1. Analyze the economic rationale of the Carborundum acquisition. Under what conditions would an acquisition be expected to add to shareholder value in general? Do any of these reasons apply to the Carborundum acquisition?

Generally, acquisitions are expected to increase earnings and the value of the combined company by realising synergistic opportunities for both pre-merger companies. These may include realising additional tax benefits and diversifying business risk. Mergers can be horizontal or vertical, and can increase firm value via synergies such as economies of scale, product cost savings, sharing sales channels, use of the same backend services and leveraging expertise.

In the present case however, Kennecott had more specific economic rationales.

After the Peabody divestiture, Kennecott had a market value of $900 million, and also received $600 million of cash proceeds from sale of Peabody. Due to this Kennecott risked becoming an attractive acquisition target itself. Furthermore Kennecott was also facing other problems including fluctuations in copper prices and labor strikes. As a result, Kennecott decided to acquire another company to reinvest and utilize the sale proceeds from Peabody to mitigate both of these problems, by diversifying their business away from copper and to stabilize their earnings from political and economic fluctuations. Carborundum, a producer of abrasive products was an attractive acquisition target for Kennecott to replace Peabody given its stably increasing earnings profile.

This rationale however does not appear to achieve general principles of either horizontal or vertical synergies. For horizontal mergers, acquirers and targets tend to be either in the same or similar industries at a similar point in the production chain, however Carborundum in this case is an abrasive products manufacturer, with little