Certified Financial Management Specialist Practice Exam

What is a characteristic of a purchase merger?

1. Involves the absorption of a company by another

2. Typically occurs during a management buyout

3. Combines companies in direct competition

4. Links a customer and supplier

The correct answer is: Involves the absorption of a company by another

A purchase merger is characterized by the absorption of one company by another, meaning that one company acquires a controlling interest in another, effectively integrating it into its own operations. This type of merger typically results in the acquired company ceasing to exist as an independent entity as it is fully absorbed by the acquiring company. In contrast, while management buyouts may involve acquisitions, they do not specifically describe the nature of a purchase merger. Similarly, merging companies in direct competition highlights strategic consolidation but does not define the absorption characteristic of purchase mergers. Lastly, a link between a customer and supplier describes a different business relationship, known as a strategic alliance or partnership, rather than a purchase merger. Thus, the definition of a purchase merger firmly aligns with the notion of absorption, emphasizing how one entity integrates into another upon acquisition.