Financial Management & Mergers and Acquisitions

This assignment delves into the crucial role of financial management within mergers and acquisitions (M&A). It examines various financial considerations related to M&A strategies, post-merger integration processes, and the impact of these transactions on organizational performance. The provided resources encompass a range of perspectives, from academic research articles to practical guides, offering insights into the complexities of financial management in the context of M&A.

Financial management

Table of Contents
INTRODUCTION.........................................................................................................................................5
Analysis of financial statement of companies...........................................................................................5
Identify ratios and ratio analysis................................................................................................................5
Argue the case either DC will succeed or not in future period..................................................................8
Assessing the impact of political and competitive environment on the business organization.................9
Stating the factors which company needs to consider while taking decision about merger and
acquisition................................................................................................................................................10
Relevant ethical considerations when an organization becomes insolvent.............................................11
RECOMMENDATION...............................................................................................................................11
CONCLUSION............................................................................................................................................12
REFERENCES............................................................................................................................................13

INTRODUCTION
Every company measure their financial performance by constructing basic statements that
are statement of comprehensive income, statement of financial position and cash flow statement
as well. These statements are prepared to assess and evaluate operational result i.e. profit or loss
and financial health i.e. short-term and long-term credit payment ability and efficiency to use
business assets. The present project report lay emphasizes on financial statement analysis of
Dragonfly Corporation which operates clothing stores to serve teenagers. In this respect,
performance and financial status of the business will be investigated by using variety of ratios
i.e. profitability, solvency, liquidity and activity or efficiency ratios. On the basis of such
evaluation, appropriate advices or recommendation will be given so as to enhance performance
and meet targets.
Analysis of financial statement of companies
Establishments need to analyze and interpret their performance and financial status so as
to identify reasons for poor performance and thereby make solid decisions for achieving success
in the future years. Profitability statement gives information that whether Dragonfly Corporation
has earned enough return or not on their functions, however, balance sheet delivers information
about their creditworthiness or liquidity and long-term solvency (Watson, Parsons and Synovec,
2016). There are various kind of techniques available to examine annual accounts such as ratio
analysis, common-size or vertical analysis and horizontal analysis. Strategic financial analysis
(SFA) helps to investigate reasons for changes in reported monetary figures and helps to make
effective decisions. It assists managers, executives and policy-makers to identify reasons for
negative yield and poor financial health, which in turn, they can frame better strategies and
policies to accomplish targets.
Identify ratios and ratio analysis
Ratio analysis of financial statement evaluation is considered as the best way to measure
business strength. In such respect, ratio depicts relationship between two variables of the annual
financial statements (Titman, Keown and Martin, 2015). There are wide range of ratios that are
available to Dragonfly Corporation to investigate the result or outcome of daily business
activities and monetary transactions, enumerated below:

Profitability ratios: Surplus or excess income received by the organization over total
incurred expenditures is a sign of profit, otherwise it will represent a situation of loss. Gross
profit margin (GPM) and net profit margin (NPM) are the best ways to investigate and interpret
profitability statement, described hereunder:
Ratios 2009 2010 2011
Profitability ratios
Gross profit 183600 367200 581400
Net profit 21080 69360 182240
Turnover 408000 816000 1292000
Gross margin 45.00% 45% 45%
Net margin 5.17% 8.50% 14.11%
Liquidity performance
Current assets 87584 117868 122274
Current liabilities 134693 133992 188219
Inventory 83548 111311 115569
Current ratio 0.65 0.88 0.65
Quick/acid test ratio 0.03 0.05 0.04
Activity/efficiency ratios
Total assets 147013 174884 210976
Fixed assets 53999 49347 84795
assets turnover ratio 2.78 4.67 6.12
Fixed assets turnover ratio 7.56 16.54 15.24
Solvency ratios
Long-term debt 96930 95405 93973
Total shareholder's equity 27200 27200 68000
Debt to equity ratio 3.56 3.51 1.38
GPM: The portion of revenues remains after making payment to the cost of sale is called
gross margin. During a period of 2009 to 2011, Dragonfly Corporation’s GM held constant to
45% every year indicating that company has earned constant return on their total sales. Although,
revenue of the company has been increased due to opening new retail store 2 and 3 in the year
2010 and 2011, but still, cost of goods sold also gone increased exactly in the same proportion to
that of rise in turnover (Finkler and et.al., 2016). In 2011, Thompson decided to open a second
retail store to encounter the problem of deterioration of Crossroads, which was the main
responsible for reason for increased revenue. It helps DC to maximize their customer base,
economies of scale benefits in relation to advertisement and excess revenue.

