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M&A Analysis - Effects of Accounting, Taxes and Law

Prepare a 1,050-1,750-word answer in which you analyze the effects of the following on M&A activities:

1. Accounting (i.e. revenue enhancement, cost reduction, risk management)
2. Taxes (i.e. shields, synergies, WACC)
3. Legal (i.e. corporate organization and ownership, litigation risk, law compliance)

Select at least two effects from each category and explain it's relevance in pursuing an M&A strategy.

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Mergers and Acquisition


Mergers and acquisitions are the most popular means of corporate restructuring or business combination. M & A are strategic decisions that lead to the maximization of a company's growth by enhancing the production and marketing operations. It has become popular in recent times because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with hither economies (Gaughan, 2002).

Mergers and acquisitions are intended to limit competition, overcome the problem of slow growth and profitability in the industry. The fundamental motive that drives mergers and acquisitions is the growth impulse of firms. Firms that desire to expand have to choose between two generic growth strategies, such as organic growth or acquisitions driven growth. Organic growth is a slow and steady process and very often is a function of time factor. Acquisition led growth is an aggressive strategy and is relatively riskier to an organic growth strategy. An organic growth may not be an acceptable strategy.

For example, in an industry which is having over- capacity, a firm which intends to expand may necessarily have to choose acquisitions driven strategy. This is because organic growth would entail creation of additional capacity and may prove suicidal by adding to the existing over-capacity. Secondly, in a situation where speed is the essence to capitalize on an opportunity, organic growth may be an inappropriate strategy.

Relevance of Accounting on Mergers and Acquisitions

Mergers and acquisition involve complex accounting treatment. A merger, also defined as amalgamation, involves the absorption of the target company by acquiring a company which results in uniting of the interest of two companies. Thus, the merger should be structured as pooling of interest. In the acquisition where the acquiring company purchases the shares of the target company, the acquisition should be structured as a purchase.

Revenue Enhancement: The Company enhances the revenue by sharing marketing opportunities with broader product portfolio, exploiting brand loyalty of each partner and by leveraging the advantage of distribution network. Revenue enhancing is a newly produced or ...