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From Financial prospective ESLSCA MBA 38 FD Financial Management
Prepared by: Mohamed Khalifa Ibrahim Ahmed Islam Shaza Ali
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
5.Abstract The consequences of mergers and acquisitions on corporate financial performance. Deals can be worth hundreds of millions. 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. M&A represent the ultimate in change for a corporate. The extent of synergy. this paper concluded that there are some factors that affect the financial performance. Objective of the M&A. or a new market or new location. Accuracy of Due Diligence. This paper aims at reviewing and analyzing these factors on mergers and acquisitions and its effects on the financial performance. selling. M&A are a large portion of the corporate business world. Methods of valuation. Introduction Mergers and acquisitions (M&A) are an aspect of corporate strategy. as follows: 1. there are factors that might affect the performance of corporations such as synergies. dividing and/or combining of various companies and similar entities that can aid an enterprise grow faster in its respected sector or geographical location.com website. 3. These mergers can record the fortunes of the corporates involved for years to come. Wall Street investment bankers operate M&A transactions that bring companies together to create bigger ones. every day. 4. It requires that everyone 2|Page . Previous reviews and literatures are using varieties of measures to examine the impact of mergers and acquisitions on corporate financial performance. According to the investopedia. Methods of payment 2. The risk level borne by each party. or even billions. finance and management dealing with the buying. 6. for the business managers no other event is more difficult. other child entity or using a joint venture. challenging. or chaotic as a merger and acquisition. without creating a subsidiary. of dollars.
8 164. 1985-2012 (as of 24 November 2012) in figure 1. Firms will go for acquisitions when it is the most profitable means of enhancing capacity.involved in the M&A process has a very clear understanding of how. Travelers Group Inc.1 There is several numbers of motives that may play a role in merger activity. Exxon Corp. Acquisitions and Alliances (IMAA) analysis in Table 1.2 According to the Thomson Financial. Glaxo Wellcome PLC Royal Dutch Petroleum Co. Acquisitions and Alliances (IMAA) analysis.2 89.1 The term "merger".6 98. expressed the announced Mergers & Acquisitions worldwide.9 76. where and when the process works.7 72. In some cases of an acquisition. Institute of Mergers.0 74. or reallocating assets into the control of the most effective managers. many of the factors th at affect the decision of major investment would also influence merger activity. The term "acquisition" refers to the acquisition of assets by one company from another one. Institute of Mergers. Target Mannesmann AG Time Warner Philip Morris Intl Inc.6 72. Shareholders RFS Holdings BV Pfizer Inc. InBev Inc. Pfizer Inc.2 78. Table 1 The Thomson Financial.6 68 52 Year Acquirer 1999 2000 2007 2007 1999 1998 2000 2004 2006 1998 2009 2008 Vodafone AirTouch PLC America Online Inc. BellSouth Corp Citicorp Wyeth Anheuser-Busch Companies. AT&T Inc.3 3|Page . is used when referring to the merging of two companies forming one new company that will continue to exist. That’s why. ABN-AMRO Holding NV Warner-Lambert Co. obtaining new experience or skills. both companies may continue to exist. The most general motive is simply that the acquirers consider the acquisition to be a profitable investment. entering new market or geographic areas. The Largest Mergers and Acquisitions Transactions that occurred worldwide since 01 January 1985 till 19 January 20123 Transaction Value (in billion USD) 202.7 107. Inc. Mobil Corp SmithKline Beecham PLC Shell Transport & Trading Co.
1 4|Page . the total value will be $ 5 billion. The implicit principle behind mergers and acquisitions is the simple equation of synergy. product line or even an entire company. The value of Company X is $ 2 billion and the value of Company Y is $ 2 billion. 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. The difference between the two is important to be clear. but when they merge together. it retains its original identity. a division.Figure 1 Mergers or Acquisitions defining the terms The terms merger and acquisition are usually unclear or used interchangeably. Although the buying company may be a considerably different organization after the merger. as in 1+1 =3. • Acquisition: The purchase of an asset such as a plant. Reasons for Mergers and Acquisitions Each and every merger transaction has its own unique reasons why.
