- 10 Marks
FM – Nov 2019 – L2 – Q2a – Mergers and acquisitions
Explain the justification for horizontal, vertical, and conglomerate integration strategies in mergers and acquisitions.
Question
Global companies continuously explore ways to be more efficient and effective to survive the challenging global competition. Some resort to mergers and acquisitions to survive. In the light of this, Carsley Ltd and Powell Ltd are planning to merge to form Stimac Ltd. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:
| Carsley Ltd | Powell Ltd | |
|---|---|---|
| Number of shares | 40m | 10m |
| Annual earnings | GH¢10m | GH¢5.8m |
| P/E ratio | 8 | 10 |
Post-merger annual earnings of the enlarged company are expected to be eight percent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac Plc.
Required:
a) Explain to the stakeholders of both companies the justification for the following integration strategies in mergers and acquisitions: i) Horizontal takeover (4 marks)
ii) Vertical backward and forward takeovers (4 marks)
iii) Conglomerate mergers (2 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Conglomerate Merger, Horizontal Takeover, Vertical Takeover
- Level: Level 2
- Topic: Mergers and acquisitions
- Series: NOV 2019