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

Two Indian private banks of similar size merge, and the board's main stated reason is that the combined branch network and head office can be run at a lower cost per rupee of business than the two separate entities. Which motive does this describe?

The motive is economies of scale. Merging two similar banks lets fixed costs such as branches, systems and head office be spread over a larger business volume, lowering the cost per rupee of business. The other options concern risk, supply chains, tax or break-up value.

  1. ADiversification of shareholder risk
  2. BEconomies of scaleCorrect
  3. CVertical integration of the supply chain
  4. DAcquiring tax losses
  5. Exploiting an undervalued target through asset stripping

Explanation

Spreading fixed costs such as branches, technology and head office over a larger volume of business reduces unit cost, which is an economy of scale. Diversification concerns risk, not cost per unit. No supply chain, tax loss or asset stripping is involved.

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