Interview Questions
Economic benefits can be envisaged in various ways – it depends on every individual case to see what the benefit is that a certain merger/ de-merger is targeting at.
Ans.: Examples of why merger/ purchase/ amalgamation would happen:
i. to gain the benefit of synergy – the manufacturing company, struggling to cut costs on distribution may purchase another company which has a very well established distribution channel to support its logistics requirement. Thereby, the best features of both the companies, manufacturing and distribution, together will bring best results to the resulting company.
ii. Mergers also happen to get benefit under the Income Tax Act, 1961 – whereby, a company which is earning a lot of profit and incidentally has a huge tax liability may chose to buy a loss making company and take benefit of its loss to set off (and carry forward the loss too for further set-off) against its profits – thereby reducing its tax liability.
iii. Diversification is also one of the most important reasons for merger – suppose you are successful manufacturer of soaps which is a FMCG (Fast moving consumer goods) – and you would like to branch out and add more products under your brand name.
Instead, you could buy the company selling shampoo and add it to your brand name! You’ll get the readymade and working infrastructure/ factory/ machines/ shampoo formula/ employees/ ready market too!
For example a pharmaceutical company buys the R & D division of another company to add to its R & D to develop new and improved medicinal drugs.
v. Mergers and acquisition also happens to eliminate competition – if a new and upcoming mobile manufacturing company is making small waves in the market – cut it off before it starts making big waves on its own and usurping your market position – buy it out so that ‘it’ becomes ‘you’.
Excellent case in point is Facebook buying Watsapp. K
vi. Merger or acquisition may also happen to enter another country in business terms – you are successfully running a telecom company in your country and you want to increase your footprint world wide – you buy small private telecom service providers in foreign lands!
vii. Then there is the simple reason – to increase market share.
Ans.: Target valuation is the valuation of the ‘target’ company (the one that will be bought) by the acquiring company (the company wanting to buy.)
It is the value of the target company as a whole – defined in financial terms – the worth of the company at present and the benefit it will continue giving to the acquiring company in the future.
It is the first thing one sees in any M & A.
Q. 4. What is Horizontal Merger?
Ans.: Horizontal merger is when two companies which belong to the same industry merge – for example if Airtel and Reliance merge! They belong to the same industry = telecommunications. (It is never going to happen – imagine if it does though!)
Q. 5. What is Vertical Merger?
Ans.: In chain of distribution – there is a producer – then the wholesaler/ agent – retailer – buyer.
If a soap producing company purchases the company responsible for distributing its products – then it is vertical merger.
Or a car manufacturing company purchases the company producing the tyres is uses on its cars.
Q. 6. What is Reverse Merger?
Ans.: It is when a private company – buys a public company to automatically become a publicly traded company – and it does not have to undertake initial public offer.
Sort of like a roundabout way to become a public company without the actual hassles and costs of IPO and other initial formalities that a public company has to compulsorily adhere to.
Ans.: Generic means in simple words – generally meaning the same – so congeneric merger is when two companies belonging to the same/ related industry – but producing/ dealing in different products merging to form a company.
Lets say, a producer or professional bats for the game of cricket – and a company producing only baseball bats merge to go global with their bats!
Q. 8. What is Conglomerate Merger?
Ans.: This is the kind of merger between two companies in totally unrelated businesses or industries. Like if an IT company wants to enter into FMCG segment by buying a company selling FMCGs. (Wipro anyone?! Well it’s actually the opposite of the now Wipro, because Wipro spinned off is non- it segments in 2013. Selling IT and baby nappies!)
Trivia: Totally unrelated, but I feel greatly obliged to share this piece of information – Wipro is actually – WIPRO! As in WIPRO is an acronym for – Western India Products Limited! And its moto is – ‘applying thought’.
Ans.: There is no single governing body to govern mergers and acquisitions in India.
Q.10. … interviewers can ask you for actual examples of real time mergers that have taken place in India or abroad.
If you are sitting for a banking interview – you should know of mergers that have taken in banking sector – both domestic and international.
Insurance company – then you should be aware of any major merger in that sector.
And generally – any merger that makes headline – should be well remembered … like Facebook and Watsapp, Flipkart and Myntra … I’ve given a list of some popular M & A’s in my previous article…
In News:
- IT company – very popular name these days – Capgemini, Head Quartered in Paris, France – is acquiring US based IT services company IGate for $4 billion (lots of zeroes guys, and that too in dollars! K)
IGate, though US based, is a company founded and headed by Indian origin persons – its CEO is Ashok Vemuri. 75% of its employees strength is based in India.With Capgemini taking over IGate – it will become a strong competitor to TCS (which is the leading the IT outsourcing company with highest revenues.)
Through this acquisition, Capgemini also increases its market share in USA.
Capgemini being the face of European IT – through this acquisition is looking to increase its presence in rest of the world.
But for MCQs and general interview for banking of candidate who are not MBAs in Finance – this should suffice!
Best of Luck!
And keep sharing knowledge!
Have a good day!
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