Unformatted text preview: r stockholders
do not want to become a part
of another firm. In some cases,
not all of the stockholders feel
the same about the impending
takeover. Occasionally, when a firm becomes the target of an unfriendly takeover, it will as
a defense acquire another company. Such a strategy typically works like this: The
original target firm takes on additional debt to finance its defensive acquisition;
because of the debt load, the target firm becomes too highly levered financially to
be of any further interest to its suitor. To be effective, a defensive takeover must
create greater value for shareholders than they would have realized had the firm
been merged with its suitor. CHAPTER 17 Hint A merger undertaken
to obtain the synergy benefit is
usually a horizontal merger.
Diversification can be either a
vertical or a congeneric merger.
The other benefits of merging
can be achieved by any one of
the four types of mergers.
A merger of two firms in the
same line of business.
A merger in which a firm
acquires a supplier or a
A merger in which one firm
acquires another firm that is in
the same general industry but
neither in the same line of
business nor a supplier or
A merger combining firms in
unrelated businesses. Mergers, LBOs, Divestitures, and Business Failure 717 Types of Mergers
The four types of mergers are the (1) horizontal merger, (2) vertical merger, (3)
congeneric merger, and (4) conglomerate merger. A horizontal merger results
when two firms in the same line of business are merged. An example is the merger
of two machine tool manufacturers. This form of merger results in the expansion
of a firm’s operations in a given product line and at the same time eliminates a
competitor. A vertical merger occurs when a firm acquires a supplier or a customer. For example, the merger of a machine tool manufacturer with its supplier
of castings is a vertical merger. The economic benefit of a vertical merger stems
from the firm’s increased control over the acquisition of raw materials or the distribution of finished goods.
A congeneric merger is achieved by acquiring a firm that is in the same general industry but is neither in the same line of business nor a supplier or customer.
An example is the merger of a machine tool manufacturer with the manufacturer
of industrial conveyor systems. The benefit of a congeneric merger is the resulting
ability to use the same sales and distribution channels to reach customers of both
businesses. A conglomerate merger involves the combination of firms in unrelated
businesses. The merger of a machine tool manufacturer with a chain of fast-food
restaurants is an example of this kind of merger. The key benefit of the conglomerate merger is its ability to reduce risk by merging firms that have different seasonal or cyclic patterns of sales and earnings.5 Review Questions
17–1 Define and differentiate among the members of each of the following sets
of terms: (a) mergers, consolidations, and holding companies; (b) acquiring company and target company; (c) friendly merger and...
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