Mergers and Acquisitions

From Financial prospective

By Mohamed Khalifa et. al.

Abstract ......................................................................................................................................................... 2 Introduction .................................................................................................................................................. 2 Mergers or Acquisitions defining the terms ................................................................................................. 4 Reasons for Mergers and Acquisitions ......................................................................................................... 4 Types of Mergers and Acquisitions ............................................................................................................... 8 Financing the mergers and acquisitions ....................................................................................................... 9 Valuation Matters ....................................................................................................................................... 10 Financial Analysis in Mergers and Acquisitions .......................................................................................... 12 Due Diligence .............................................................................................................................................. 16 The Risk in Trade-Offs between Buyers and Sellers in Mergers and Acquisitions ...................................... 17 Conclusion ................................................................................................................................................... 19 References: ................................................................................................................................................. 21


Objective of the M&A. 4. Methods of payment 2. These mergers can record the fortunes of the corporates involved for years to come. This paper aims at reviewing and analyzing these factors on mergers and acquisitions and its effects on the financial performance. M&A represent the ultimate in change for a corporate. Deals can be worth hundreds of millions.Abstract The consequences of mergers and acquisitions on corporate financial performance. for the business managers no other event is more difficult. It requires that everyone 2|Page . selling. Corporate managers should bear in mind such factors and their impact on the post-merger and acquisition corporate financial performance to evaluate the proposed offers of mergers and acquisitions accurately and take profitable decisions. finance and management dealing with the website. 6. as follows: 1. this paper concluded that there are some factors that affect the financial performance. According to the investopedia. there are factors that might affect the performance of corporations such as synergies. Accuracy of Due Diligence. Previous reviews and literatures are using varieties of measures to examine the impact of mergers and acquisitions on corporate financial performance. dividing and/or combining of various companies and similar entities that can aid an enterprise grow faster in its respected sector or geographical location. every day. The extent of synergy. 5. Methods of valuation. 3. The risk level borne by each party. Introduction Mergers and acquisitions (M&A) are an aspect of corporate strategy. challenging. or chaotic as a merger and acquisition. or a new market or new location. Wall Street investment bankers operate M&A transactions that bring companies together to create bigger ones. without creating a subsidiary. of dollars. M&A are a large portion of the corporate business world. or even billions. other child entity or using a joint venture.

9 76.7 107.2 78.6 68 52 The Thomson Financial. Acquisitions and Alliances (IMAA) analysis in Table 1. Pfizer Inc. many of the factors th at affect the decision of major investment would also influence merger activity. AT&T Inc. Target Mannesmann AG Time Warner Philip Morris Intl Inc.0 74. Shareholders RFS Holdings BV Pfizer Inc. That’s why. entering new market or geographic areas.2 89. Acquisitions and Alliances (IMAA) analysis. where and when the process works. Institute of Mergers. BellSouth Corp Citicorp Wyeth Anheuser-Busch Companies.2 According to the Thomson Financial. Mobil Corp SmithKline Beecham PLC Shell Transport & Trading Co. InBev Inc. expressed the announced Mergers & Acquisitions worldwide. Institute of Mergers. ABN-AMRO Holding NV Warner-Lambert Co. In some cases of an acquisition. The Largest Mergers and Acquisitions Transactions that occurred worldwide since 01 January 1985 till 19 January 20123 Year Acquirer 1999 2000 2007 2007 1999 1998 2000 2004 2006 1998 2009 2008 Vodafone AirTouch PLC America Online Inc. Exxon Corp.1 The term "merger". or reallocating assets into the control of the most effective managers. The term "acquisition" refers to the acquisition of assets by one company from another one. Table 1 Transaction Value (in billion USD) 202. Glaxo Wellcome PLC Royal Dutch Petroleum Co. The most general motive is simply that the acquirers consider the acquisition to be a profitable investment. both companies may continue to exist. obtaining new experience or skills.1 There is several numbers of motives that may play a role in merger activity. Inc.6 98.7 72.6 72. Firms will go for acquisitions when it is the most profitable means of enhancing capacity.3 3|Page .8 164. Travelers Group Inc.involved in the M&A process has a very clear understanding of how. 1985-2012 (as of 24 November 2012) in figure 1. is used when referring to the merging of two companies forming one new company that will continue to exist.

