms are contemplating a merger. No operating synergy is expected. But, since returns on the 2 firms aren't perfectly positively correlated, the standard deviation of earnings would be reduced for the combined corporation. One group of consultants argues that this risk reduction is sufficient grounds for the merger. Another group thinks this type of risk reduction is irrelevant because stockholders can themselves hold the stock of both companies and thus gain the risk-reduction benefits without all the hassles and expenses of the merger. Whose position is correct?

Reference no: EM1343788

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