hariRaj

Grogan Medical Devices (GMD) is a leading manufacturer of cardiac treatment devices including defibrillators and pacemakers. Over the last three months, problems have been discovered with a GMD defibrillator model, resulting in a massive product recall. As a result of the recall, and the potential impact on future sales, the price of GMD’s stock dropped to its current level of $18 per share.

As a result of the drop in the price of the stock, two firms have expressed interest in acquiring GMD. Paulsgrove Corporation (Paulsgrove) is a large health care conglomerate with businesses in consumer products, pharmaceuticals, and cardiac treatment devices. The management team at Paulsgrove sees a merger with GMD as a means to combine its current defibrillator and pacemaker operations with those of GMD, creating the worldwide leader in those two product lines.

Bailey Scientific (Bailey) is a specialty manufacturer of stents used to open clogged arteries during heart surgery. Bailey sees a merger with GMD as a natural extension of its existing heart treatment product line, and believes using its existing stent product specialists to also market defibrillators and pacemakers could result in significant cost savings. They also believe that there would be benefits from expanding the size of Bailey’s operations. What would be the best description of the type of merger if GMD were to merge Paulsgrove or if GMD were to merge with Bailey respectively?

Merger with Paulsgrove

Merger with Bailey

A) Horizontal merger Horizontal merger

B) Conglomerate merger Horizontal merger

C) Horizontal merger Vertical merger

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Either a merger with Paulsgrove or a merger with Bailey would be described as a horizontal merger. In a horizontal merger, the two businesses operate in the same or similar industries. Even though Paulsgrove is already a conglomerate firm, the purpose of the merger would be to combine Paulsgrove’s existing defibrillator and pacemaker business with that of GMD. A merger with Bailey would also be considered a horizontal merger as the two firms operate in similar industries. Note that the primary benefit for either Paulsgrove or Bailey is economies of scale, which is typically the strategy behind a pure horizontal merger. With a vertical merger, a firm moves up or down the supply chain (i.e., acquiring a firm that makes the equipment to make pacemakers, or buying a hospital to distribute the products). With a conglomerate merger, the businesses operate in separate industries.

hariRaj

Which type of merger is most likely when the motivation for merging is to bootstrap earnings per share (EPS), and what does this imply about the lifecycle stage of the acquirer and the target?

A) Conglomerate and same stage.

B) Conglomerate and different stages.

C) Horizontal and different stages.

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In order for EPS bootstrapping to occur, the target must have a lower price-to-earnings (P/E) ratio than the acquirer. Since firms in the same industry are more likely to have similar P/Es, this makes a horizontal merger less likely. The differential in P/Es implies a differing level of expected growth. All else being equal, this suggests that the firms will be in different lifecycle stages

hariRaj

Burger World is interested in obtaining a controlling interest in Snappy Auto Repair. This potential merger is best described as a:

A) conglomerate.

B) horizontal merger.

C) vertical merger.

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Combining firms in separate industries represents a conglomerate merger.

hariRaj

A combination of two firms in entirely different industries is called a:

A) vertical merger.

B) horizontal merger.

C) conglomerate merger.

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When two firms in entirely different industries merge, it is called a conglomerate merger.

hariRaj

Suppose that a manufacturer of steel bridge beams (BridgeCo) acquires its main supplier of the steel (SteelCo) used to make the beams. After the merger is completed, the only surviving entity is BridgeCo. This is best described as a:

A) subsidiary merger.

B) horizontal merger.

C) vertical merger.

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This is best described as a vertical merger, since BridgeCo is purchasing a company from which it gets production inputs. It could also be described as a statutory merger, since only the acquiring firm is in existence following the combination.