In some cases not all of the stockholders feel the

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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. horizontal merger A merger of two firms in the same line of business. vertical merger A merger in which a firm acquires a supplier or a customer. congeneric merger 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 customer. conglomerate merger 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...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online