product line or even an entire company. but when they merge together. a division. The value of Company X is $ 2 billion and the value of Company Y is $ 2 billion.1 4|Page . The definition of the words is as follows: 4 • Merger: A combination of two or more companies in which the assets and liabilities of the target company(s) are absorbed by the buying company. as in 1+1 =3. Although the buying company may be a considerably different organization after the merger. • Acquisition: The purchase of an asset such as a plant. The difference between the two is important to be clear.Figure 1 Mergers or Acquisitions defining the terms The terms merger and acquisition are usually unclear or used interchangeably. it retains its original identity. Reasons for Mergers and Acquisitions Each and every merger transaction has its own unique reasons why. The implicit principle behind mergers and acquisitions is the simple equation of synergy. the total value will be $ 5 billion.

they will experience a lower overall cost of capital. Which means buyers will need to pay more (a premium) if they want to buy the company. they will realize lower expenses than if they operate independently. In spite of what premerger valuation price. IT and so on. The equation solves for the minimum required synergy: 5 The largest source of synergy value is lowering the expenses.T VA = = value of the post-merger firm value of the pre-merger acquiring firm The combining of the two firms creates additional value which is called "synergy" value which can take one of three forms:1 1. Accounting. Expenses: By joining the two companies. These reasons include but not limited to: 1 5|Page . that premium reflects the company's future prospects. 2. Several mergers were driven by the urge to cut costs. For the sellers. Revenues: By joining the two companies. 3. For buyers. as in the following formula: 6 Where: ∆V= VA – T . the premium reflects part of the post-merger synergy they forecast to be achieved. Cost of Capital: By combining the two companies. Cost savings always come from the omitting of unnecessary or duplicated supportive functions.Synergy is the additional value created (∆V). such as HR. they will realize higher revenues than if they operate independently. The following equation offers a good way to evaluate synergy and how to determine whether a merger or acquisition transaction makes sense. The ideal mergers might have strategic reasons for the business combination. It would be very unlikely for owners to sell if they would gain more by not selling.(VA+ VT) VT = the pre-merger value of the target firm VA .

 Fast Market Access – Merging with or acquiring a foreign company will give quick access to emerging global markets geographically.  Organizational Competencies . We have to know that merger activity is something other than a simple extension of business investment.A company may have an obvious weakness in distribution and strong finance whereas the second company has strong distribution and weak finance.  Short Term Growth – Company management always under the pressure to turnaround slow growth and profitability.  Diversification . Hereunder are some of these factors. By merging these two companies. A second company may have a very similar facility that is idle.It could be cost effective to acquire another company than to invest internally.  New segments talking and Positioning . This occurs for companies in very mature industries such as the pharmaceutical industry where future growth will be questioned. It could be more cost effective to just buy this second company with the unused facilities than building a new facility.It is necessary to increase earnings and get more consistent long-term revenue growth and profitability. 2 6|Page .Acquiring companies with strong human resources and or intellectual capital can improve innovative thinking and progress within the first company. Regardless of the main motivations for mergers.Taking the benefit of future opportunities that may be exploited when the two companies are joined.The acquired company’s assets may be undervalued and that’s why it represents an attractive investment. Such as if a company is looking for expansion of its manufacturing facilities. Fortifying the weakness “Gap Filling” . Mergers and acquisitions will also be carried out by basic business reasons. each company will fills-in a strategic gap that is crucial for their long-term survival. there are a few categories of factors that tends to play a role in a least some mergers. So mergers and acquisitions are the easy way to boost poor performance. such as: 1  Capital investment reduction .  Undervalued assets .

