Commercial Awareness- Law Firms Questions With Verified Answers.
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Law And Business
Commercial Awareness- Law Firms Questions With Verified Answers.
What is a merger? - Correct Answer A merger is the result of two firms forming one company. The three major types are vertical mergers, horizontal mergers, and conglomerate mergers.
What is an acquisition? - Correct Answer the inc...
Commercial Awareness- Law Firms
Questions With Verified Answers.
What is a merger? - Correct Answer A merger is the result of two firms forming one company. The three
major types are vertical mergers, horizontal mergers, and conglomerate mergers.
What is an acquisition? - Correct Answer the incorporation of one firm into another through purchase.
What are differences between Mergers and Acquisitions? - Correct Answer In a merger, the companies
involve decide jointly to form a new business entity, agreeing this by mutual consent. In an acquisition,
one company completely takes over the other's operations
Advantages of Acquiring or merging - Correct Answer 1) Rapid Expansion
2) Immediate access to new expertise and complementary resources.
3) Economies of Scale- the end goal of a merger and acquisition is to realize economic gains and
economies of scale. This becomes possible when the two firms involved in the merger and acquisition
are stronger, more productive, and more efficient together than apart.
4) Getting rid of duplicate employees (e.g. if both acquirer and target have CEOs, CFOs, COOs etc.) and
duplicate real estate (e.g. if they both have head offices, can combine into one)
5) Acquisition may involve integrating into the supply chain- reducing costs.
6) Geographical expansion into the area of the target company, which may not otherwise have had the
expertise to pull off.
7) Expansion of products/services range.
8) Reputation- acquiring another business can lead to acquirer gaining external legitimacy in eyes of
suppliers, lenders and customers who may not have trusted it or come across it before.
,9) can reduce competition, increasing market share.
Disadvantages of Acquiring/Merging - Correct Answer 1) Expensive- esp if target demands a premium
and all professional services involved such as lawyers, accountants, tax advisers etc.
2) Time consuming- lots of Due Diligence, lots of documents.
3) Complex- difficult to integrate two businesses both operationally and culturally. Internal
communication and organisation becomes larger and more complex.
Why an acquirer might be willing to pay a premium? - Correct Answer 1) if the target complements the
existing part of the business so that the sum would be greater than the value of its parts.
2) acquisition may lead to cost efficiencies, e.g. greater economies of scale.
3) Acquirer may gain access to unique, valuable or complementary skill set and expertise, or a valuable
network.
4) Acquisition may lead to a reduction in competition and hence increase market share.
5) Considering future legal developments- e.g acquiring a London gift shop chain before London
Olympics, Growth projections for similar products may help with this.
The opposite is also true, need to consider where a product is in the product life-cycle, e.g. is it nearing
the end of its patent.
How to companies acquire other companies? - Correct Answer 1) Horizontal Merger- Two companies
that are in direct competition and share the same product lines and markets.
,2)Vertical merger: A customer and company or a supplier and company. Think of an ice cream maker
merging with a cone supplier.
3) Congeneric mergers: Two businesses that serve the same consumer base in different ways, such as a
TV manufacturer and a cable company.
4)Market-extension merger: Two companies that sell the same products in different markets.
5)Product-extension merger: Two companies selling different but related products in the same market.
6) Conglomeration: Two companies that have no common business areas.
What is vertical integration? - Correct Answer buying out raw material producers and distributors
What is horizontal integration? - Correct Answer system of consolidating many firms in the same
business
What is an asset purchase? - Correct Answer Asset Purchase:
• Buyer acquires only certain assets and assumes only certain liabilities of the seller and gets nothing
else.
• Most common for private companies, divestitures, and distressed public companies.
What is a Share purchase? - Correct Answer A share purchase occurs when all shares in a company are
purchased from the shareholders and ownership of the whole business is transferred to the buyer.
While a share sale ensures there is continuity in the business, it also means the buyer takes on all
existing liabilities and historic issues.
What are the advantages of an Asset Purchase? - Correct Answer 1) Flexibility- can cherry pick the assets
it wants and only pay for those ones.
, 2) Valuation- less subjective as intangible assets such as customer loyalty are not considered.
3) Due Diligence- quicker to carry out Due diligence on specific assets than entire company.
4) Risk- lower risk of acquiring unforeseen liabilities as only take on liabilities of the assets being
purchases.
5) Tax- tax law in the UK enables the market value of assets purchased to be offset against tax, even if
the purchaser paid less than market value. Buyers may however incur stamp duty land tax on real estate
acquisitions.
what are the negatives of Asset purchase? - Correct Answer 1) Control- purchasers don't gain full control
of company so may fail to benefit from any internal mechanisms that have helped enable efficient and
effective use of assets.
2) Sellers may want a clean break- may refuse to sell as don't want to release revenue generating assets
whilst remaining on the hook for a range of liabilities.
What are the positives of share purchase? - Correct Answer 1) Control- easier to BIDCO to gain full
control over a company including its human capital, tangible assets and intangible assets.
2) Logistics- buying entire business, rather than certain assets, is more likely to lead to smoother
business continuity post-purchase.
3) Tax- exempt from goods and services tax if buying assets through shares.
What are the negatives of share purchase? - Correct Answer 1) Shareholders: may be difficult for buyers
to convince a significant portion of the shareholders to agree to the sale.
2) Risk- will take on target's existing liabilities and obligations
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