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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A pharmaceutical company buys its main active-ingredient supplier to secure input quality and reduce supplier bargaining power. How is this acquisition best classified?

This is backward vertical integration, because the acquirer takes over a business earlier in its own supply chain, the input supplier. Forward integration would involve distributors, horizontal would involve a competitor, and a conglomerate deal would involve an unrelated business.

  1. ABackward vertical integrationCorrect
  2. BForward vertical integration
  3. CHorizontal integration
  4. DConglomerate diversification
  5. Management buy-out

Explanation

The target operates earlier in the supply chain, supplying inputs to the buyer, which is backward vertical integration. Forward integration would be buying a distributor or retailer. Horizontal would mean a competitor at the same stage; conglomerate means unrelated business.

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