M&A ANALYSIS PAPER

M&A Analysis Paper

M&A Analysis Paper

Introduction

It 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.

Part I

Impact of Merger & Acquisition on Accounting

A method of accounting for a business combination. It may only be used when a business combination falls within the definition of a merger in Financial Reporting Standard  6 and Schedule 4A to the Companies Act 1985 (in respect of financial years beginning before 6 April 2008) or regulations made under the Companies Act 2006 (in respect of financial years beginning on or after 6 April 2008). A business combination meets the definition of a merger under the Companies Acts only if it involves the exchange of equity shares for equity shares such that a stake of more than 90% is acquired and generally accepted accounting principles permit the use of merger accounting. Under FRS 6 it must satisfy the following five criteria:

No party to the merger is portrayed as either the buyer or the target.

All parties to the combination participate in the selection of management and such decisions are based on consensus rather than by reference to voting rights.

The parties to the combination are approximately the same size.

Only an immaterial proportion of the consideration received by shareholders of any party is other than equity shares in the combined entity.

No equity shareholders of the combining entities retain an interest in the performance of part only of the combined entity.

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 ...