Case Study: Business Merger Impact on Profitability & Income Taxes

This case study investigates the impact of business mergers on the profitability and income taxes of CPA firms, specifically examining the merger of Moore Stevens into BDO. The study uses financial ratio analysis to compare BDO's performance before (2018) and after (2019) the merger. The results indicate a significant impact on profitability metrics such as operating profit ratio and return on investment, alongside a decrease in income tax payments. The study concludes that mergers can be a beneficial strategy for growth, provided that fairness, negotiation, and the reputation of the merging parties are carefully considered. Desklib provides access to this case study and many other solved assignments and past papers.

The Impact of Business
Merger on the Profitability
and income Taxes : case study
of two CPA firms

ABSTRACT
Merger & Acquisitions are two distinct terms in business that describes the consolidations
between companies through different ways. The study investigates the role impact of mergers
and acquisitions over the profitability of companies.

Table of Contents
Purpose............................................................................................................................................4
Introduction......................................................................................................................................4
Hypothesis.......................................................................................................................................4
Literature Review............................................................................................................................4
Methodology of the study................................................................................................................5
Conclusion.......................................................................................................................................8
Recommendations............................................................................................................................8
REFERENCES................................................................................................................................1

Purpose
The aim of the study is to examine the impact of Business Merger on the Profitability and
income taxes. The purpose of the study is to enhance the knowledge of merger and acquisition
and its effect over the profits and the income tax payments of the company.
Study Problem
The problem to which the current study deals with is whether the companies should use
merger and acquisition into its planning for the growth perspectives.
Significance of Study
The significance of the study’s topic is that it helps businesses majorly to explore wide
range of products and services that can satisfy consumer needs and increase the market share and
profits.
Introduction
There are a multiple number of reasons like increasing the profitability, growth of market
shares in numbers and price, to achieve the compatibility to pay dividends regularly, etc. that
indulges companies into mergers over the years. Reported that a merger can be looked upon as a
situation where two or more companies come together in order to combine, forming bigger
organization. According to Singh and Das (2018) a merger is a kind of business transaction that
is made with the purpose of making a new single entity from multiple business entities that are
already existing. Further Brooks, Chen and Zeng (2018) noted that the problem in efficiently
using limited resources can be countered along with hiking the competitiveness and performance
of a company. The method is considered as the best way for expanding the market share/
ownership according to Christofi and et.al (2019).
Financial theories are studied for analysing the positive as well as negative impacts that
mergers entail over corporative firms. A merger can on one hand help a company by enhancing
its liquidity and on the side can impact financial performance & profitability negatively. There
are three types of mergers namely, horizontal, vertical & conglomerate.

Hypothesis
H01 = There is no major distinction in the profitability of chosen CPA businesses for the period
before & after merger.
H02 = There exists no significant change over the taxes of selected CPA companies pre & post-
merger.
Literature Review
The available literature highlighted many tools technique for analysing the effects of
merger, Analysis of financial ratios to find out the effects of mergers.
Positive impacts of merger on profitability
On systematic assessment and evaluation of researched 150 articles related to financial
mergers and acquisition it was found that efficiency level was affected positively by the mergers
of North American Bank. Literary works has also revealed a situation of creation of wealthy
which concerns the stakeholders shown by the mixed picture. Literature of European bank
related to the merger showed gains in the efficiency along with improvement in the value for
stockholders. Diversification with respect to the product and geography impacted in mixed sense
via merger whereas, adverse impacts were revealed on the types of borrowers, external
stakeholders and depositors shown by mergers of the financial institutions. Brueller, Carmeli and
Markman (2018).
It has been found that the efficiency related to the cost and profits affected the merger
events in the banking sector in the US sector of banking by utilization of the SFA (Stochastic
Frontier Approach) and DEA (Data Envelopment Analysis which includes studying the merged
and non-merged banks’ structure of production. An improved efficiency of cost and profit was
depicted post-merger. Additionally, higher costs were revealed for the non – merged banks as
compared to the merged banks reason being, the focus of such merged bank is on technical and
well located efficiency.
According to Welch and et.al (2020) a merger has its positive impact over the
organizations in the form of increase in revenue that is achieved as a result of deduction in the
costs. The market share potential of the company increases in both the domestic market and also
the foreign market where the new consumers seeks for such merger firm’s products and services.
Mergers leads to reduction in competition that significantly helps in increasing profitability.

