The Financial Analysis of Merger Opportunities
The example in this chapter is concerned with the complex and increasingly important field of business combinations. The number of mergers and acquisitions which have taken place has expanded rapidly and at an ever increasing pace in recent years. Conglomerate enterprises have led the merger movement, of course, but a significant number of mergers are being carried out by other corporations which do not make a habit of acquisitions. Many small family-owned corporations are interested in seeking a merger partner for a variety of reasons. The head of such an organization may be approaching retirement age and may wish to convert his small but valuable business into a more liquid holding. Some small businesses find it useful to become associated with larger companies to make economies of scale possible. An important aspect of the merger movement from the viewpoint of the selling corporation is the income tax problem. If the seller disposes of his entire corporation for cash, he will probably be subject to capital gain taxes amounting to one quarter of the proceeds of sale. This can be very expensive and many sellers prefer a securities exchange basis, which defers income tax and capital gain payments for a substantial interval at the option of the seller.
KeywordsCash Flow Stock Price Parent Company Payout Ratio Prefer Stock
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