NPM: Excess or surplus of total revenues or income earned over incurred expenditures is
called net profit margin. In the year 2009, DC’s NPM was 5.17% gone increased to 8.50% and
14.11% respectively in next two years. Increased net margin is a good indicator that reflects that
company earned higher profit in the upcoming years. Higher percentage increase in revenues as
compare to the cost is the reason for improved performance and demonstrates that company
performed well in this year.
Liquidity ratios: These ratios are used by the analysts to measure that whether they are
able or not to meet their short-term liabilities on right time (Haque, Knight and Jayasuriya,
2015).
Current ratio: It indicates relationship between short-term or current assets (inventory,
cash and others) and current liabilities (notes payable, trade payables, and accrued liabilities). CR
of DC got improved from 0.65:1 to 0.88:1 and thereafter it again came down to 0.65:1. Declined
CR demonstrates that DC did not brought any improvement in their capability to meet their
short-term creditors on right time. Moreover, ideal ratio depicts that current assets must be
doubled to total current liabilities (Bundy and et.al., 2015). Henceforth, it can be said that
company’s liquidity performance is not sound as it is not strongly able to repay short-term
obligations.
Quick ratio/Acid test ratio: This ratio measure liquidity performance without considering
their closing inventory position. Similar to CR, QR shows a little bit increase from 0.03:1 to
0.05:1 and then got declined to 0.04:1. Decreased ratio demonstrates that Dragonfly Corp. is not
able to repay nearby obligations and deferral payments timely.
Efficiency/activity ratio: It indicates manager’s efficiency to use both the fixed as well
as current assets so as to generate high level of income (Ding, Booth and Roscoe, 2016).
Assets turnover ratios: This ratio measure proficiency of managers to utilize total assets.
Regards to Dragonfly Corporation, it got increased from 2.78 times to 4.67 times and 6.12 times
in 2010 and 2011. Inclining trend demonstrates that business managers take stronger decisions to
utilize corporate assets in an effective and efficient manner so as to gather higher revenue and
achieve operational success (Baxamusa and Jalal, 2016).

Fixed assets turnover ratio: FATR of the company increased from 7.56 times to 16.54
times in 2010 whilst in 2011, it came down to 15.24 times. Decreased ratio is an adverse
indicator which reflects that fixed assets like office and ship equipments, furniture and fixture
and leasehold property are not utilized in an effective manner to maximize business revenues.
Solvency ratio: This ratio is used to evaluate that whether Dragonfly Corporation is
capable or not to meet their long-term obligations, especially debt fund as per repayment
schedule.
Debt to equity ratio: This ratio measures long-term capital generated either in the form of
debt and equity mainly used to measure investment risk. In 2010, D/E ratio came down from
3.56 to 3.51 due to repayment of some long-term debt and is an indicator of less financial risk.
Again, in 2011, it came down from 3.51 times to 1.38 times because of repayment of debt and
increase in shareholder’s equity (Kural and et.al., 2016). Trend depicts that DC’s ratio moved in
favorable direction and come near to ideal ratio of 0.5:1. It indicates that Janet and Thompson
tried to manage their capital structure so as to minimize long-term investment risk, which in turn,
company will be able to gather required long-term fund at right time and at right cost in the
future period.
Argue the case either DC will succeed or not in future period
After taking into consideration above results, it can be estimated that in the upcoming
period, profitability of the firm will may goes upward. However, on the other hand, liquidity
performance of the firm may goes declined over the period. Moreover, rising trend of managerial
efficiency indicates that both the Thomson and Janet are utilizing assets optimally to generate
maximize their income level. In addition to this, corporate financial structure also moved in
favorable direction due to more composition of equity resources over the debt fund. In 2011, as
per the case study, Thompson opened a new retail store for their merchandise operations which
delivers scale-based benefits by spreading cost over possible revenues of both the two location
which was earlier allocated to only one store. Moreover, protection decisions by deciding to fold
first store in case of increasing lease and move merchandising division to the Bellevue location
will also proves beneficial for the business. Thus, excess revenues over the incremental cost of
second set of lease payments can be considered as an effective decisions accomplishing vision of

