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Merger And Acquisition Analysis

1047 words - 4 pages

IntroductionIt is often said that two heads are better than one. This is also true in business. By merging or through acquisitions, two organizations can group their resources to increase market share, beat a competitor, or create a more efficient business model. Joining forces does not happen overnight; it is process. Mergers and acquisitions are used to describe various corporate restructuring strategies. Mergers take place when two relatively equal sized companies mutually decide to pool their interests to become one jointed organization. Acquisitions occur when companies purchase another and eliminate the existence of the target as an independent entity.The decision to merge with or acquire another company is, in principle, a capital budgeting decision. The value of a merger may depend on such things as strategic fits. Accounting, tax, and legal aspects of a merger can be complex.Accounting: Revenue Enhancement and Cost ReductionWhen two companies merge, synergistic benefits such as revenue enhancement, cost reduction, risk management, and greater market share can occur. Synergy takes the form of revenue enhancement and cost savings. Combined revenue tends to decline to the extent that the businesses overlap in the same market and some customers become alienated. For the merger to benefit shareholders there should be cost saving opportunities to offset the revenue decline.Synergy can come in the form of staff reductions as the merger of two companies creates an overlap in some positions. A newly merged company would only have a need for one Controller, or one President of Sales and Marketing. Also, it would produce more products and reach more customers with a reduction in staff. The economy of scale also provides a synergy; this refers to the benefits of ordering in bulk provides as the size increase that goes along with mergers provides better power for the newer, large entity.A merged organization may reduce costs by working more efficiently than the two smaller organizations. A horizontal merger can generate economies of scale; the average production cost will decline as production volume increases. A vertical merger allows an organization to decrease costs by coordinating production and distribution more closely. Economies may be achieved when one organization has excess production capacity and another has insufficient capacity.Taxes: Shields and WACCWeighted average cost of capital is a calculation which determines an organizations cost of capital and how it is proportionally weighted. Common stock, preferred stock, bonds and any other long term debt are capital sources that are included in the WACC. A company's assets are financed by either debt or equity. WACC is the average costs of these sources of financing. By calculating the WACC, the amount of interest the company has to pay for every dollar financed is revealed about the company.Unused tax losses, debt capacity, surplus funds, and a reporting of depreciable assets can stimulate...

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