{"id":15908,"date":"2021-06-05T21:06:25","date_gmt":"2021-06-05T21:06:25","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=15908"},"modified":"2025-12-10T18:36:48","modified_gmt":"2025-12-10T18:36:48","slug":"classification-of-mergers-and-acquisitions","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/classification-of-mergers-and-acquisitions\/","title":{"rendered":"Classification of Mergers and Acquisitions"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"AMC is a steel manufacturer that is looking to acquire Dura, an iron ore mining company. If the merger is successful, this will most likely be an example of a:\",\r\n    \"text\": \"AMC is a steel manufacturer that is looking to acquire Dura, an iron ore mining company. If the merger is successful, this will most likely be an example of a: Vertical merger and backward integration. Vertical merger and forward integration. Conglomerate merger.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is A. This is a vertical merger involving backward integration because Dura supplies the iron ore needed by AMC in the steel production process. B is incorrect because Dura is not a distributor, so there is no forward integration. C is incorrect because the merger is vertical, not a conglomerate merger.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/XBra1Jp5JAU\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The financial and operational consequences of mergers and the motive for the mergers are key aspects that management and analysts need to understand.<\/p>\r\n<p>An <em><strong>acquisition <\/strong><\/em>occurs when a company purchases a portion or all of another company&#8217;s shares, effectively controlling it. A <em><strong>merger <\/strong><\/em>occurs when a company absorbs another company. Mergers are categorized by the form of integration.<\/p>\r\n<h2>Statutory Merger<\/h2>\r\n<p>In a statutory merger, one of the companies will no longer exist, and all its assets and liability are transferred to the purchasing company.<\/p>\r\n<p>$$\\text{Company A} + \\text{Company B} = \\text{Company A}$$<\/p>\r\n<h2>Subsidiary Merger<\/h2>\r\n<p>In a subsidiary merger, the target company becomes a subsidiary of the acquirer. The subsidiary merger occurs when the target company has a good brand among consumers, and the acquirer would like to keep it.<\/p>\r\n<p>$$\\text{Company A} + \\text{Company B} = (\\text{Company A} + \\text{Company B})$$<\/p>\r\n<h2>Horizontal Merger<\/h2>\r\n<p>A horizontal merger occurs when companies in the same business merge. Horizontal mergers increase market power, and companies that execute horizontal mergers often want to experience economies of scale.<\/p>\r\n<h2>Vertical Merger<\/h2>\r\n<p>In a vertical merger, a target company is bought by an acquirer in the same production chain. The benefit of vertical mergers is that they give better control of the production process and cost savings. <em><strong>Backward integration<\/strong><\/em> occurs when an acquirer buys a target that is ahead of their value chain. In a <em><strong>forward integration<\/strong><\/em>, an acquirer buys a target that is a distributor.<\/p>\r\n<h2>Conglomerate Merger<\/h2>\r\n<p>In a conglomerate merger, an acquirer purchases a target that is not related to its core business. The motivation behind a conglomerate merger is company-level diversification to reduce the volatility of its cash flows.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>AMC is a steel manufacturer that is looking to acquire Dura, an iron ore mining company. If the merger is successful, this will <em>most likely<\/em> be an example of a:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Vertical merger and backward integration.<\/li>\r\n\t<li>Vertical merger and forward integration.<\/li>\r\n\t<li>Conglomerate merger.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is A.<\/strong><\/p>\r\n<p>Because AMC and Dura are in the same production chain of manufacturing steel, and Dura is a supplier of iron ore used to make steel.<\/p>\r\n<p><strong>B is incorrect. <\/strong>While AMC and Dura in the same production chain, Dura acts as a supplier and not a distributor; hence there is no forward integration.<\/p>\r\n<p><strong>C is incorrect. <\/strong>This type of merger is vertical, not horizontal.<\/p>\r\n<\/blockquote>\r\n<p><em>Reading 18: Mergers and Acquisitions<\/em><\/p>\r\n<p><em>LOS 18 (a) Classify mergers and acquisitions(M&amp;A) activities based on forms of integration and relatedness of business activities.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>The financial and operational consequences of mergers and the motive for the mergers are key aspects that management and analysts need to understand. An acquisition occurs when a company purchases a portion or all of another company&#8217;s shares, effectively controlling&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,346],"tags":[383,344,384],"class_list":["post-15908","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-corporate-finance-cfa-level-2","tag-classification-of-mergers-and-acquisitions","tag-corporate-finance","tag-reading-23-mergers-and-acquisition","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Classification of Mergers and Acquisitions - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/classification-of-mergers-and-acquisitions\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Classification of Mergers and Acquisitions - CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"og:description\" content=\"The financial and operational consequences of mergers and the motive for the mergers are key aspects that management and analysts need to understand. 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