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.

Incentives for Mergers and Acquisitions

Followings are incentives for financial managers for mergers and acquisitions:

Economies of Scale: Economies of scale characterizes a production process in which an increase in the number of units produced causes a decrease in the average cost of each unit. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Economies of Vertical Integration: Achieving lower operating costs by bringing the entire production chain within the firm rather than contracting through the marketplace. The most common way is merging with a company at a different stage in the production process, for instance, a car maker merging with a car retailer or a parts supplier.Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Complementary Resources: Most likely to end up with acquisitions when a big firm sees an opportunity in the small one which has technology, competitiveness talented team etc. If small company has insufficient resources to finance its own projects two companies may prefer to merge and complete each other's needs.

Surplus Funds: It is about spending excess of earnings to fund mergers and acquisitions instead of investing it on new projects of paying out dividends or buying back stocks.

Eliminating Inefficiencies: As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Industry Consolidation: If market has too many entities and each one is competing to gain more slice from it, merging can be seen as a good way to consolidate to gain more competitiveness.