Study Of Mergers And Acquisitions Of Financial Strategy

The purpose of business merger and acquisition (M&A) is to have the maximum profit,to maximize the net present value of the enterprise. How to meet the target relies fundamentally upon the analysis of some financial issues. This paper aims at discussing several financial issues in M&A, based on the basic knowledge of this field. These financial issues are the key parts and difficulties in M&A. They are not only independent but also interrelated closely。Financial decision on these issues run through the procedure of M&A and makes up the main contents of procedure of M&A and makes up the main contents of financial management in M&A .The paper consists of six parts .SECTION ONE :A GENERAL STUDY OF M&A.This part interprets the concepts of merger, acquisition and consolidation. M&A is the property transaction activity which is conducted for the purpose of obtaining the right of control target firm. Although M&A is one of the primary activity of capital management and assets rearrangement, the difference between them is obvious evidently. In the end ,five financial issues about M&A are introduced . SECTION TWO : AN EXTENSIVE FINANCIAL ANALYSIS OF M&AThis part discusses two issues: 1.the choice of the manner in which the acquiring firm will pay for the target firm 2.A model of financial decision--making .There are two forms of payment in practice: cash and share. As to the choice of payment, the acquiring firm should consider financial factors such as financial position ,capital structure,sufficiency of cash and so on .The M&A is a long investment activity in Finance.The principle of capital budget can be used for making the decision.SECTION THREE: THE EVALUATION OF THE TARGET FIRM.This part introduce the system of value appraisal method in M&A. These method are adopted extensively in the M&A cases of foreign developed countries. Discounted cash flow such as Rappaport model and Weston model is regard as the most scientific and mature appraisal method.In separate valuation model ,we analyse the valuation standard,current value and other issues and get some conclusions. The comprehensive valuation models are mainly Rappaport model and Weston model, The Weston is more scientific and more feasible than Rappaport Model.The difference between these two valuation is named goodwillSECTION FOUR: THE DETERMINATION OF EXCHANGE RATIO.If the acquiring firm adopts exchange of shares, the basic variable in question is the exchange ratio .The exchange ratio is important considering the rights of both shareholders in the new firm.The traditional method for determining the exchange ratio is based on the EPS of both the acquiring firm and the target firm. There are three standards when EPS is adopted: current EPS, future EPS and undiluted EPS. Although traditional method reflects an enterprise's earning ability, it doesn't include the risk factor.The deficits are obvious evidently . The modern method is L-G model, which is put by professor K D.Larson and N J.Gronedes in 1969.L-G model can be used in most cases and has been proven the most scientific method.SECTION FIVE: THE CONTINGENT PAYOUT STRATEGY.In practice ,the acquiring firm can adopt the Contingent payout strategy to avoid the risk of overpay which comes from the outright payment.There are two issues when taking the contingent payout strategy :the determination of the Down payment and the standard of performance measurement We introduce three typical schemes after discussing these problems:stable scheme,movable scheme and accumulative scheme In most cases ,the contingent payout strategy is feasible and acceptable for both the acquiring firm and the target firm.SECTION SIX: AN EMPIRICAL STUDY OF M&AThe last part is an empirical study of M&A in China capital market. There are still some deficits of M&A in China: small percentage of the stock in the capital market, fund resource restrain of the acquiring company, the shortage of the instruments of the acquiring company and so on ,In a word ,M&A in China is s...