Long Type Questions - Enterprise Growth Strategies, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. What is Synergy ? In what forms it can take place ? (TBQ) (5 marks)
Ans. Synergy is the difference between the value of the combined firm and the value of the sum of participants in a merger. It occurs in the form of revenue enhancement and cost savings.
It can take place in the following forms :
(i) Operating synergy : It refers to cost savings that come through economies of scale or increased sales and profits.
(ii) Financial Synergy : It is the result of financial factors such as lower taxes, higher debt capacity or better use of idle cash.

Q2. Explain in detail the types of mergers ? (TBQ) (6 marks)
Ans.
(i) Conglomerate merger : Merger between firms that are involved in totally unrelated business activities. There are two types of mergers : pure and mixed. Pure conglomerate mergers involve firms with nothing in common. Mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
(ii) Horizontal mergers : These occur between companies in the same industry. It is a business consolidation that occurs between firms which operate in the same space, often as competitors offering the same goods or services.
(iii) Market extension mergers : These take place between two companies that deal in the same products but in separate markets. The purpose of this type of merger is to make sure that the emerging companies can get access to the bigger market and that ensures a bigger client base.
(iv) Product extension mergers : These take place between two business organisations that deal in products that are related to each other and operate in same market. This type of merger allows the merging companies to group together their products and get access to a bigger set of consumers.
(v) Vertical merger : A merger between two companies producing different goods or services for one specific finished product. It occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.

Q3. What are the reasons for failure of Merger and Acquisition (M & A) ? (TBQ) (6 marks)
Ans.
(i) Unrealistic Price Paid for Target : M & A involves valuation of the target company and paying a price for taking over the assets of the company. Many a times the shareholders of the target company stand benefited while that of the acquirer company end up on the losing side. This is because the assets of the target company are overpriced which dilutes the future earnings of the acquirer.
(ii) Difficulty in Cultural Integration : The merger of two or more different entities reflect different corporate cultures, styles of leadership, differing employee expectation and functional differences. While the process of merger is being executed, these differences are known but often ignored. Such, ignorance may turn out to be a disaster.
(iii) Overstated Synergies : Over estimation of synergies may lead to failure of mergers.
(iv) Integration difficulties : It means the combined entity has to adopt to a new set of challenges given by the changed circumstances.
(v) Poor Business Fit : M & A also fails when the products or services of the merging entities do not naturally fit into the acquirer’s overall business plan. This delays efficient and effective integration and causes failure.
(vi) Inadequate Due Diligence : Due diligence helps in detecting financial and business risks that the acquirer inhabits from the target company. Inaccurate estimation of the related risk may result in failure of merger.
(vii) Regulatory Issues : The entire process of merger requires legal approvals. If any of the stake holders are not in favour of the merger, they might create legal obstacles and slow down the entire process. This results in regulatory delays and increases the risks of deterioration for the business.
(viii) Human Resource Issues : Merger or acquisition is identified with job losses, restructuring and the imposition of a new corporate culture and identity. This can create uncertainty, anxiety and resentment among the company’s employees.

Q4. Explain the types of acquisitions. (6 marks)
Ans. There are four types of acquisitions :
(i) Friendly acquisition : Both the companies approve of the acquisition under friendly terms. There is no forceful acquisition and the entire process is cordial.
(ii) Reverse acquisition : A private company takes over a public company.
(iii) Back flip acquisition : A very rare case of acquisition in which the purchasing company becomes a subsidiary of the purchased company.
(iv) Hostile acquisition : Here the entire process is done by force. The smaller company is either driven to such a condition that it has no option but to say yes to the acquisition to save its skin or the bigger company just buys off all its share, thereby establishing majority and hence initiating the acquisition.

Q5. Explain the resources for merger and acquisitions. (6 marks)
Ans.
(i) Synergy : Synergy refers to the difference between the value of the combined firm and the value of the sum of the participants. Synergy accures in the form of revenue enhancement and cost savings.
(ii) Acquiring new technology : To remain competitive, companies need to constantly upgrade their technology and business applications. By buying another company with unique technology, the buying company can maintain or develop a competitive edge.
(iii) Improved profitability : Companies explore the possibilities of a merger when they anticipate that it will improve their profitability.
(iv) Acquiring a competency : Companies opt for mergers and acquisitions to acquire a competency or capability that they do not have and which the other firm has.
(v) Entry into new markets : Mergers are often looked upon as a tool for hassle-free entry into new markets. Through mergers one can enter the market with greater ease and avoid too much competition.
(vi) Access to funds : often companies find it difficult to access funds from capital market. In such a case company may decide to merge with another company which is fund-rich.
(vii) Tax benefits : By merging with a loss-making entity, a company with high tax liability can set off the accumulated losses of the target against its profits gaining tax benefits.

Q6. State the advantages and limitations of horizontal merger. (6 marks)
Ans. Advantages of horizontal merger :
(i) It eliminates cut throat competiton.
(ii) Economies of scale reduces the cost per unit.
(iii) Large control over market.
(iv) Economies in external services such as transportation, marketing services, etc.
Limitations of horizontal merger :
(i) May lead to monopoly power and exploitation of customers.
(ii) Does not control supply of raw material.
(iii) If resources of both the units are not used efficiently, it may lead to over capitalization.

Q7. What are the advantages and limitations of vertical merger ? (6 marks)
Ans. Advantages of vertical merger are :
(i) Improvement of quality of raw material.
(ii) Elimination of middlemen’s profit and thus reduction of cost.
(iii) Smooth productivity due to regular supply of raw material and assured market.
Limitations of vertical merger :
(i) Difficult to bring coordination between the activities of dissimilar units.
(ii) Does not bring economies of large scale production.
(iii) Trend to create big gaint in the same industry capable of giving competitive throat.