Corporate Mergers and Finance: Patterns and Elements

This article discusses the patterns and elements of corporate mergers in finance, including the history of mergers in the United States, the fifth merge wave, M&A purchase method, push down accounting, PE ratio, EV/EBITDA ratio, earnings before interest tax, APV, and equity carve-out.

1
Running Head: FINANCE
Finance
Student’s Name
Affiliate Institution
Submission Date

2
FINANCE
Corporate mergers have occurred in distinctive patterns over the years in the United
States since the late 18th century. In some season/ period, the merges were symbolized by both
less and major merge activities. Over the years most of the merges either went successful or
unsuccessful. In the history of the United States, five merges have been in existence with each
having its distinct elements. The first merge was from 1897 to 1907 while the second merge
wave occurred from 1916 to 1929.
Moreover, the rest three merges happened between 1965 and 2000. The fifth merge wave
marked the end of the existed merges which run for seven good years (Alexandridis, Mavrovitis
& Travlos, 2012). In early March 2011 is when Telkom AG took an acceptance of thirty-nine
billion United States dollars purchases and stock offers coming from AT&T Inc on behalf of T-
mobile in America. This merge was highly opposed by Bursor and fisher law firm (Baluch,
Burgess, Cohen, Kushi, Tucker, & Volkan, 2010). The law firm claimed that the main aim of the
merger was to force the customers of AT&T to file demands on arbitration with America
arbitration association which would be under the wave of Supreme Court judgment in the case of
AT&T mobility versus conception.
The fifth merge wave came to existence after the slump of economic in 1990 to late 1991.
Although the merge seemed strong the rate of formation was similar to that of the fourth one.
The fifth merge marked a very significant decline of the hostile takeover rates. Compared to the
successor merge the fifth merge wave had a reduced creation of supported debt merges. M&A
purchase method is used during the consolidation of companies. During the acquisition, the
absorber company seeking to purchase the other one in a latter situation the company obtains the
target company and pays through M&A method. The acquired companies shares and securities
are consolidated through stock for stock exchange or through a form of currency. Push down

3
FINANCE
accounting is a concept which refers to the transformation of accounting for a procurement of a
subsidiary to the current purchase cost rather than dwelling on the historical values as the
acquired firm gets consolidated into the absorber company for financial reporting. Push down
accounting appears to be more of an external financial reporting of as firm (Baluch, Burgess,
Cohen, Kushi, Tucker & Volkan, 2010).
The PE ratio is a ratio of valuation which is responsible for comparing a firms stock
returns per share to the current price in the market. The concept is such crucial as it is usable in
the prediction and as an indicator of the firm’s potential growth in the future. This ratio is usable
during comparing firms in the same industry. A higher P/E ratio indicates the capability of the
market to pay higher prices as compared to the returns as there is an indication of the future
growth of a firm. While a low P/E ratio indicates the low growth expected by the market for a
company hence few favorable macroeconomics environmental condition which might eventually
hurt the company (Brooks, 2019). The EV/EBITDA ratio is useful as it helps in decreasing some
of the shortfalls of the P/E ratio and more so, it is a metric used in measuring a company’s
returns made in the capital investment. Earnings before interest provide clear evidence and
pictures of the performance of the company as it strips away taxes, debts, and other accounting
values’ such as depreciation.
Earnings before interest tax is a value of the firm’s operating performance. It is generally
a way of evaluating the performance of firms without decisions in financing. APV or the
adjusted present value is almost similar to DCF analytic. The difference between the two is that
APV does not try to consider taxes and other effects of financing in the weighted average cost of
capital WACC or even discounts adjusted. When companies have an account due the debts are

4
FINANCE
tax deductible in interest tax shields. After tax deduction interest valued interest tax shields are
created.
On the other hand, equity carve-out well known as split-off IPO is majorly a type of
corporate recognition whereby companies are mandated to form new subsequently and
subsidiary IPOs while still operating the control of management (Brealey, Myers, Allen &
Mohanty, 2012). McDonald wanted the name of chipotle to change. Moreover, Chipotle was
forced to franchise some of its essential branches which seemed hard and hence it did in a
reluctant manner (Brooks, 2019). McDonald wanted to consolidate chipotle securities through a
franchise.

5
FINANCE
References
Alexandridis, G., Mavrovitis, C. F., & Travlos, N. G. (2012). How have M&As changed?
Evidence from the sixth merger wave. The European Journal of Finance, 18(8), 663-688.
Baluch, C., Burgess, D., Cohen, R., Kushi, E., Tucker, P. J., & Volkan, A. (2010). Consolidation
theories and push-down accounting: achieving global convergence. Journal of Finance
and Accountancy, 3, 1.
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance.
Tata McGraw-Hill Education.
Brooks, C. (2019). Introductory econometrics for finance. Cambridge university press.