M&A Analysis Paper

Merger & Acquisition is an important part of the corporate finance. It is

combining of two or more entities into one through a purchase acquisition but it is
different from consolidation (Dounis, 2008). The process of merger & acquisition
includes various strategies that are extremely important in order to derive the
maximum benefit from merger and acquisition deal. Some of the factors such as
accounting, taxation, and legal factor affect the merger and acquisition strategy in
different ways.
Relevance of accounting effects in Merge & Acquisition Strategy
Accounting is an important factor that has relevance in pursuing merger and
acquisition strategy. It is because; the main aim of merger and acquisition is to get
the financial gain and benefits. Some of accounting effects such as revenue
enhancement, cost reduction, and risk management are important in merger and
acquisition. Relevance of these effects in pursuing mergers and acquisitions are as
follow
Revenue Enhancement:
Revenue enhancement is a gain or benefit from the merger and acquisition in
terms of increasing the revenues of a firm through market gain, increase in market
power, and strategic benefits. It has important relevance in pursuing merger and
acquisition strategy as the main aim of a firm is to increase its revenues by
acquiring or merged with another firm (Hunt, 2009). Nevertheless, every firm that
pursues merger and acquisition strategy considers the revenue enhancement factor.
Risk Management:
Risk Management is important and relevant in pursuing the strategy of
merger and acquisition. The success or failure of merger and acquisition also
depends upon the effective risk management within the businesses. Higher failure
rate of merger and acquisition strategies indicates that organizations underestimate
the importance of risk management in decision-making. The internal audit function
can improve the quality of risk management throughout the process. Risk
management could be done by the expertise or professionals within the companies
(Dounis, 2008).
Relevance of Taxation Effects in Merger & Acquisition Strategy
Tax is an important factor in merger and acquisition strategy for firms. It is
because; the benefits of acquisition are also comes from lower taxes and tax
savings on reserves of the firm. It includes some of the effect such as weighted
average cost of capital, shields, and synergies for firms. Relevance of these effects
in merger and acquisition are as follow

Synergies:
Synergies are result from every merger and acquisition transaction between
firms. It can be defined as leveraging the combined strength of two parties in
merger and acquisition transaction by adding the individual capabilities of two
firms. Synergies are relevant and important in merger and acquisition strategy.
Synergies are come in two forms such as financial as well as operating synergies in
merger and acquisition. Operating synergies come from capitalizing on the merger
of two firms operation. Financial synergies enhance the companys capital structure
the is important in merger and acquisition strategy. Financial synergies provide
more access to the capital markets and lower the companys cost of capital (Hunt,
2009).
Weighted Average Cost of Capital:
Low cost of capital has an important effect of lower taxes in merger and
acquisition. Weighted average cost of capital is important aspect in merger and
acquisition strategies. Cost of mergers and acquisitions are an important and
integral part of this process. Before going for merger and acquisition, both the
companies calculate the cost and find out the viability and profitability of the deal.
The cost of capital is calculated as the weighted average of cost of debt and equity
capital (Rock, Rock & Sikora, 1994). In an acquisition, the acquiring firm uses its own
cost of capital to discount the targets projected cash flows of new firm. Cost of
capital has an important relevance in merger and acquisition strategy. It is because,
the WACC could be affect the merger and acquisition strategy as high cost of capital
may result the rejection of merger and acquisition strategy by the firms in some
cases.
Relevance of Legal effects in Merger & Acquisition Strategy
Legal factor created some of the effects on merger and acquisition strategy
such as corporate organization and ownership, litigation risk, and legal compliance.
The relevance of these effects in merger and acquisition are as follow
Litigation Risk:
Litigation risks are common and relevant to most corporate merger and
acquisitions. Litigation risk should be assessed by management and as it is not
involved directly with merger or acquisition. A single merger or acquisition can raise
different types of litigation risks and causes of action. In an acquisition, the acquirer
should work with its legal counsel to determine appropriate legal action to facilitate
the acquisition transaction to protect from litigation risks (Hunt, 2009). Four
litigation issues are common in merger and acquisition such as personal injury
liability, accounting related issues, employment benefit issues, and antitrust issues
(Brown, Pluchinsky & Murr, 2005). Litigation risks are important in selection of
merger and acquisition strategy.

Legal Compliance:
From a legal perspective, companies or firms that are involved in merger and
acquisition have some legal compliance. It is required for both firms to fulfill all
these legal compliances. The significance of merger and acquisition not only
involved organization but also their stakeholders. It is because; the success or
failure of merger and acquisition strategy also depends upon the legal compliance
related to shareholders, employees, lenders, community, as well as economy
(Ferenczy, 2008). Legal compliance includes employee compensation, and benefits
issues after merger or acquisition of companies. Compensation and benefit plan
includes review of salary rates and ranges, determine the benefits merger strategy
etc.
With the above discussion, it can be explained that various factors are
affecting the merger and acquisition strategies. Some of the factor such accounting,
legal, and taxes are very important in merger and acquisition transactions. The
impact of these factors has the relevance and importance in pursuing merger and
acquisition strategies. The revenue enhancement, risk management, cost of capital,
synergies, legal compliance, and litigation risks are equally important to complete
the merger and acquisition transactions.

Reference
Brown, B.T, Pluchinsky, D.A & Murr, G.B. (2005). The Risk of Merger and Acquisition
in the
Energy Sector: What to Expect and How to Be Prepared for Potential Litigation
Issues.
http://library.findlaw.com/2005/Jul/22/186428.html.
Dounis, N.P. (2008). The Auditors Role in Mergers and Acquisition: Companies often
Underestimate the Importance of Risk Management during the M&A Process.
Retrieved
November 6, 2010 from:
http://findarticles.com/p/articles/mi_m4153/is_3_64/ai_n27504379/
Ferenczy, L.H. (2008). Employee Benefits in Merger and Acquisition. Aspen
publishers Online

Hunt, P.A. (2009). Structuring Mergers & Acquisition: A Guide to Creating

Shareholder Value.
(4th ed.). Aspen Publishers Online.
Rock, M.L, Rock, R.H & Sikora, M.J. (1994). The Merger & Acquisition Handbook. (2nd
ed.).
McGraw Hill Professional.