Mergers and Acquisitions Analysis

Mergers and Acquisitions Analysis

Fin 444: Mergers, Acquisitions, and Corporate Restructuring

Mergers and acquisitions are driven by a few simple goals: value enhancement, increased market share or revenues, cost reduction, or to better align a company with their strategic plan. Each of these possibilities requires careful consideration during the takeover process, not only to determine the wisdom of the effort, but to evaluate the merged company’s viability, as well as how the merger will be financed and how much financing is required. Revenue enhancement, cost reduction, tax shields, the weighted cost of capital, corporate organization and regulatory requirements all factor into the process of a merger and affect how the company is structured and functions in the end.

Accounting aspects

Revenue enhancement is an important factor in the decision to pursue a takeover. If there isn’t significant increased revenue involved as one of the synergies expected to provide gains in the merger, there must be other factors that will effectively offset the debt costs of the acquisition. While value enhancement may be a significant byproduct of the merger, it is different from revenue enhancement, which tracks gains in revenue rather than the overall valuation of the company. Revenue enhancement is generally the result of synergies and the associated cost reductions.

Mergers present a double-sided risk management concern for companies. Risk management is another area where company valuation and profits can improve. Mergers can be part of an overall pattern of diversification intended to reduce the overall risks an organization faces (Amihud, Dodd & Weinstein, 1986). Mergers can also pose failure risks in relation to the transaction itself. Determining what these potential risks are, and the level of threat they pose to the organization, is key to minimizing these affects or avoiding them all together. Significant risks faced in a merger are overpaying...