Folks, I am having a tough time seen/understanding the underlying reasoning behind this question. Could some one explain it to me? Question from Schweser (rephrased) - Which type of merger is most likely to occur if the motivation of an acquiring company is to bootstrap? Answer - conglomerate My reasoning - I realize that the acquiring co’ and target must have different P/Es for bootstrap to occur. Isn’t it possible for firms involved in a vertical or horizontal merger to also have different P/Es? … sure it is. So why can’t the answer be vertical or horizontal. I think that any merger could be triggered by bootstrap (as well as other reasons probably), so why conglomerate over vertical or horizontal?
bootstrapping occurs when high p/e, high growth firm acquires low p/e, low growth firm. when you think vertical or horizontal - the industry profits and experiences growth at the same level, meaning a high growth industry will have high p/e. since you have this ‘clustering within the industry’ conglomerates are ‘most likely’.
Interesting … and i see your ‘most likely’ scenario for conglomerates. However, what you’re saying is that companies in a high growth industry will ALL most likely have the same high P/E … Couldn’t a company in this high growth industry have an even higher P/E than the rest? if so, bootstrap would be possible in this horizontal high growth industry.
i would say that it is possible also within the industry to find low p/e companies but it is prob not to likely. lets say company a = p/e = 60 . company b = p/e = 50. relatively speaking b has a low p/e compared to a. so bootstrapping could occur.