improved focus on core skills of the firm. 2 Diversification in earnings within firms may minimize the variation in their profitability. gain new technologies. improved resource allocation. The benefits from mergers and acquisitions are not. Because these accumulated losses can make up for the profits of the profit-making firm. reductions in transportation costs. improve product quality. The tendency of one firm to merge with another firm or acquire its assets also creates a market for corporate dominancy. production economies of scope.enhanced use of information and expertise. 2  Financial and Tax Benefits Mergers and acquisitions can lead to financial efficiencies. For example. reducing the risk of bankruptcy. increase output. 2 Moving to an alternative less costly production technology . however. Operational efficiencies may arise from economies of scale. a more utilized combination of assets. The efficiency benefits from mergers and acquisitions include both operating and managerial efficiencies. Assume when a firm with accumulated losses mergers with a profit-making firm. Under other conditions. or provide new products. restricted to little gains to the firms. Efficiencies Companies might combine their operations through mergers and acquisitions of company assets to diminish production costs. 2  Market Power Effects Some mergers may end up with market power which pours into the benefit of the merging firms. tax benefits may turn out to be the underlying motive for a merger.2 7|Page . firms may diversify their earnings by acquiring other firms or their assets with different earnings flow. tax benefits are utilized better. and consumption economies of scope.

a merger with another company involving cash compensation often stands for a more effective utilization of surplus funds. 2  Utilization of surplus cash: A firm in a mature industry may generate a lot of cash but may not have profitable investment opportunities . major motive will be cost savings and process efficiency.Two companies that are working in totally different business areas. Conglomeration . cost savings and exploring new market opportunities. as in pharmaceutical industry where the synergy can obtained by many forms such as. Management Greed. 2 Types of Mergers and Acquisitions From the business structures point of view. Product-extension merger .In such a situation.Two companies are in different industries but still related products in the same geographical market.Two firms that are in a direct competition and share the same product lines and market. distinguished by the relationship between the companies that are merging: 5  Horizontal merger . 8|Page .    Market-extension merger . in most cases managers who make poor acquisitions increase the likelihood that they will. be an acquisition targets. Self-Aggrandizement Some managers may overemphasize growth. Though self-aggrandizement and greediness by managers may motivate some mergers and acquisitions.Two companies that are in the same industry with similar product but in different markets. there are different types of mergers.  Vertical merger – Backward or forward vertical merger as in a distributor and manufacturing company or a supplier and company. increased market share. or simply make wrong acquisition decisions. themselves.

The receipt of cash for shares by shareholders of the target company.  Consolidation Mergers – A new company is formed and both companies are bought and combined under the new entity. each has certain implications for the companies involved and for investors: 5  Purchase Mergers . There are two types. in simple words payment in the form of the acquiring company's stock.The offer by an acquiring company of shares or a combination of cash and shares to the target company’s shareholders. and together they become an entirely new public corporation with tradable shares. reducing taxes payable by the acquiring company.Classification by how the merger is financed. Also there is a type of acquisition which is a reverse merger. which is a deal that enables a private company to get publicly-listed in somehow short period. Different methods of financing merger or acquisition deal exist. but they mainly fall under the following category: 6  Cash Transaction . issued to the shareholders of the target company at a given ratio proportional to the valuation of it.  Share Transaction .The purchase is made with cash or through the issue of some kind of debt instrument. Such transactions are normally called acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target company goes under the (indirect) control of the bidder's shareholders. A reverse merger take place when a private company that has a very strong prospects and is seeking to raise financing buys a publicly-listed shell company.5 Financing the mergers and acquisitions Mergers are identified from acquisitions by the method in which they are financed and also by the relative size of the companies. the sale is taxable. The tax terms are the same as those of a purchase merger. and the difference between the book value and the purchase price of the assets can depreciate annually. Acquired assets can be written-up to the actual purchase price. The private company reverse merges into the public company. 9|Page . Acquirers usually prefer this kind of merger because it can provide them with a tax benefit. normally a company with no business and limited assets.

