Question

1- Discuss any three factors that could influence the choice between a merger and acquisition of shares in a business combination transection 2- Explain why appropriate examples, four possible sources of value in corporate merger.

Answer 1

1]

Three factors that could influence the choice between a merger and acquisition are :

1. Legal restrictions with respect to acquisition of shares - For example, some countries do not permit acquisition of shares by foreign companies beyond a specified limit in sensitive sectors such as defence, agriculture etc.
2. Control of board - Acquisition of shares would allow the acquiring company to control a majority of the board of directors, whereas a merger would not
3. Acquisition of a majority of the shares by another company may not agree with the existing shareholders, who may demand a high premium in return for their shares

2]

Four possible sources of value in a merger are :

1. Each company will have access to the other's customer base. For example, Vodafone and Idea merged in India to create the second largest telecom company in the country, which gave each company access to the entire customer base of both companies
2. Employee cost savings. In the above example, the merged company would have employees with overlapping responsibilities. Such redundant employees can be identified to cut employee costs
3. Share infrastructure - In the same example, each company would have overlapping telecom towers, transmitters and other infrastructure. Extra infrastructure which is not required can be scrapped, resulting in savings
4. The combined company would have more bargaining power with suppliers as well as customers since it is much larger in size.