M&A Analysis Paper
In order to have a successful M&A many different steps are involved. Each step in the process is just as important as the next and cannot be over looked. Some of the broader area’s that require focus are; accounting, taxes, and legal. Within each of these categories are several sub categories that are important to focus on when attempting to complete a successful merger or acquisition. While every organization may have a different process for doing so, and place more importance on one than another would, all of the aspects listed are important.
However, it is up to each individual organization to designate how important each one is. When it comes to the accounting portion of a merger or acquisition it would seem that this would be one of the most important areas of all. Several of the subcategories in the accounting portion are; revenue enhancement, cost reduction, and risk management. With mergers and acquisitions revenue enhancement can often come in the form of synergy, and involves greater cost effectiveness of the new organization.
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Under revenue enhancement there are several areas that could be a priority such as; a reduction in staff, new technology and systems, increased negotiating power, and improved market reach and visibility. (www. investopedia. com) Accomplishing revenue enhancement is often much more difficult than it sounds. It is not something that is automatically realized, and often involve many tough, tough decisions. The next portion of the accounting side of M&A is cost reduction. Cost reduction is a process that organizations use in order to reduce their overall expenses which in turn will increase profits.
There are many different strategies that organizations use in order to accomplish this, but there is not one blanket strategy that applies to all. If the organizations manufacture products then they will use strategies such as supplier and/or component consolidation, re-source out to a low cost country, and value engineering. Whereas if the company offers a variety of services instead of an actual product they may use strategies such as competitor benchmarking, function analysis, and “should cost” tools. (www. wikipedia. om) Lastly, with the accounting portion we have risk management. Risk management is an extremely important aspect of the M&A process. Without risk management a company could potentially leave themselves open to various legal and market risks and wouldn’t recognize it until it was too late. Risk management is the process of identifying, assessing, and then prioritizing risks associated within an organization. That process is then followed by an application that has been designed in such a way as to monitor, minimize, and control the impact of unforeseen future events.
In short, there are risks associated with almost every aspect of a business’s operations. There is a five point system to risk management that an organization can follow; 1. Identify risks, 2. Quantify risks, 3. Formulate strategies, 4. Implement strategies, 5. Continuously monitor the preset risk containment tasks. (www. morebusiness. com, 2007) The next broad category in the merger and acquisition process is taxes. As with accounting there are several subcategories in this area such as; synergies, shields, and weighted average cost of capital.
Each one of these serves its own purpose, and is important in its own way. The first of these subcategories, synergy, is the ability of an organization to generate a higher shareholder return once it has been merged with the other than it could do on its own. Many define this process simply as a 1+1=3. Synergy can often materialize in several different forms such as; an increase in the dominance of a certain market and the growth opportunities involved, streamlining employee operations, and cutting back on non-essential employee roles, and in technological advances for an organization. Zain, 2008) The next subcategory that falls under the taxes section is shields. One of the big processes in finding an appropriate organization to complete a merger or acquisition with is to investigate which type of tax shields will be afforded to the acquiring organization. A tax shield is when there is a reduction in the amount of income taxes paid that result from the amount of income a company has that is considered taxable. A good example of a tax shield is the interest paid on debt.
Organizations may take on more debt, or acquire companies with large debt loads simply to increase the amount of interest paid and to receive that amount in a reduction on their income taxes. Tax shields is relevant because they often increase the overall value of an organization due to the cash flow that it saves for them, and is an invaluable piece to the business valuation process. (Hartman) Lastly, we have the weighted average cost of capital (WACC). The WACC is the percentage rate that an organization is going to be projected to pay in order to finance all of its assets.
Factored into this calculation are the monies owed to its creditors, other providers of capital, and owners. Organizations also use this weighted average in order to see if any of the investments that are available to them are worth pursuing or not. The calculation for the WACC is: . (www. investopedia. com) The WACC is relevant to the M&A process because it helps to determine whether or not the company in question is worth pursuing or not. The last section of the M&A process is the legal side. Under the legal category there is; corporate organization and ownership, litigation risk, and legal compliance.
There are several different forms of corporate organization and ownership are; corporation, limited liability company, limited partnership, general partnership, limited liability partnership, and a sole proprietorship. Each of these ownership structures have its pros and cons and specific times that they should be utilized. A corporation is a legal entity exists independently from its actual owners, and limits personal liability on the owner’s part for any type of taxes that are imposed on the corporation.
Corporations often use the sales of bonds and/or stocks in order to generate capital. The next, a limited liability company provides similar protection than that of a corporation but gets taxed differently. Next is a limited partnership. With a limited partnership offers limited liability for some partners. The big difference for this type of structure is that the partners share an unlimited amount of personal liability for the limited partnerships responsibilities. A general partnership is one that is required to have two or more persons that are engaged in the business.
In this partnership all partners unless agreed otherwise, are responsible for all of the obligations in the partnership. Lastly, there is the sole proprietorship. This is a structure that is set up to allow a single individual to own/operate a business. These different structures are important because they each have their own pros and cons and depending on the organizations objectives can be an appropriate form. They also each have their own rules and regulations when considering a merger or acquisition and need to be dealt with accordingly. (www. sos. ca. gov) The next subcategory is litigation risk.
Litigation is one of the fastest growing areas when looking at mergers and acquisitions. They are becoming progressively more common and at the same time more costly. Many believe that the growth in this area is happening so rapidly that the area remains extremely underappreciated. Most of the risk of litigation arises from shareholder lawsuits in the form of a class action. However, litigation between two organizations is becoming increasingly more frequent. In 2001 for example, there was only four M&A lawsuits filed versus 2009 with 150, and 2010 with 341.
This is relevant to a potential merger or acquisition because the two organizations need to understand what kind of liability they are opening themselves up to. In many cases the litigation costs alone force the organizations to withdraw from the proposed deal. (LaCroix, 2011) These risks are creating an ever more important focus on legal compliance. Many M&A deals fall apart because of a lack of oversight in the compliance area. In order for an organization to have any type of longevity compliance must be a primary focus.
In this ever changing world mergers and acquisitions are becoming more and more complicated. In part due to the fault of the two organizations but also in part due to the changing economic environment. More and more organizations face lawsuits and changing government regulations that impede them from accomplishing the tasks they set out to do in the first place. With that said though, there are still billions of dollars to be made in mergers and acquisitions if handled appropriately, and there is no sign that organizations will slow down attempting them in the future.
www.morebusiness.com . (2007, 05 28) . Retrieved 10 08 , 2012 , from http://www.morebusiness.com/running_your_business/businessbits/Business-Risk.brc Hartman , D. (n.d.) . www.smallbusienss.chron.com . Retrieved 10 08 , 2012 , from http://smallbusiness.chron.com/tax-shield-cash-flow-analysis-22753. html LaCroix , K . (2011, 11 28) . www.dandodiary.com . Retrieved 10 08, 2012, from http://www.dandodiary.com/2011/11/articles/securities-litigation/why-marelated-litigation-is-a-serious-problem/ www.investopedia.com . (n.d.) . Retrieved 10 08 , 2012 , from http://www.investopedia.com/university/mergers/mergers1.asp#axzz28jLQ0mTj www.investopedia.com . (n.d.) .