Question

Mergers and Acquisitions

A. What justifies one firm paying a premium over the market price of another?

B. What factors have contributed to an increase in mergers the past several years?

C. What is the current state of the M&A market?

D. What is the proper accounting for M&A transactions? Explain.

Answer 1

A. What justifies one firm paying a premium over the market price of another?

Ans: There can be majorly two reasons for paying premium over the market: 1. The synergies resulting from the merger or acquisition from the two companies will be greater than the single entity. 2 . The firm does not want to waste time to close the deal.

B. What factors have contributed to an increase in mergers the past several years?

Ans: Following are the factors that have led to an increase in the mergers of many renowned firms across the world: 1. Destroying the competitiveness which may impact the profitability. 2. It give a flexibility to manage the larger chunk of customer base. 3. It gives the firm liquidity to sort out either the debt or to acquire the smaller firms of the same business segment and increase the synergies.

C. What is the current state of the M&A market?

Ans: Current state of the M&A market looks gloomy due to many factors prevailing such as Pandemic, Trade war, Political tensions between countries, Brexit, Weak economical data, Slow down in the capital markets. But, this time also gives a goldern opportunity for acquisition as the overall market value of the firm is low. Conversely, M&A market was doing very good in 2018 and slowly started deteriorating from late 2019 onwards.

D. What is the proper accounting for M&A transactions? Explain.

Ans: Accounting transactions in any M&A is called Purchase accounting. There are many factors which has to be taken in account for evaluating the cost of Acquisition properly, mentioned herwith:

1. Fair value, at the time of acquisition, of the assets, liabilities and Equity acquired by the all the stakeholders for both the entities who are acquiring and getting acquired or merged.

2. Any debt out the arena of the balance sheet.

3. Any other cost, directly attributable to the Companies.

4. Goodwill of the firm.

5. Transaction charges for the auditing firms, legal advisors, or third party consultant.

6. Tangible and Intangible liabilities.

7. Contigencies cost including Research and developments cost.

These are the factors to be kept in mind before selecting proper accounting for any M&A transactions.