In evaluating a proposed merger, analysts are interested in determining whether the merger creates new wealth for acquiring and target stockholders, or whether it is motivated by managers' desires to increase their own power and prestige. Key ques- tions for financial analysis are likely to include:

1. What is the motivation(s) for an acquisition and the anticipated benefits dis- closed by acquirers or targets?

2. What are the industries of the target and acquirer? Are the firms related hori- zontally or vertically? How close are the business relations between them? If the businesses are unrelated, is the acquirer cash-rich and reluctant to return free cash flows to stockholders?

3. What are the key operational strengths of the target and the acquirer! Are these strengths complementary? For example, does one firm have a renowned research group and the other a strong distribution network?

4. Is the acquisition a friendly one, supported by target management, or hostile? In tuie case of a hostile takeover, which is more likely to occur for targets with poor- performing management, will the transaction go through despite the opposie of management who will want to preserve its jobs? Will the hostile acquirer have sufficient access to information to mitigate the risk of overpayment:

5. What is the premerger performance of the two firms? Performance metrics are likely to include ROE, gross margins, general and administrative expenses to sales, and working capital management ratios. On the basis of these measures, is the target a poor performer in its industry, implying that there are oppor- tunities for improved management? Is the acquirer in a declining industry and searching for new directions?

6. What is the tax position of both firms? What are the average and marginal current tax rates for the target and the acquirer? Does the acquirer have oper- ating loss carryforwards and the target taxable profits:

This analysis should help the analyst understand what specific benefits, if any, the merger is likely to generate.