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Subject 1. Definitions and Classifications PDF Download
The last two decades have seen a number of corporate mergers and acquisitions. They can be evaluated in the same way as any other investment. As long as the merged firms are worth more combined than when alone, the net present value of the fusion is profitable and shareholders are better off. Financial managers need to know under what conditions it is worthwhile to merge with another firm.

  • Acquisition is the purchase of part of one company by another. For example, company A purchasing the subsidiary of company B is an acquisition.
  • Merger is the purchase of one entire company by another. Only one company will remain after the merger.

There are different ways to categorize mergers and acquisitions.

Based on how the companies physically come together (forms of integration):

  • Statutory merger. The target company's assets and liabilities become part of the acquiring company, and the target company ceases to exist.
  • Subsidiary merger. The target company becomes a subsidiary of the acquiring company.
  • Consolidation. Both companies cease to exist, and they become partly of a newly formed company.

Based on how the companies' business activities relate to each other (types of mergers):

  • Horizontal integration. Two firms in the same line of business are merged. Common motives are to achieve economies of scale, to eliminate inefficiencies and to increase market power.
  • Vertical integration. Firms which have supplier-customer linkage are combined. A vertical merger involves companies at different stages of production. The buyer expands back toward the source of raw materials or forward in the direction of the ultimate consumer. An example is a car manufacturer purchasing a tire company.

    • Backward integration. The target is the supplier of the acquiring company.
    • Forward integration. the target is further down the value chain of the acquiring company.

  • Conglomerates. Companies in unrelated businesses are combined.

Learning Outcome Statements

a. classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities;

CFA® 2023 Level I Curriculum, Volume 3, Module 18

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