The ideal mergers might have strategic reasons for the business combination. they will realize lower expenses than if they operate independently. Expenses: By joining the two companies.Synergy is the additional value created (∆V). the premium reflects part of the post-merger synergy they forecast to be achieved.(VA+ VT) VT = the pre-merger value of the target firm VA . they will experience a lower overall cost of capital. they will realize higher revenues than if they operate independently. that premium reflects the company's future prospects. Revenues: By joining the two companies. 3. Cost savings always come from the omitting of unnecessary or duplicated supportive functions. as in the following formula: 6 Where: ∆V= VA – T . Several mergers were driven by the urge to cut costs. These reasons include but not limited to: 1 5|Page . 2. such as HR. Accounting. The equation solves for the minimum required synergy: 5 The largest source of synergy value is lowering the expenses. For the sellers. For buyers. In spite of what premerger valuation price. The following equation offers a good way to evaluate synergy and how to determine whether a merger or acquisition transaction makes sense.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. Which means buyers will need to pay more (a premium) if they want to buy the company. It would be very unlikely for owners to sell if they would gain more by not selling. IT and so on. Cost of Capital: By combining the two companies.
The acquired company’s assets may be undervalued and that’s why it represents an attractive investment. Hereunder are some of these factors. A second company may have a very similar facility that is idle.It is necessary to increase earnings and get more consistent long-term revenue growth and profitability. So mergers and acquisitions are the easy way to boost poor performance. 2 6|Page .Taking the benefit of future opportunities that may be exploited when the two companies are joined. New segments talking and Positioning . there are a few categories of factors that tends to play a role in a least some mergers. Organizational Competencies . Fast Market Access – Merging with or acquiring a foreign company will give quick access to emerging global markets geographically. Such as if a company is looking for expansion of its manufacturing facilities. Fortifying the weakness “Gap Filling” .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. each company will fills-in a strategic gap that is crucial for their long-term survival.It could be cost effective to acquire another company than to invest internally. By merging these two companies. This occurs for companies in very mature industries such as the pharmaceutical industry where future growth will be questioned.Acquiring companies with strong human resources and or intellectual capital can improve innovative thinking and progress within the first company. It could be more cost effective to just buy this second company with the unused facilities than building a new facility. Regardless of the main motivations for mergers. We have to know that merger activity is something other than a simple extension of business investment. such as: 1 Capital investment reduction . Mergers and acquisitions will also be carried out by basic business reasons. Diversification . Undervalued assets .
increase output. improved focus on core skills of the firm. tax benefits are utilized better. 2 Diversification in earnings within firms may minimize the variation in their profitability. 2 Moving to an alternative less costly production technology . a more utilized combination of assets. reducing the risk of bankruptcy. improve product quality. firms may diversify their earnings by acquiring other firms or their assets with different earnings flow. gain new technologies. restricted to little gains to the firms. 2 Market Power Effects Some mergers may end up with market power which pours into the benefit of the merging firms. improved resource allocation. Operational efficiencies may arise from economies of scale. Because these accumulated losses can make up for the profits of the profit-making firm. Under other conditions. The tendency of one firm to merge with another firm or acquire its assets also creates a market for corporate dominancy. however. tax benefits may turn out to be the underlying motive for a merger. Assume when a firm with accumulated losses mergers with a profit-making firm.2 7|Page . Efficiencies Companies might combine their operations through mergers and acquisitions of company assets to diminish production costs. and consumption economies of scope.enhanced use of information and expertise. The efficiency benefits from mergers and acquisitions include both operating and managerial efficiencies. The benefits from mergers and acquisitions are not. 2 Financial and Tax Benefits Mergers and acquisitions can lead to financial efficiencies. or provide new products. reductions in transportation costs. For example. production economies of scope.
Two firms that are in a direct competition and share the same product lines and market. a merger with another company involving cash compensation often stands for a more effective utilization of surplus funds. Though self-aggrandizement and greediness by managers may motivate some mergers and acquisitions. 8|Page . there are different types of mergers. Management Greed. Market-extension merger . Conglomeration . Self-Aggrandizement Some managers may overemphasize growth. distinguished by the relationship between the companies that are merging: 5 Horizontal merger . Vertical merger – Backward or forward vertical merger as in a distributor and manufacturing company or a supplier and company. major motive will be cost savings and process efficiency. as in pharmaceutical industry where the synergy can obtained by many forms such as. 2 Utilization of surplus cash: A firm in a mature industry may generate a lot of cash but may not have profitable investment opportunities . themselves.In such a situation.Two companies are in different industries but still related products in the same geographical market. increased market share. in most cases managers who make poor acquisitions increase the likelihood that they will.Two companies that are working in totally different business areas. or simply make wrong acquisition decisions. Product-extension merger . be an acquisition targets. cost savings and exploring new market opportunities.Two companies that are in the same industry with similar product but in different markets. 2 Types of Mergers and Acquisitions From the business structures point of view.