profitable multisite operation. It indicates that there is a extreme possibility that Dragonfly
Corporation will perform well in the forthcoming years.
In addition to this, Thomson communicated with Crossroad’s landlord to pay rent equal
to 6% of gross revenues considerably lower than current rent of 2550 dollar each month. Further,
differential advertisement will definitely assist business to maximize their sales as well as
customer traffic to their retail stores. All the results show that in the upcoming period, Dragonfly
Corp. will perform better.
Assessing the impact of political and competitive environment on the business organization
Political and competition are the main two factors which have high level of impact on the
activities and functioning of the business organization. Taxation as well as other laws and
legislation introduced by the political authorities closely influence the growth and success of
firm. Hence, Dragonfly needs to consider such aspect while developing strategic and policy
framework. Such business organization is operating in US economy where government
intervention in the marketing trend is highly minimal. Along with this, company is operating in
the capitalist economic system where government and private business organization monitors the
activities.
Besides this, rules and regulations in relation to the registration, labeling, branding,
pricing etc. affects the overall business framework of the company. Further, safety and
environmental are the main political issues that affect the business practices to the large extent.
In addition to this, tax policy directly impacts the profit margin of firm. In this way, political
stability is highly required for getting the desired level of success (Parola, Ellis and Golden,
2015). Moreover, monetary policy of the country influences the expansion decision of Dragonfly
Corporation. The rationale behind this, companies are encouraged to expand their business
activities when they get finance at lower interest rate from bank. Hence, by considering such
aspects it can be said that political environment affect the functions of business unit.
Further, competition is another significant factor which affects the strategies of the
company. Clothing sector is facing stiff competition due to changing needs, taste and preferences
of the customers. In this, Dragonfly Corporation can get competitive edge over others only when
it offers highly designer outlets to the customers. Hence, if business unit fails to focus on the

market research then it may result into loss of productivity, profitability and customer base.
Along with this, in US technological advancement increased with the very high pace. Thus,
company needs to focus on adopting high-tech aspects which in turn helps in fulfilling the aims
and objectives (Furlan, Oberhofer and Winner, 2016). Further, by taking into account the
technological advancements Dragonfly Corporation can develop awareness among the customers
about the designer dresses offered by it. Thus, company should consider the impact of both
political and competitive situation while taking business decisions.
Stating the factors which company needs to consider while taking decision about merger and
acquisition
There are several factors which business unit including Dragonfly Corporation needs to
consider while taking decision about merger & acquisition are enumerated below:
 Before acquisition company needs to hire investment bankers because they have proper
knowledge about the pricing aspect of the comparable companies (Zhang and et.al.,
2015). Hence, with the help of investment banker Dragonfly Corporation would become
able to select suitable company for the investment purpose that operates in the similar
sector.
 Along with this, company needs to take services from the advisors which in turn help
them in raising fund from the capital market (Tanriverdi and Uysal, 2015). Moreover,
advisors have better idea about the fund which company need to investment for merger.
 Further, business unit needs to consider the valuation methods such as net asset value etc.
before deciding the actual worth of the potential company. Besides this, Dragonfly
Corporation requires conducting ratio analysis to assess the financial position and
performance of the proposed company. Moreover, ratios provide deeper insight about the
profitability, liquidity and solvency position of the firm. In this, by evaluating such aspect
company would become able to assess that proposed investment will prove to be
beneficial for it or not (Brueller, Carmeli and Markman, 2016). Moreover, earning high
profitability, expansion and enhancement of customer base is one of the main objectives
of the company behind merger and acquisition. Hence, by taking into account all the
above mentioned aspect company can take suitable merger and acquisition decision.

