ABC Limited, a textile company and XYZ Limited, a cotton processing company agreed to merge. (a) Identify and explain the type of merger to be formed by the companies. (b) State four reasons that would have necessitated the formation of the merger. (C) List and explain three sources of finance available to the company formed.
Explanation
(a) The type of merger is vertical merger: lt is a merger where companies in the same line of business and at different levels of production come together to form a new company. This is when a company producing new raw materials merges with the one using the raw materials.
(b) Reasons that would have Necessitated the Formation of the Merger: (i) The merger could have resulted from the need for introduction of additional capital to avoid liquidation. (ii) There could be the desire by the firms to maintain stable prices. (iii) The decision to merge could have resulted from the need to achieve economies of scale. (iv) Reduction of overhead cost as a result of removal of duplicated staff could have necessitated the merger. (v) The desire to have regular supply of raw materials could have led to the merger. (vi) The merger could also arise due to the need to reduce the cost of production and increase profit. (vii) The firms could also merge because of the need to check competition and remove its undesirable consequences/achieve large share of the market.
(c) Sources of Finance Available to the Company: (i) Issue of shares:- This is where a newly formed company calls for subscriptions to shares. (ii) Issue of debenture: A debenture is a document conferring a long-term loan to a company. The holder becomes a creditor to the company and he is entitled to a fixed rate of interest whether or not the company makes profit. (iii) Bank loan: Banks advance loans to companies that satisfy the conditions for the loan. A loan is payable with interest at regular intervals (iv) Leasing:- An equipment or property could be rented for use by the new company for a specific number of years. (v) Hire purchase:- This facility is extended to companies to enable them own properties by making a down payment and the balance settled through installments. (vi) Overdraft:- The new company can arrange with the bank to withdraw more than what it has in the account.