There are two types. 9|Page . Consolidation Mergers – A new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.Classification by how the merger is financed. issued to the shareholders of the target company at a given ratio proportional to the valuation of it. which is a deal that enables a private company to get publicly-listed in somehow short period. and together they become an entirely new public corporation with tradable shares. Different methods of financing merger or acquisition deal exist.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. but they mainly fall under the following category: 6 Cash Transaction . each has certain implications for the companies involved and for investors: 5 Purchase Mergers . the sale is taxable. Acquirers usually prefer this kind of merger because it can provide them with a tax benefit. reducing taxes payable by the acquiring company. Share Transaction . in simple words payment in the form of the acquiring company's stock. normally a company with no business and limited assets. 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.The receipt of cash for shares by shareholders of the target company. Acquired assets can be written-up to the actual purchase price. 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.The offer by an acquiring company of shares or a combination of cash and shares to the target company’s shareholders. Also there is a type of acquisition which is a reverse merger. and the difference between the book value and the purchase price of the assets can depreciate annually.The purchase is made with cash or through the issue of some kind of debt instrument. The private company reverse merges into the public company.
investors must ask themselves how much the acquired company is really worth.6 Normally. Sean Cleary (2007) the Fair market value (FMV) is the highest price obtainable in an open and unrestricted (free) market between knowledgeable. with neither party being under any compulsion to transact.5 According to L. 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. In order to do so. Booth and W. informed and prudent parties acting at arm’s length. 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. while the buyer will tend to get the lowest price that they can. There are many direct and clear 10 | P a g e .
or it will create a competitor for them with the same cost. Usually.6 11 | P a g e . Forecasted free cash flows =operating profit + depreciation + amortization of goodwill – capital expenditures – cash taxes .legitimate methods to value companies.change in working capital The forecasted FCF are discounted to a present value using the company's weighted average costs of capital (WACC).The following are two methods of many comparative metrics on which acquiring companies may base their offers: Price-Earnings Ratio (P/E Ratio) . but there are a variety of other methods and tools to assess a target company.5 Determining fair market value depends on the perspective of the buyer. acquisitions are valued based on the cost of replacing the target company. Comparative Ratios . 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.In some cases. 5 3.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. Discounted Cash Flow (DCF) – It is the key valuation method in mergers and acquisitions. 5 2.are hard to value and develop. This way of establishing value of a company definitely wouldn't make much sense in a service industry where the key assets . The value of a company is the sum of all its equipment and staffing costs. 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. Such as: 5 1. Replacement Cost .The buyer company makes an offer as a multiple of the revenues. while being aware of the price-to-sales ratio of other companies in the same industry.5 Enterprise-Value-to-Sales Ratio (EV/Sales) . it takes a long time to create a company.people and ideas . The buyer company can order the target to sell at that price. The most common way is to look at comparable companies in the same industry.
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..V0 CF CFt CF1 CF2 . This analysis is used in measuring the value of the shares or the net assets of the target firm. 7 12 | P a g e . Strategic investors – use estimated synergies and changes that are forecast to arise through integration of operations with their own 3.. Managers – value the firm based on their own job potential and ability to motivate staff and reorganize the firm’s operations. Reactive Pricing Approaches Models reacting to general rules of thumb and the relative pricing compared to other securities. Passive investors – use estimated cash flows currently present 2. 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. 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 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.
The quantity and timing of probable cash flows that will be generated. 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. or its ability to generate its forecast operating results. and amortization ‘EBITDA’) less income taxes. capital expenditure and working capital requirements. In addition. 7 Prospective Discretionary Cash Flow Any Business is usually valued based on its ability to prospectively generate cash flow. 3.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. depreciation. 2. Discretionary cash flow is defined as cash flow from operations (Earnings before interest. taxes. 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. This is due to such things as the negotiating positions of the parties involved. an assessment of the prospective discretionary cash flows to be generated normally includes those of the target company 13 | P a g e . 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. and several other factors that take place during the course of negotiations. 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. Non-operating assets that are acquired as part of the transaction. 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. the number of acquirers interested in such Company at that time.