6 Normally. Going Private Transaction (Issuer bid) – it is a special type of acquisition where the purchaser already owns a majority of the target company shares and wants to fully own it back again as in the Virgin company example Table 2 Adapted from reference 4 Valuation Matters Investors aiming to take over a company should determine whether the deal will be of benefit to them. In order to do so. with neither party being under any compulsion to transact. while the buyer will tend to get the lowest price that they can.5 According to L. There are many direct and clear 10 | P a g e . Booth and W. Sean Cleary (2007) the Fair market value (FMV) is the highest price obtainable in an open and unrestricted (free) market between knowledgeable. investors must ask themselves how much the acquired company is really worth. the two sides of merger or acquisition deal will have different point of view about the worth of the target company: the sellers will try to value the company as high as they can. informed and prudent parties acting at arm’s length.

change in working capital The forecasted FCF are discounted to a present value using the company's weighted average costs of capital (WACC). The buyer company can order the target to sell at that price. it takes a long time to create a company.5 Determining fair market value depends on the perspective of the buyer. The most common way is to look at comparable companies in the same industry. Usually. while being aware of the price-to-sales ratio of other companies in the same industry.are hard to value and develop. but there are a variety of other methods and tools to assess a target company. 5 3. Discounted Cash Flow (DCF) – It is the key valuation method in mergers and acquisitions. Replacement Cost . acquisitions are valued based on the cost of replacing the target company. Comparative Ratios . The value of a company is the sum of all its equipment and staffing costs. or it will create a competitor for them with the same cost. By viewing the P/E for all the stocks within the same industry this will give the buyer company good guidance for what the target's P/E multiple should be. Forecasted free cash flows =operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes .legitimate methods to value companies.The buyer company makes an offer as a multiple of the revenues. 5 2.people and ideas . Such as: 5 1.In some cases.6 11 | P a g e .5  Enterprise-Value-to-Sales Ratio (EV/Sales) .The following are two methods of many comparative metrics on which acquiring companies may base their offers:  Price-Earnings Ratio (P/E Ratio) . This way of establishing value of a company definitely wouldn't make much sense in a service industry where the key assets .An acquiring company makes an offer that is a multiple of the earnings of the target company. discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Some buyers are more likely to be able to realize synergies than others and those with the greatest ability to generate synergies are the ones who can justify higher prices.

 CF CFt CF1 CF2 V0    .   1 2  t (1  k ) (1  k ) (1  k ) t 1 (1  k ) K= Discount rate CF= Free cash flow t= Time period Types of buyers and the impact of their perspective on value include: 6 1. 6 Financial Analysis in Mergers and Acquisitions It is a crucial step for a corporate acquirer’s to assess and analyze the financial statement of an acquisition or merger candidate. Financials – valued on the basis of reorganized and refinanced operations 4. a corporate acquirer usually analyzes the current and potential financial statements of a target company.. Reactive Pricing Approaches Models reacting to general rules of thumb and the relative pricing compared to other securities. This analysis is used in measuring the value of the shares or the net assets of the target firm. Passive investors – use estimated cash flows currently present 2. 6   Multiples or relative valuation Liquidation or breakup values Proactive Models A valuation method to determine what a target firm’s value should be based on future values of cash flow and earnings as the discounted cash flow (DCF) models. Strategic investors – use estimated synergies and changes that are forecast to arise through integration of operations with their own 3.. 7 12 | P a g e . Managers – value the firm based on their own job potential and ability to motivate staff and reorganize the firm’s operations.

taxes. 3. This is due to such things as the negotiating positions of the parties involved. Non-operating assets that are acquired as part of the transaction. or its ability to generate its forecast operating results. and amortization ‘EBITDA’) less income taxes. depreciation. 2. and several other factors that take place during the course of negotiations. 7 An estimate of prospective discretionary cash flow to be generated by a business normally involves an assessment of the historical operating results of the target company and any financial projections that have been prepared. The actual price that a corporate acquirer might be prepared to pay for the shares (or net assets) of the target company may be higher or lower than its estimate of fair market value. Discretionary cash flow is defined as cash flow from operations (Earnings before interest. the number of acquirers interested in such Company at that time. The acquirer’s required rate of return given its perceived risk level of achieving said cash flows and its perception of the target company’s ‘strategic importance. 7 Prospective Discretionary Cash Flow Any Business is usually valued based on its ability to prospectively generate cash flow. 7 Discretionary cash flow represents the amount of money available to the providers of capital of a business (debt holders and shareholders) that can be withdrawn without affecting the existing operations of the business. an assessment of the prospective discretionary cash flows to be generated normally includes those of the target company 13 | P a g e . In addition. capital expenditure and working capital requirements. The quantity and timing of probable cash flows that will be generated.How to determine value and price of Shares: The principal determinants of the shares value (or net assets) of a target company are: 7 1. This includes cash flows to be generated by the target company from its operations on a ‘standalone’ basis as well as discretionary cash flows that a buyer anticipates will arise in the form of post-acquisition synergies.

