Differentiate between horizontal merger and vertical merger.

A horizontal merger takes place when two companies offering similar, or compatible, products or services to the same market combine under single ownership. If the other company sells products similar, the combined sales give a greater share of the market. If the other company manufactures products complementary to the range, a wider range of products can be offered to the customers. A merger with a company that offers different products to a different sector of the market enables the company to diversify their activities and enter new markets. For example, both Nokia and Sony Erricson are Communication Company and Nokia were to take over Sony Erricson. This would be horizontal merger. The main aim of a horizontal merger is to increase revenue by offering an additional range of products to the existing customers. The company do not have to invest time or resources in developing their own new products. Company may be able to sell to different geographical territories if the other company has distribution facilities or customers in areas which do not currently cover. Horizontal mergers can also help to reduce the threat of competition in the market. The new merged company may have greater resources and market share than the other competitors, enabling the company to achieve economies of scale and exercise greater control over pricing. The main aim of a vertical merger is not to increase revenue, but to improve efficiency or reduce costs. A vertical merger takes place when two companies that previously sold to or bought from each other combine under single ownership. The companies are generally at different stages of production. A manufacturer may decide to merge with a supplier of important components or raw materials, for example, or with a distributor or retailer that sells its products. For example, Toyota which is a car manufacturer has taken over Dunlop which produce tyre wheel. This would be vertical merger. Vertical mergers can help secure access to important supplies. They also help to reduce the overall costs by eliminating the costs of finding suppliers, negotiating deals and paying full market prices. Vertical mergers can improve the efficiency by synchronizing production and supply between the two companies and ensuring that supplies are available when production need them. This type of merger can also help to deal with competitors. By making it difficult for competitors to obtain important supplies, the company can weaken existing competitors and increase barriers to the entry of new competitors.

Explain reasons for a firm to issue warrants. Warrant holders receive the right to buy shares in the company at a fixed price in the future, in return for paying for the warrants today. Following are the reasons for a firm to issue warrants: 1. Warrants are priced according to the variance of the underlying stock price whereby the greater the variance, the grater the value. To the degree that the market overestimates a firms risk, the firm may gain by using warrants and other equity options because they will be overpriced relative to their true value. 2. Warrants themselves create no financial obligations (such as dividend) at the time of issue. 3. Warrants do not create any new additional shares currently while they raise equity capital for current use and hence there is no dilution effect.