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

Two competing Indian cement companies merge and the combined entity closes duplicate plants and sales offices, lowering average cost per tonne. This gain is best described as:

This is operating synergy arising from economies of scale. Two competing cement firms in a horizontal merger remove duplicate plants and offices, spreading fixed costs over larger output and reducing cost per tonne. The gain comes from operations, not from financing, tax losses or diversification.

  1. AFinancial synergy from a lower cost of capital
  2. BOperating synergy from economies of scaleCorrect
  3. CTax synergy from set-off of accumulated losses
  4. DDiversification benefit from unrelated businesses

Explanation

Merging direct competitors is a horizontal merger. Eliminating duplicate facilities and spreading fixed costs over higher output reduces unit cost, which is operating synergy through economies of scale. No loss set-off or cost of capital effect is described.

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