1. A leading financial publication published an article in November 2021 about the recent boom in merger and acquisition activity. With a stock market reaching record high levels, these mergers and acquisitions are using valuations that have reached dangerously high levels. A number of mergers have been sold to shareholders on the basis of the benefits that arise from vertical integration. This trend echoes the M&A (merger&acquisition) activity last seen in 2004. Many analysts write that mergers and acquisitions, on average, have not produced the expected higher profits or greater efficiencies, but have rather damaged profits and efficiencies of both businesses. They state that while a merger or acquisition can give rise to a rapid increase in the combined stock market value of the merging firms, this gain is often short-lived.

(a) Discuss three ways in which a merger or acquisition can produce increased profits and growth for the acquirer and/or the target company. (6 marks)

(b) Are there factors that increase the chance of failure for a merger or acquisition? If so, list and describe five factors that lead to failed mergers. You should also explain what failure means in the context of a merger or acquisition. (6 marks)

(c) Why do you think analysts refer to the dangerously high valuations of companies involved in mergers and acquisitions? Your answer should refer to the reasons for the inflated valuations, and the impact of this on the shareholders of the target company and the acquiring company. (6 marks)

(d) Assuming the management of a business would like to purchase the equity of a target company, explain how it would determine its offer price. Your answer should also describe at what point in the process these valuation activities take place. (6 marks)