For example. The quantum of weight afforded to historical operating results depends on whether and to what extent they are believed to represent what the target company prospectively is capable of generating on a stand-alone basis. the current ratio and quick ratio).g. then historical operating results may not be indicative of future expectations.g. an analysis of the historical financial statements of an acquisition target normally involves the calculation of various financial ratios that can generally be categorized as: 7  Profitability Ratios (e. capacity.g. If the target company has made significant changes in the recent years (e. which help a buyer in assessing the resource and capacity requirements of a target company. return on assets) that indicate the proportion of revenues retained by the company at different levels. and whether the buyer will be required to make a capital injection to support the operations of the target company. days at hand and inventory turnover) which assist a buyer in assessing incremental working capital requirements that will be needed to support prospective revenues.  Debt management Ratios (e. 7 Historical operating results Recent historical operating results (normally the past five years) are considered when estimating prospective operating results.g.g. and in evaluating management efficiency  Liquidity Ratios (e.g. which measure the short term financial strength of the business. profit margin. Debt ratio and times interest earned) which measure target company’s ability to accommodate interest bearing debt. Product lines extension. and those that the acquirer anticipates will be realized in the form of post-acquisition synergies.itself. 7 Moreover. This may in turn affect the acquirer’s cost of capital.).  Asset Management Ratios (e. 14 | P a g e . the dynamics of the industry in which it operates. etc. sales per employee and average selling price per unit sold). Basic earning power. and the company’s sensitivity to fluctuations in revenues. and its required rate of return  Operating Ratios (e.

and hence should be considered either through a reduction of prospective discretionary cash flows. Conversely. For example. knowing that those results often are a key element in negotiations with prospective acquirers. owners and managers sometimes reduce spending in discretionary accounts such as advertising. Thus. these actions may have serious long term consequences to the vendor’s business. and the recovery of assets that had previously been written down. including ratios and so on. it is important to consider the status of the economy and the industry at the time those results were achieved. However. Prior to selling a business. and so on. and so on. The detection of these things requires careful analysis of the historical financial statements. non-recurring and unusual items that favorably affected historical operating results often are buried as part of revenues or expenses from ongoing operations.. historical unusual and non-recurring items are not indicative of prospective operating results. Quarterly and monthly results also should be considered as these can provide insight as to seasonality and short-term performance. a buyer should consider whether these things truly are nonrecurring. 7 15 | P a g e . ratio analysis must be moderated by taking into consideration the changes in accounting policies. This is because. 7 The analysis of historical financial statements should not be limited to annual results. 7 One more thing should be taken into consideration is that analysis of historical financial statements involves the identification of unusual or non-recurring items. which may alter such analysis. or in the level of risk of achieving those cash flows. In addition. management practices. a significant one-time sale. However. to increase short-term profitability. Examples include nonrecurring property tax refunds. while a costly strike may be unusual. it may recur in the future. Just because an item is classified as ‘unusual’ or ‘extraordinary’ in the financial statements does not necessarily mean that it will not reappear. by definition. However. many owners and managers will take steps to reflect the best possible financial results. when analyzing the historical financial statements of the target company.These mentioned above ratios can provide a buyer with insight into the reasons for a target company’s historical performance. Sellers normally are quick to point out unusual and non-recurring items that negatively impacted historical results. research and development.

