Fundamentals of Financial Management (MindTap Course List)
Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 21, Problem 5Q
Summary Introduction

To discuss: The correct position on the argument made by the group of consultants.

Introduction:

A process or an agreement where two or more firms combines together to form one new company is termed as Mergers.

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Two large, publicly owned firms are contemplating a merger. No operating synergy isexpected. However, because returns on the two firms are not perfectly positively correlated,the standard deviation of earnings would be reduced for the combined corporation. Onegroup of consultants argues that this risk reduction is sufficient grounds for the merger.Another group thinks that this type of risk reduction is irrelevant because stockholders canhold the stock of both companies and thus gain the risk-reduction benefits without all thehassles and expenses of the merger. Whose position is correct? Explain.
Suppose you are the CEO of a large firm in a service business and you think that by acquiring a certain competing firm, you can generate growth and profits at a greater rate for the combined firm. Youhave asked some financial analysts to study the proposed acquisition/merger. Do you think valuechain analysis would be useful to them? Why or why not?
It is often difficult to draw a distinctive line between mergers and takeovers, and the terms tend to be used rather loosely to describe the process by which firms combine. In principle, a merger may be defined as a combination of firms of approximately equal standings on the basis of an agreement between their respective managements who recognize some mutual advantage in he arrangement. A merger can result in a new company being formed or one of the two companies absorbs the other. Required: i. Describe various types of mergers and critically discuss the motives for undertaking mergers and takeover. ii. Identify the organ(s) or institution(s) that regulates/approves the mergers and acquisitions in Tanzania and discuss all steps/procedures to be undertaken by the merging companies in Tanzania as required by the regulator for a merger to be successful. iii. Identify any recent Merger and Acquisition in Tanzania, discuss its type and the motive behind it.
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