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

A textile company merges with an IT services firm, both unrelated, mainly to stabilise combined cash flows because their earnings are not perfectly correlated. Which statement is correct?

It is a conglomerate merger, and the benefit is mainly financial synergy. The firms are in unrelated businesses, and imperfectly correlated earnings stabilise combined cash flows, which can increase debt capacity and lower the cost of capital. It is neither horizontal nor vertical.

  1. AIt is a horizontal merger and the gain is operating synergy
  2. BIt is a conglomerate merger and the benefit is mainly financial synergy such as higher debt capacityCorrect
  3. CIt is a vertical merger and the gain is backward integration
  4. DIt is a concentric merger since both firms share the same customers

Explanation

Merging unrelated businesses is a conglomerate merger. Imperfectly correlated earnings reduce combined risk, which can raise debt capacity and lower the cost of capital, a financial synergy. No competitor or value-chain link exists, so horizontal or vertical labels fail.

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