Theory question 102
Business CombinationsABC Limited, a textile company and XYZ Limited, a cotton processing company agreed to merge.
(a) Identify and explain the type of merger to be formed by the companies.
(b) State four reasons that would have necessitated the formation of the merger.
(c) List and explain three sources of finance available to the company formed.
Show the model answer
(a) Vertical merger (backward integration for the textile firm): firms at different stages of the production of the same product combine, here a cotton processor (raw material) and a textile maker (user of the cotton).
(b) Any four: to secure a regular supply of raw material; to reduce costs and enjoy economies of scale; to raise more capital; to reduce or remove competition and gain market share; to control prices; to avoid liquidation of a weak firm; to cut duplicated overheads and staff.
(c) Any three, explained: issue of shares (selling ordinary/preference shares to the public); debentures (long-term loans at fixed interest); bank loans and overdrafts; retained profits; hire purchase and leasing of equipment; trade credit from suppliers.
Different stages of the same product line = vertical merger.