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

Two Indian pharma firms merge. Combined sales are ₹500 crore, and the merged firm eliminates duplicate R&D labs and administrative offices, reducing the combined fixed cost per unit. Which synergy does this primarily represent?

This is operating synergy through economies of scale. Removing duplicate laboratories and offices and spreading fixed costs across larger volume lowers cost per unit. Financial synergy would involve lower capital cost or higher debt capacity, which the scenario does not mention.

  1. AFinancial synergy through lower cost of capital
  2. BOperating synergy through economies of scaleCorrect
  3. CTax synergy from set-off of accumulated losses
  4. DDiversification synergy from reducing earnings volatility

Explanation

Eliminating duplicate facilities and spreading fixed costs over larger volumes is an operating synergy arising from economies of scale. Financial synergy relates to cost of capital and debt capacity. No loss set-off or diversification is described.

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