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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

A leading Indian auto-component maker merges with an unrelated hotel chain, mainly to diversify earnings. Which type of synergy is most plausibly claimed, and which is least likely to arise?

Financial synergy is the most plausible, through lower earnings volatility, higher debt capacity and a cheaper cost of capital, while operational synergy is least likely. In a conglomerate merger of unrelated businesses there are few shared operations to rationalise, and the firms are not competitors.

  1. AOperational synergy is most likely; financial synergy is least likely
  2. BFinancial synergy such as lower cost of capital and debt capacity is most plausible; operational synergy is least likelyCorrect
  3. CBoth operational and financial synergies are equally likely
  4. DMarket-power synergy is most likely because the firms compete

Explanation

In a conglomerate merger the businesses are unrelated, so there is little scope for shared production, distribution or technology economies. Gains, if any, come from diversification-led financial synergy such as reduced earnings volatility, higher debt capacity and a lower cost of capital. Market power requires competitors, which these are not.

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