g. Product lines extension. sales per employee and average selling price per unit sold).g. 7 Moreover. the current ratio and quick ratio). profit margin. etc. and its required rate of return Operating Ratios (e. Asset Management Ratios (e.g. and those that the acquirer anticipates will be realized in the form of post-acquisition synergies. 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. days at hand and inventory turnover) which assist a buyer in assessing incremental working capital requirements that will be needed to support prospective revenues. the dynamics of the industry in which it operates. capacity. 7 Historical operating results Recent historical operating results (normally the past five years) are considered when estimating prospective operating results. Debt ratio and times interest earned) which measure target company’s ability to accommodate interest bearing debt. which measure the short term financial strength of the business. Debt management Ratios (e. If the target company has made significant changes in the recent years (e. This may in turn affect the acquirer’s cost of capital. 14 | P a g e . 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.g. and in evaluating management efficiency Liquidity Ratios (e.).g. and the company’s sensitivity to fluctuations in revenues. Basic earning power. which help a buyer in assessing the resource and capacity requirements of a target company.itself. and whether the buyer will be required to make a capital injection to support the operations of the target company. return on assets) that indicate the proportion of revenues retained by the company at different levels. then historical operating results may not be indicative of future expectations.g. For example.
a buyer should consider whether these things truly are nonrecurring. Examples include nonrecurring property tax refunds.. Just because an item is classified as ‘unusual’ or ‘extraordinary’ in the financial statements does not necessarily mean that it will not reappear. many owners and managers will take steps to reflect the best possible financial results. and hence should be considered either through a reduction of prospective discretionary cash flows. which may alter such analysis. For example. Conversely. 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. a significant one-time sale. and the recovery of assets that had previously been written down. these actions may have serious long term consequences to the vendor’s business. 7 The analysis of historical financial statements should not be limited to annual results. Thus. research and development. or in the level of risk of achieving those cash flows. including ratios and so on.These mentioned above ratios can provide a buyer with insight into the reasons for a target company’s historical performance. to increase short-term profitability. and so on. it is important to consider the status of the economy and the industry at the time those results were achieved. 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. when analyzing the historical financial statements of the target company. Prior to selling a business. by definition. Quarterly and monthly results also should be considered as these can provide insight as to seasonality and short-term performance. and so on. knowing that those results often are a key element in negotiations with prospective acquirers. In addition. management practices. However. it may recur in the future. However. However. owners and managers sometimes reduce spending in discretionary accounts such as advertising. The detection of these things requires careful analysis of the historical financial statements. Sellers normally are quick to point out unusual and non-recurring items that negatively impacted historical results. 7 15 | P a g e . ratio analysis must be moderated by taking into consideration the changes in accounting policies. while a costly strike may be unusual. This is because.
Will this merger work? And to answer this question. what level of risk fits with the new organization. brand names. Any trial to keep out or manipulate data will lead to risks and problems in the future. Marketing synergy – Does the products and services complement each other? Will the various components of marketing fit together – promotion programs. Where forecasts are prepared. strategic thinking. It is the Due Diligence. technologies.1 Strategic synergy . distribution channels. a buyer typically will estimate the value of the target company’s equity using a ‘discounted cash flow’ methodology as discussed earlier.Forecast operating results When getting a business for sale. 16 | P a g e . and production capacities.What financial resources will be required. This is a very detailed and extensive evaluation of the proposed deal. they normally are for a period of 3 to 7 years.7 Due Diligence There is a shared lead that runs throughout most of the mergers and acquisitions deals. and many questions that should be answered before doing the deal.What expertise and talents do both sides bring to the merger? How well do leadership styles.What management strengths will be brought together through this deal? Both parties must bring unique experience to the table to create synergies. managers or sellers may prepare forecast operating results. An important question is . Where meaningful forecasts are available. This includes: Investment synergy . fit together? Management synergy . customer mix? Operating synergy . it is a must to determine what kind of "synergy" exists between the two companies. the owners. 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.Will the different business units and production facilities fit together and how? How do labor force. ability to change.
