Advices for Financial Managers on Mergers and Acquisitions

All financial mangers have to face with followings:

Antitrust Law: Merged companies have to make sure that they are not lessening the competition on any line of business or they are not imposing a monopoly on the market.

The Form of Financing: There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

  • Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
    Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
  • Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity.

See this for more detail.

Merger 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 defined in associated Laws. A business combination meets the definition of a merger under the Companies Act 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.

Tax Considerations: When making an acquisition, disposing of a non-core business or going through a merger, companies need to manage tax risk and ensure future net cash flows are optimised.