Market_Analysis

Mergers and Acquisitions Paper Mergers, Acquisitions, And Corporate Restructuring FIN/444 Introduction When considering a merger there are many different factors that can lead to the success or failure of the deal. There are always the valuations and the projections to consider to determine whether the merger will create value or not. However, in addition to these estimations it is important to keep in mind the factors which can have a significant effect on the final outcome of the merger. These factors are broadly grouped as accounting factors, taxes, and legal factors. If there is a problem with the merger in one of these areas it could derail a merger that otherwise would have been successful, while if there is smart handling of these factors they can be a opportunity to the merging firms. Accounting Factors Even if a merger is believed to create a significant synergy and add value for shareholders, smart management must ensure that the combination of the two firm’s accounting will work. One way in which firms can benefit from a merger is through cost reduction. This cost reduction can come in the form of staff reductions or economies of scale or additionally increased access to technology to name a few. “Staff reductions - 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.” (Investopedia.com,  2008). Additionally, problems instead of benefits can occur from the merger of two companies from this factor. When post merger firms are trying to establish their synergy they may become too focused on the cost cutting measures and not enough on revenue enhancement. “The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee.” (Investopedia.com,  2008). A firm can find many benefits from merging with another firm. A savvy management team will be able to balance the benefits and costs of a prospective merger to find out whether it is worth the undertaking. Taxes The tax implications of a proposed merger can have a significant impact on the success of that merger. Any analysis of a proposed merger would be incomplete without a thorough understanding of the tax situation of the two firms and how they will come together. One potentially beneficial arrangement could arise if one firm purchases another in a purchase merger. In this case the acquiring firm would gain a tax write off from the purchase of the assets. “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.” (Investopedia.com,  2008). Another factor for consideration in merging is the financing of the two firms’ operations. A firm that has debt financing has a tax deduction that may be useful to an acquiring company. “A strong inducement to sell debt is that the interest on debt is deductible as an expense for tax purposes.” (Mulherin, Mitchell, & Weston, 2004). If a debt laden firm has something of value to offer, like an innovative product or intellectual property, a larger firm that has the capital may want to acquire the firm and it’s tax write off. Though there are many different potential tax benefits from a merger, a savvy manager will be able to identify the benefits and avoid the pitfalls. Legal Considerations One of the most perilous aspects of a merger is the legal considerations. If management is not careful when approaching a merger, legal troubles can destroy the whole deal no matter how well the rest of merger might be planned. One of the hardest hurdles that merging firms can face is anti-trust legislation. If the government decides that the merging of two firms will have a negative impact on competition then the government can stop the merger outright. “The companies, (Google and Yahoo), must convince the agency's antitrust regulators the partnership won't be a threat to competition, but insiders say the agreement is unlikely to get antitrust approval because there's no way that an alliance between two of the three big search advertising firms can avoid hurting competition.” (Lindell,  2008). As is shown here companies that would like to merge can be stopped altogether if the merger is seen as detrimental to competition. However this is not the only legal hurdle that can arise in the attempt by two firms to merge. If the firms that are planning to merge are in the media or telecommunications industries then the FCC, or Federal Communications Committee, must also give its approval for the merger to take place. This process of getting approval can be a time and capital consuming undertaking. “Four FCC commissioners are now at an impasse over the AT&T/BellSouth deal, in large part because of net neutrality. To get the merger approved, AT&T has pledged that for 2 1/2 years it won't provide Web sites that agree to pay a premium either faster or more reliable service over its Internet backbone.” (Doyle,  2006). To get approval from regulators firms may have to make damaging concessions which will likely curb some of the synergy the firms are expecting to make the merger worthwhile. Legal considerations can have severe negative impacts on the outcome of a merger. A skillful management team must be able to recognize the legal risks of a merger and weigh them against the benefits of the merger. Conclusion When a two firms are considering merging there are many benefits to be had. For as many benefits as there are in a successful merger there are just as many pitfalls to fall into with a failed one. A strong levelheaded management team should be able to evaluate all the factors and decide whether it is prudent to proceed or not. The factors of legal, accounting and taxes are a large part of this evaluation and should be ignored at the firm’s peril. References: Mulherin, J. H., Mitchell,, M. L., & Weston,, J. F. (2004). Takeovers, Restructuring, and Corporate Governance. [University of Phoenix Custom Edition e-Text]. , : Prentice Hall, Inc. A Pearson Education Company . Retrieved November 3, 2008, from University Of Phoenix, MERGERS, ACQUISITIONS, AND CORPORATE RESTRUCTURING FIN/444. Investopedia.com (2008). Mergers and Acquisitions: Valuation Matters. Retrieved November 3, 2008, from http://www.investopedia.com/university/mergers/mergers2.asp Lindell, C. K. (2008). Law.com. Google, Yahoo Antitrust Lawyers Give Merger Effort One Last Try. Retrieved November 3, 2008, from http://www.law.com/jsp/article.jsp'id=1202425742415&rss=newswire Doyle, T. (2006). Forbes.com. FCC And Mergers: 'Can You Hold'. Retrieved November 3, 2008, from http://www.forbes.com/2006/12/05/beltway-network-neutrality-fcc-biz-wash-cz_td_1206fcc.html