1 Strategic synergy . strategic thinking.Forecast operating results When getting a business for sale. brand names. An important question is . what level of risk fits with the new organization. ability to change. This includes: Investment synergy . customer mix? Operating synergy . and production capacities. fit together? Management synergy . it is a must to determine what kind of "synergy" exists between the two companies. Any trial to keep out or manipulate data will lead to risks and problems in the future. the owners. a buyer typically will estimate the value of the target company’s equity using a ‘discounted cash flow’ methodology as discussed earlier. technologies. distribution channels.What management strengths will be brought together through this deal? Both parties must bring unique experience to the table to create synergies.Will this merger work? And to answer this question. This is a very detailed and extensive evaluation of the proposed deal.7 Due Diligence There is a shared lead that runs throughout most of the mergers and acquisitions deals.Will the different business units and production facilities fit together and how? How do labor force.What expertise and talents do both sides bring to the merger? How well do leadership styles. managers or sellers may prepare forecast operating results. Where meaningful forecasts are available. and many questions that should be answered before doing the deal. Marketing synergy – Does the products and services complement each other? Will the various components of marketing fit together – promotion programs. and culture fit together? Financial synergy – Will the financial elements fit together and how? Due diligence should be a cooperative and patient process between the buyer’s and seller’s. It is the Due Diligence.What financial resources will be required. they normally are for a period of 3 to 7 years. 16 | P a g e . Where forecasts are prepared.

the acquirer’s stock price falls instantly after the deal is announced. production.). many acquisitions fail simply because they set too high performance bar. and marketing.8 Reasons behind this are mainly the following: 8 First of all. In most cases. that risk is shared with selling shareholders. 8 The main difference between cash and stock transactions is that: In cash transactions. or marketing campaigns can be made in stages over time. So in acquisitions the financial clock just starts ticking on the whole investment just from the beginning. that drop is a sign of worse to come. Due diligence must expose all of the major risk associated with the proposed merger or acquisition. which is expensive and time consuming for both sides. extending well beyond the functional areas (finance. 8 Third reason of problems is the fact that acquisition – though it is a quick route to growth –it requires full payment ahead. acquiring shareholders take on the whole risk that the expected synergy value involved in the acquisition premium won’t materialize. In other cases.Misrepresentations of data or omissions will lead to post-closing litigation. The market’s routinely negative response to M&A announcements reflects investors’ skepticism about the likelihood that the acquirer will be able both to maintain the original values of the businesses in question and to achieve the synergies required to justify the premium.4 Due diligence is very wide and deep.Legal) 1 The Risk in Trade-Offs between Buyers and Sellers in Mergers and Acquisitions In about most of all acquisitions. capacity expansion. 17 | P a g e . Even without the acquisition premium. Competitors will not stand idly by while an acquirer attempts to generate synergies at their expense. performance improvements have already been built into the prices of both the acquirer and the seller.Competition . In stock transactions. By contrast. acquisitions turn sour because the benefits they bring are easily replicated by competitors. human resources. These risk areas that need to be investigated are (Market . investments in research and development.Customer .

or if their shares are in tax-exempt pension funds. 8 How Risk Is Distributed Between Acquirer and Seller The risk is distributed between the buyer and the seller based on the way an acquisition is paid for.. On the other hand. a cash purchase of shares is the most tax-favorable way for the acquirer to make an acquisition as it offers the opportunity to revalue assets and hence to increase the depreciation expense for tax purposes. An acquirer who pays mainly in cash. which may offset the acquirer’s tax benefits. merged company. presumes all the risk that the price of its shares will drop between the announcement of the deal and its closing. an acquirer who pays the seller a fixed number of its own shares minimizes its risk from a drop in share price to the percentage it will own of the new.More specifically. if the selling shareholders suffer losses on their shares. The acquirer also assumes all the operating risk after the deal closes. 8 Table 3 Adapted From reference 8 Tax Consequences of Acquisitions The way an acquisition is paid for whether cash or stock affects the tax bills of the shareholders involved. for example.8 18 | P a g e . shareholders in the selling company will face a tax bill for capital gains if they receive cash. After all. the synergy risk is shared in proportion to the percentage of the combined company the acquiring and selling shareholders each will own. By contrast. The acquirer that pays a fixed value of shares assumes the entire pre-closing market risk but minimizes its operating risk to the percentage of its post-closing ownership in the newly acquired company. they may favor cash rather than stock. They are therefore likely to bargain up the price to compensate for that cost. in stock transactions.

