Financial problems of mergers and consolidation

After merger and consolidation the companies face a number of financial problems. The liquidity of the companies has to be established afresh. The merging and consolidating companies pursue their own financial policies when they are working independently. A number of adjustments are required to be made in financial planning and policies so that consolidated efforts may enable to improve short term and long term finances of the companies. Some of the financial problems of merging and consolidating companies are discussed as follow:

  1. Cash management. The Liquidity Problem is the usual problem faced by acquiring companies. Before merger and consolidation, the companies had their own method of payments, cash behavior pattern and arrangements with financial institutions. The cash pattern will have to be adjusted according to the present needs of the business.
  2. Credit policy. The credit policies of the companies are unified so that same term and conditions may be applied to the customers. If the market areas of the companies are different, then same old polices may be followed. The problem will arise only when operating areas of the companies are the same and same credit policy will have to be pursued.
  3. Financial planning. The companies may be following different financial plans before merger and consolidation, a unified financial planning is followed. The divergent financial control will be unified to suit the needs of the acquiring concerns.
  4. Dividend policy. The companies may be following different policies for paying dividend. The stockholders will be expecting higher rates of dividend after merger and consolidation on the belief that financial position and earning capacity has increased after combining the resources of the companies. This is a ticklish problem and management will have to device an acceptable pay-out policy. In the earlier stages of merger and consolidation it may be difficult to maintain even the old rates of dividend.
  5. Depreciation policy. The companies follow different depreciation policies. The method of depreciation, the rate of depreciation, and the amount to be taken to revenue accounts will be different. After merger and consolidation the first thing to be decided will be different. After merger and consolidation the first thing to be decided will be about the depreciable and non-depreciable assets. The second will be about the rate of depreciation. Different assets will be in different stages of use and appropriate amounts of depreciation should be decided.

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