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...

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.

Answer Details

(a) The type of merger to be formed by ABC Limited and XYZ Limited is a vertical merger. This is a type of merger where two companies that are at different stages of the production process or supply chain come together to form a single entity. In this case, ABC Limited is a textile company, while XYZ Limited is a cotton processing company. By merging, ABC Limited will have better control over the cotton supply chain, and this will lead to increased efficiency in their textile production. (b) The following are four reasons that would have necessitated the formation of the merger: 1. Economies of scale: By merging, the companies can take advantage of economies of scale, such as bulk purchasing of raw materials and joint marketing efforts. 2. Improved efficiency: The merger will lead to improved efficiency in the production process, resulting in cost savings and increased profits. 3. Diversification: The merger will allow the companies to diversify their operations and reduce their dependence on a single product line or market segment. 4. Synergy: The merger will create synergies between the two companies, resulting in increased competitiveness and profitability. (c) The following are three sources of finance available to the company formed: 1. Debt financing: This involves borrowing money from financial institutions such as banks or issuing bonds to raise capital for the merged company. 2. Equity financing: This involves issuing shares of the merged company to the public in exchange for capital. 3. Internal financing: This involves using the profits generated by the merged company to finance its operations and growth.