5. Objective of the M&A . In other words. geographic expansions comes third.The way an acquisition is paid for whether cash or stock affects the tax bills of the shareholders involved.Competition . Expenses or Cost of Capital and the most likely to bring highest synergy value is lowering the expenses due to omitting of unnecessary or duplicated supportive functions. 2. Accuracy of Due Diligence .There are various types of reasons and objectives for mergers and acquisitions.Customer . accordingly the relative importance of the reasons is a major determinant of the success of the M&A and the financial performance of the company post-merge. The extent of synergy . which is expensive and 19 | P a g e . IT and so on 4.The combining of the two firms creates additional "synergy" value which can take one of three forms: Revenues.We have concluded that to value the target company it is better to use the comparative ratios method along with the discounted cash flow method as the first gives a bigger picture versus the market and industry while the other method gives a snapshot on the future estimated financial status of the post merge transaction in order to reach the ideal buying price 3. a cash purchase of shares is the most tax-favorable way for the acquirer to make an acquisition as it offers the opportunity to revalue assets and hence to increase the depreciation expense for tax purposes. selling shareholders can defer taxes until they sell the acquirer’s stock. Methods of valuation .Due diligence should expose all of the major risk associated with the proposed merger or acquisition. These risk areas that need to be investigated are (Market . 8 Conclusion Our conclusion is that there are some major factors that affect the financial performance of a corporate post-merger and acquisition. Overcapacity deals and product-line extensions were the most common reasons. Accounting. such as HR. Methods of payment from a taxation prospective . any trial to keep out or manipulate data will lead to risks and problems in the future and will lead to post-closing litigation.Legal).By contrast. the tax treatments for stock financed acquisitions appear to favor the selling shareholders because they allow them to receive the acquirer’s stock tax-free. as follows: 1.

By contrast. the buyer that pays the seller a fixed number of its own shares minimizes its risk from a drop in share price to the percentage it will own of the new. The risk level borne by each party – Distributing the risk between the buyer and the seller is based on the way an acquisition is paid for. merged company. The buyer that pays a fixed value of shares assumes the entire pre-closing market risk but minimizes its operating risk to the percentage of its post-closing ownership in the newly acquired company Corporate managers should bear in mind such factors and their impact on the post-merger and acquisition corporate financial performance to evaluate the proposed offers of mergers and acquisitions accurately and take profitable decisions.time consuming for both sides. The extend on how accurate the due diligence the more successful the transaction and will impact positively on the financial performance of the corporate 6. 20 | P a g e . The buyer that pays mainly in cash presumes all the risk that the price of its shares will drop between the announcement of the deal and it’s closing. The buyer also assumes all the operating risk after the deal closes.

Johnson. 2007 John Wiley & Sons Canada. Investopedia. Reprint 99611 21 | P a g e . 2001 8. 7. Harvard business review November–December 1999. Hart.campbellvaluation.imaa-institute. http://www. INTRODUCTION TO CORPORATE FINANCE. Acquisitions and Alliances (IMAA) analysis. Excellence in Financial Management. 2001 3.Andrew J.References: 1. Evidence on Mergers and Acquisitions .org/statistics-mergers-acquisitions. American Management Association 2006 Institute of Mergers. Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions.html 4.The Basics Of Mergers And Acquisitions.Howard E. Financial Statement Analysis in Mergers and Acquisitions.investopedia. extracted on 3 January 2013 on http://www. Sean Cleary. Bureau of Economics. 2nd edition. Campbell Valuation Partners Limited 6. (www.Laurence Booth and W. Sirower. Evans. Chapter 15 – Mergers and Acquisitions. Ltd. Sherman and Milledge A. Pautler. Mergers & Acquisitions from A to Z. March 2000 2.Paul A. September 25.Matt H. . Mergers & Acquisitions (Part 1). Federal Trade Commission. January 1.Thomson Financial.Alfred Rappaport and Mark L.

Sign up to vote on this title
UsefulNot useful