What is the difference between horizontal integration and vertical integration? How does antitrust policy affect the nature of mergers?

Short Answer

Expert verified

Horizontal integration refers to the acquiring of competitors; whereas, in the case of vertical integration, the buyers or sellers of the company are acquired.

The antitrust policy prevents the elimination of competition.

Step by step solution

01

Explanation on Horizontal Integration

Under horizontal integration, one business entity purchases another business entity that manufactures the same goods or services as of acquiring company.

02

Explanation on Vertical Integration

Under vertical integration, one business entity purchases another business entity, providing goods or services to the acquiring business entity.

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Most popular questions from this chapter

What is synergy? What might cause this result? Is there a tendency for management to over- or underestimate the potential synergistic benefits of a merger?

What risks does a foreign affiliate of a multinational firm face in today's business world?

Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:

Rembrandt

Paint Co.

Picasso Art

Supplies

Total earnings ........................................................... \(1,200,000 \)3,600,000

Number of shares of stock outstanding ................... 600,000 2,400,000

Earnings per share ................................................... \(2.00 \)1.50

Price-earnings ratio (P/E) ......................................... 243 323

Market price per share.............................................. \(48 \)48

a.If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso

Art Supplies on a share-for-share basis, what will post merger earnings

per share be for Picasso Art Supplies? Use an approach similar to that in

Table 20-3.

b.Explain why the earnings per share of Picasso Art Supplies changed.

c.Can we necessarily assume that Picasso Art Supplies is better off after the

merger?

The Office Automation Corporation is considering a foreign investment. The initial cash outlay will be \(10 million. The current foreign exchange rate is 2 ugans 5 \)1. Thus the investment in foreign currency will be 20 million ugans. The assets have a useful life of five years and no expected salvage value. The firm uses a straight-line method of depreciation. Sales are expected to be 20 million ugans and operating cash expenses 10 million ugans every year for five years. The foreign income tax rate is 25 percent. The foreign subsidiary will repatriate all aftertax profits to Office Automation in the form of dividends. Furthermore, the depreciation cash flows (equal to each year’s depreciation) will be repatriated during the same year they accrue to the foreign subsidiary. The applicable cost of capital that reflects the riskiness of the cash flows is 16 percent. The U.S. tax rate is 40 percent of foreign earnings before taxes.

  1. Should the Office Automation Corporation undertake the investment if the foreign exchange rate is expected to remain constant during the five year period?
  2. Should Office Automation undertake the investment if the foreign exchange rate is expected to be as follows?

Year 0 .......................... \(152.0ugans

Year 1 .......................... \)152.2ugans

Year 2 .......................... \(152.4ugans

Year 3 .......................... \)152.7ugans

Year 4 .......................... \(152.9ugans

Year 5 .......................... \)1 5 3.2 ugans

What is meant by translation exposure in terms of foreign exchange risk?

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