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Mergers and Acquisitions

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The weighted average cost of capital reflects a firms total cost of doing business and is related to the firms risk level. M&A activity can be conducted in order to lower a firms cost of capital. This can be done either by lowering the firms total risk through diversification, by absorbing a company in a lower-risk business than the new parent company, or by using the M&A activity as an opportunity for arbitrage, taking advantage of disequilibrium between currencies and interest rates in two different nations

Corporate organization and ownership issues can stimulate merger & acquisition activity as well. In some cases, the activity is a reorganization within the company, conducted for strategic reasons and often tied to tax consequences. In other cases, firms may combine assets in a manner that allows for one or both of the firms to improve its strategic position in specific products or markets. Organization and ownership can have a negative impact on the success of a merger or acquisition, however. Issues regarding control, culture or mission conflict can arise post-merger that can reduce the ability of the firm to gain synergies or otherwise meet the objectives of the merger activity......