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ACCA Strategic Professional · Advanced Financial Management · Acquisitions and mergers versus other growth strategies

Zeta plc is considering buying a competitor in the same industry. The board's main reason is that the combined company would be able to spread head office costs and purchasing overheads over a larger output, so that the cost per unit falls. Which type of motive does this describe?

The motive is economies of scale from a horizontal acquisition. Buying a competitor in the same industry lets the combined firm spread fixed head office and purchasing costs over greater output, lowering unit cost. It is not diversification or vertical integration because the target is neither unrelated nor a supplier or customer.

  1. AEconomies of scale from a horizontal acquisitionCorrect
  2. BDiversification to reduce unsystematic risk for shareholders
  3. CVertical integration to secure supply of inputs
  4. DAcquisition of undervalued assets to realise a market-to-book gain

Explanation

Buying a same-industry competitor is a horizontal acquisition. Spreading overheads and purchasing costs over higher output is the classic economies of scale motive. Diversification would involve unrelated businesses and vertical integration involves suppliers or customers.

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