Fall 2022 Semester Exam Solutions on Mergers and Acquisitions – University of California

Here are accurate exam questions and solutions on mergers & acquisitions – for a fall exam written at the university of California in 2022. You’re free to use them for your revision as the solutions presented are easy to understand. You can also ask us for corporate finance exam help and receive better grades. We work with the best finance exam solvers who deliver guaranteed success.

To gain an understanding of the processes involved in merger and acquisition activities, it is necessary to have some appreciation of the driving forces which lie behind them. Most of these forces are rational and it may well be that no acquisition of significant size, at least in a public company, is likely to proceed unless it is capable of rational justification.

However, mergers and acquisitions form an area of business activity where the emotions and instincts of those closely involved play a major part. Why a particular deal is being progressed in a particular way becomes a complex matter. Anticipating the next move becomes as much a matter of psychology as of logic.

The reasons for making acquisitions are probably as numerous as people who make them. However, motives can be usefully grouped under the following:

An acquisition of a company in the same general line of business will increase the acquiror's market share in that sector. At the same time, the acquiror may strengthen its market position in another way by eliminating an active competitor. Acquisitions of this type (called horizontal) are the most easily justified by the acquiror in terms of 'fit'. A target company in the same line of business is likely to have a broadly similar structure and organisation.

Its business should be fairly easy for the acquiror to understand and assimilate. Specific executives may be known to management. The industry grape-vine will probably have alerted the acquiror to any significant problems that may exist and some which no doubts do not. After the acquisition, there may be obvious cost savings through the elimination of duplicated functions or by economies of scale.

The opposite side of the coin is that mergers of this type are the most likely to attract official scrutiny. This is particularly so in jurisdictions where, and at periods when, anti-monopoly regulatory bodies are strong or fears of unemployment The very reasons which make this type of acquisition attractive, principally reduction in competition and the elimination of duplication leading to redundancies, are the factors which can most readily unite opposition groups.

Management has the responsibility for determining the future direction and policy of the business. The development of a new product range or entry into a more effectively by acquiring an existing business than by starting from scratch.

In sectors which have a depressed stock market rating, it may also be possible to acquire assets and facilities through an acquisition at a lower price than the cost to build comparable 'green field' facilities. It must be borne in mind, however, that it is rare for the assets acquired to be precisely what the acquiror would have wished or in the condition it would desire.

Growth can become an end in itself, perhaps because it is taken as a proxy for dynamic management. In the short term, whether growth is simply growth in assets and sales or whether it is also growth in profitability can become obscured Comparing the year-by-year performance of a fast-growing group on a consistent basis is a difficult task.

It has been frequently argued that in certain circumstances a complex business is worth more than the sum of its parts, in other words, two plus two can equal more than four. The thrust of this argument is that by putting organisations together the performance of the components can be enhanced and their potential increased by feeding off each other's strengths.

Examples might be a company with a good product range combining with a company with strong marketing and distributing capability or a research-oriented company combining with a traditional manufacturer. Size alone can confer benefits, for example when negotiating with suppliers, customers and financiers.

In practice it has been difficult to demonstrate that these theoretical advantages have been realized. It is fairly easy to show that costs have been reduced following a horizontal merger. Benefits from synergy tend to be less tangible and more difficult to quantify particularly when accounting systems may not have been designed to capture the relevant information. Despite this, synergy remains one of the most important theoretical bases used to justify mergers and acquisitions because it opens up the prospect of benefits to the economy as a whole. Synergy is therefore an important counter to arguments in favor of restraints on merger activity.

Critical business relationships exist with suppliers and customers. In some industries, for example and petroleum, the relationships are so close that it is difficult for the functions of supply, production and marketing to be conducted on a totally arm's length basis. There is therefore a tendency for these activities to be controlled inside one group. An industry where this type of merger has occurred is called 'vertically integrated. It should be said that what is presented as compelling business logic at one time seems later to owe much to herd instinct.

An increased availability of a previously scarce raw material, for example crude oil, decreases the importance of a guaranteed source of supply. Although vertical integration brings more aspects of the business under top management's control, it also complicates the allocation of profits and costs. The performance of executives in charge of a particular division cannot be properly evaluated and monitored if key variables are out of their hands. Initiative may be stifled as freedom of action of the various parts of the organisation are constrained by the interests of others.

Management may seek to reduce risks by acquiring a portfolio of assets or companies rather than being dependent on one product or industry. To combine in one group businesses which are not equally affected by prevailing economic factors and cycles should produce a more consistent overall performance than to be heavily dependent on one business. Complex analysis may seek to demonstrate this statistically, backing up the commonsense belief in not keeping 'all your eggs in one basket'.

Groups consisting of businesses which do not bear particularly close commercial relationships with each other are called conglomerates. It has proved difficult to demonstrate that conglomerates have achieved a superior performance through reduction of risk.

Their rise seems to have been partly a product of 'merger mania' and of the philosophy that a good manager can manage anything. However, the practical difficulties of controlling very diverse groups may have cancelled out the theoretical benefits of diversification. Conglomerates built up of disparate parts have at a later stage of their development tended to rationalise their activities. Management picks out certain core businesses, spinning off or disposing of 'non-core' companies.