Relevant ethical considerations when an organization becomes insolvent
There are several ethical issues which need to be considered by Dragonfly Corporation in
connection with the possibility of insolvency. In accordance with the case study, DC is
struggling for financial difficulties and may lead to possible bankruptcy or insolvency. At the
initial decisions, managers and policy-makers have to make strategies and business decisions by
selecting the best choice from a set of alternatives. At this stage, many-times, it may be possible
that they have to make choice between one good or one bad alternative. During the time of
decision-making, parties can be sometimes pressurized by others who posses conflicts of interest.
Thus, the key ethical challenge that exists in the front of policy-makers is to identify those
stakeholders who are highly interested in DC’s operations and have strong power to influence
decision-makers as well (Harris, 2013). In such respect, management parties have to prioritize
the parties for the purpose of solid decision. Apart from this, confidentiality of the information
and gathered data, threats and safeguarding approach, integrity and objectivity are also main
ethical issues that needs to be considered by Thompson and Janet to enhance their ethnicity of
various business decisions. Furthermore, companies have responsibility to fulfill their debt
covenant conditions so as to meet their long-term obligations and carry out operations
successfully.
RECOMMENDATION
Taking into consideration the results, it can be consider good to invest money in
Dragonfly Corporation. The reason behind this is company’s is receiving increased return on
their total turnover and performing well. Moreover, favorable change in capital structure is a sign
of decreased investment risk and assures safety of fund. On the other hand, in order to drive
improvement over business performance, following suggestion is considered advisable,
enumerated hereunder:
 Better quality products in different innovative looks and design will help company to
maximize their customer base, maximum revenue and generate more yields for the
success.
 Business expansion by opening more retailing stores to merchandise items at different
stores is also considered good to enlarge turnover and yield.

 Improvement in current assets, repayment of nearby obligations like trade payables, bank
overdraft also enables Thompson to improve their creditworthiness or liquidity status
(Titman, Keown and Martin, 2015).
 Reduction in cost by applying cost control mechanism is also considered good to control
operational expenditures which in turn deliver more return to DC.
CONCLUSION
Report concluded that although in the beginning times, Dragonfly Corporation faced
several issues and difficulties, but still, couple Thompon and Janet had made several better
decisions and strategies to improve their performance i.e. opening new retail store and spreader
of advertisement over revenues to maximize return. Moreover, declined use of debt fund and
maximum use of stockholders equity also give assistance to the business to enhance their
capabilities to meet their long-term liabilities as per debt covenants. Apart from this, from the
report, it also has been inferred that political environment and external market forces like
competition, technological changes, and market volatility also have a strong influence over
regular activities. Henceforth, DC needs to take best decisions to combat adverse impact of the
market changes and grab the benefit of existed market opportunities.

REFERENCES
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Industrial and Corporate Change. 25(3). pp.447-455.
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Parola, H. R., Ellis, K. M. and Golden, P., 2015. Performance effects of top management team
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Tanriverdi, H. and Uysal, V. B., 2015. When IT capabilities are not scale-free in merger and
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Online
Harris, J. T., 2013. Insolvency, Bankruptcy and the Board. [Online]. Available through: <
https://www.scu.edu/ethics/focus-areas/business-ethics/resources/insolvency-bankruptcy-
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