extending well beyond the functional areas (finance. investments in research and development. Competitors will not stand idly by while an acquirer attempts to generate synergies at their expense.8 Reasons behind this are mainly the following: 8 First of all.Competition . performance improvements have already been built into the prices of both the acquirer and the seller. production. By contrast. and marketing. which is expensive and time consuming for both sides. human resources.). capacity expansion. In most cases. In other cases. that drop is a sign of worse to come.Misrepresentations of data or omissions will lead to post-closing litigation. 8 The main difference between cash and stock transactions is that: In cash transactions. So in acquisitions the financial clock just starts ticking on the whole investment just from the beginning. Due diligence must expose all of the major risk associated with the proposed merger or acquisition. 8 Third reason of problems is the fact that acquisition – though it is a quick route to growth –it requires full payment ahead. that risk is shared with selling shareholders. many acquisitions fail simply because they set too high performance bar.4 Due diligence is very wide and deep.Customer . In stock transactions. acquisitions turn sour because the benefits they bring are easily replicated by competitors. These risk areas that need to be investigated are (Market . 17 | P a g e . 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. Even without the acquisition premium. acquiring shareholders take on the whole risk that the expected synergy value involved in the acquisition premium won’t materialize. the acquirer’s stock price falls instantly after the deal is announced. or marketing campaigns can be made in stages over time.Legal) 1 The Risk in Trade-Offs between Buyers and Sellers in Mergers and Acquisitions In about most of all acquisitions.
for example. merged company.. By contrast. 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. the synergy risk is shared in proportion to the percentage of the combined company the acquiring and selling shareholders each will own.8 18 | P a g e . An acquirer who pays mainly in cash. or if their shares are in tax-exempt pension funds.More specifically. shareholders in the selling company will face a tax bill for capital gains if they receive cash. if the selling shareholders suffer losses on their shares. The acquirer also assumes all the operating risk after the deal closes. in stock transactions. On the other hand. 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. 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. which may offset the acquirer’s tax benefits. After all. presumes all the risk that the price of its shares will drop between the announcement of the deal and its closing. They are therefore likely to bargain up the price to compensate for that cost. 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. they may favor cash rather than stock. 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.
Customer .The combining of the two firms creates additional "synergy" value which can take one of three forms: Revenues. 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.Competition . Objective of the M&A .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. Methods of payment from a taxation prospective . geographic expansions comes third. 5. as follows: 1. which is expensive and 19 | P a g e . Accounting.The way an acquisition is paid for whether cash or stock affects the tax bills of the shareholders involved. The extent of synergy . 8 Conclusion Our conclusion is that there are some major factors that affect the financial performance of a corporate post-merger and acquisition.By contrast.There are various types of reasons and objectives for mergers and acquisitions. Overcapacity deals and product-line extensions were the most common reasons. selling shareholders can defer taxes until they sell the acquirer’s stock. Methods of valuation . such as HR.Due diligence should expose all of the major risk associated with the proposed merger or acquisition. 2. any trial to keep out or manipulate data will lead to risks and problems in the future and will lead to post-closing litigation. 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. 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.Legal). In other words. IT and so on 4. These risk areas that need to be investigated are (Market . Accuracy of Due Diligence . 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.
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.time consuming for both sides. merged company. 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. 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 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. 20 | P a g e . The buyer also assumes all the operating risk after the deal closes. 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.
Thomson Financial. extracted on 3 January 2013 on http://www.References: 1. Harvard business review November–December 1999.com. INTRODUCTION TO CORPORATE FINANCE.investopedia. September 25. Campbell Valuation Partners Limited publication. Federal Trade Commission. (www. Bureau of Economics.Howard E. http://www. Institute of Mergers.Laurence Booth and W. Acquisitions and Alliances (IMAA) analysis. 2nd edition. Ltd.com/university/mergers/ 6. 7. Financial Statement Analysis in Mergers and Acquisitions. Excellence in Financial Management. March 2000 2.Paul A. 2010. 2001 3. 2007 John Wiley & Sons Canada. Sirower.Andrew J. Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions. Mergers & Acquisitions from A to Z.com) .Matt H.campbellvaluation.Alfred Rappaport and Mark L. Sean Cleary. Reprint 99611 21 | P a g e . Mergers & Acquisitions (Part 1). Pautler. Hart. 2001 8. Evidence on Mergers and Acquisitions . January 1.imaa-institute.org/statistics-mergers-acquisitions. Johnson. American Management Association 2006 5.The Basics Of Mergers And Acquisitions. Sherman and Milledge A. Investopedia. Chapter 15 – Mergers and Acquisitions. Evans.html 4.
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