Further Argentesi and et.al (2021) highlights some of the elements that needs to be
considered for effective merger. To begin with the merger partner should be first ensured for the
suitability of coming together and merge. There should be trust between the parties for the
smooth negotiation. The valuation should be good considered with diligence. The experience
from the past mergers & acquisitions should always serve as a guide for efficacy in future
dealings.
Methodology of the study
Research Type In the studies qualitative and quantitative both
the research type has been used.
Research Approach In approach that has been followed in the
conducted studies is deductive approach.
Research Philosophy Positivism is the research type that has been
used in the current studies.
Data Collection Data has been collected from the secondary
sources for writing literature review and
profitability analysis.
Data Analysis The data that has been collected in the study
will be analysed using SPSS.
Ratio Analysis
Profitability Ratios Formula
2019 (in
Billions)
2018 (in
Billions)
Operating Profit Ratio
Operating Profit/Net
Sales X 100 50.36% 31.03%
Operating Profit 65.3 50
Revenue 129.67 161.13
Net Profit Ratio Net Profit/Net Sales X 15.12% 20.29%

100
Net Profit 44.2 32.7
Revenue 292.34 161.13
Return on Investment
Ratio
Net Profit After
Interest And Taxes/
Shareholders Funds or
Investments X 100 13.72% 8.99%
Net Profit After Interest And
Taxes 44.2 32.7
Shareholders’ Funds 322.22 363.78
Return on Capital
Employed Ratio
Net Profit after
Taxes/ Gross Capital
Employed X 100 1.49% 1.03%
Net Profit after Taxes 44.2 32.7
Gross Capital Employed
Total Assets – Current
Liabilities 2972.14 3172.66
Total Assets
Noncurrent assets +
current assets 3020.00 3190
Current Liabilities 47.86 17.34
Earnings Per Share Ratio
Net Profit After Tax &
Preference
Dividend /No of
Equity Shares 0.137 0.090
Net Profit After Tax &
Preference Dividend 44.2 32.7
No of Equity Shares 3.22222E+11 3.63789E+11
The above table represents the ratio of two years that is 2018 & 2019. The BOD merged
with Moore Stevens on 8th of February, 2018. The figures of the year 2018 represents the

performance of company for the pre- merger period and the values of 2019 taken represents the
post – merger profitability of the company. Operating profit ratio of the company hiked from
31.03 % in the previous year to 50.36 % in the current year. The net profit ratio shows a decrease
of five –percent approximately. Another major determinant of a company’s progress and
profitability is through its return on the money put in for carrying out the activities of the
business. The year 2018 BOD seen an investment return ratio as nearly 9% and in the year 2019
this jumped to 14% approximately. It can be said that the company’s potentiality of receive
investments increased. There is also an increase in the EPS of the company. 0.44% of increase is
seen in the return on capital employed making the shareholders’ investment more worthy.
Income tax for the year 2018 was 15.02 B and year 2019 income tax was 11.01 B. it shows a
decline of 4.01 B.
Conclusion
On the basis of the studies it can be concluded that there is a significant impact that an
organization experiences in its profitability and tax payments in situation of mergers. The study
has selected two CPA firms one is BDO and the other is Moore Stevens. The later merged into
the former in the year 2019. For analysing the impact of merger on BDO the financial statements
of the company have been analysed in the studies for the years 2018 & 2019.
Recommendations
On the basis of the studies it can be recommended to the company that mergers are one of
the best ways through which it can experience good growth by combating all the challenges. To
have successful mergers certain points are suggested to the company firstly it should ensure
fairness to all the parties in the process the negotiation must be completely justifiable. It should
be noted that the selected must be reputed in the market as reputation of the company plays a
major role behind the successful and effective merger.

Refrences
Books and Journals
Argentesi, E., Buccirossi, P., Calvano, E., Duso, T., Marrazzo, A., & Nava, S. (2021). Merger
policy in digital markets: an ex post assessment. Journal of Competition Law &
Economics. 17(1). 95-140.
Brooks, C., Chen, Z., & Zeng, Y. (2018). Institutional cross-ownership and corporate strategy:
The case of mergers and acquisitions. Journal of Corporate Finance. 48. 187-216.
Brueller, N. N., Carmeli, A., & Markman, G. D. (2018). Linking merger and acquisition
strategies to postmerger integration: A configurational perspective of human resource
management. Journal of Management. 44(5). 1793-1818.
Christofi, M., Vrontis, D., Thrassou, A., & Shams, S. R. (2019). Triggering technological
innovation through cross-border mergers and acquisitions: A micro-foundational
perspective. Technological Forecasting and Social Change. 146. 148-166.
Singh, S., & Das, S. (2018). Impact of post-merger and acquisition activities on the financial
performance of banks: A study of Indian private sector and public sector banks. Revista
Espacios Magazine. 39(26). 25.
Welch, X., Pavićević, S., Keil, T., & Laamanen, T. (2020). The pre-deal phase of mergers and
acquisitions: A review and research agenda. Journal of Management. 46(6). 843-878.
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