Hypothetical Mergers question horizontal, question, because, another, company

LorrinCFA

Family company owns three subsidiaries: Clothing, Food, and Drug.
Food purchases another Food company in the same part of the supply chain.
Is the merger a) horizontal (because Food purchases Food) or b) conglomerate (because Food is a subdivision and a part of Family, which is a conglomerate, so you have a conglomerate merging with another firm)?

bapswarrior

I would say horizontal. It would only be considered conglomerate if Food purchases Family.

SWASH

I thought b) at first, but I think I’d say a)
You’re simply talking about the ‘merger’. Because Food is purchasing another food company in the supply chain, it would be a horizontal merger
But I’m not positive, where is this from, FRA accounting for significance of investing?

andytrader

(a) since the acquirer and target companies are key in determining the type of merger.

hoangvu90

i agree with all of you that its a however according to the answer it is actually b). it seems that you should think of it in terms of food being part of family, so if food1 (family’s subsidiary) merges with food2, food2 is in essence also merging with family. If you;re curious here is the relevant info:
Clothing Tree is a Milan-based holding company. The holding company comprises individual firms with unique brands that produce and sell products ranging from infant and children’s clothing, to fashion wear, to work uniforms, to undergarments. The firm’s founder and chairman, Romano Nocci, says that “since we assume that people will continue to wear clothes, we continue to believe that this is a good business for the long haul.”
However, in spite of his overall belief in the soundness of the clothing market, he realizes that tastes and fashions change, and believes that the firm should constantly be on the lookout for suitable candidates to add to the Clothing Tree empire. He also believes that it may make sense to restructure the firm by creating a new holding company, Family Tree, to own the Clothing Tree plus two new divisions—Food Tree and Drug Tree.
The Food Tree would be a holding company formed to acquire companies in all phases of the food business. The Drug Tree would be a holding company formed to acquire companies in all phases of the non-prescription pharmaceuticals market. Both of these product lines are necessary goods, so Nocci believes that they would fit well with the firm’s existing clothing businesses.
If Food Tree is successful in purchasing a food company for which it maintains the firm’s existing identity and brands, the first such purchase would be classified as a:
A) subsidiary, conglomerate merger.
B) statutory, conglomerate merger.
C) subsidiary, horizontal merger.
The correct answer was A.
The first food company, being in an entirely different business from clothing, would have to be considered a conglomerate merger. The fact that the firm intends to maintain the target’s identity after it is acquired indicates that it would be considered a subsidiary merger. (Study Session 9, LOS 31.a)

soverby

After reading the entire question, it is very clear that it is a conglomerate merger. In the original question at the top of the topic, it appeared that the Food unit purchased another food company, implying that there are several food units.
The actual problem specifically stated that the food company acquired is the first one of its industry, and hence would make it a conglomerate merger. If the Food company would acquire another food unit, it would then be considered a horizontal merger.

JGovender

jackofalltrades,
where do you see that? the question says that FOOD is purchasing another FOOD. it does not say that FAMILY purchases FOOD. yes i see that it says that FOOD is the first one it its industry and thus im confused because it seems counterintituive to read that FOOD is purchasing another FOOD, which is the first one of its industry (how so, if FOOD is purchasing it?)

stalkey

Food Tree is just a holding co. created by Family Tree.
so basically Family Tree has no actual exposure to the food industry until its Food Tree Holding Co. purchases its first food co. which would be classified as a conglomerate merger.

yospaghetti

oh GOT IT now.
Only Clothing existed. Family was created with subdivisions Clothing (real company with Clothing assets), Food (just a holding co) and Drug (just a holding co). When Food Tree (the holding co) purchases it’s first Food Co, this is a conglomerate merger because the only real assets of Family are Clothing, and Clothing and Food are different.
That’s how I see it and this makes sense.
Putthing this question aside (but on the same topic), if a conglomerate merges with another firm, and the conglomerate has subsidiaries with the same line of business as the purchased firm, would this be considered a congolmerate merger or a horizontal merger (because you assume it is the subsidiares that will be merging)?

giorgio10

As I mentioned in my previous post, it is a conglomerate merger since the first-ever food unit was acquired by a diversifying conglomerate (clothing company at that point in time). It did not have another food company buying another food company to begin with. If an actual food company acquired food company, you can consider this as a horizontal merger. Please note that having a Food holding company does not make you enter the Food industry, as you do not have any actual Food assets.
On your last query, just think about who would be the acquirer and who would be the target. That should give you a better picture of what type of merger it would be, as mentioned in my original post.