Study On The Tax Synergy Of Mergers And Acquisitions

Mergers and Acquisitions(M&A), as a primary means of business expansion, not only aims to meet the strategic demand of businesses, but also plays a part in China’s national economic strategy. With an eye for strategic results, modern M&A pays more attention to business complementarity to achieve the expected synergy. The present dissertation focuses on synergy of income tax in the M&A of Chinese businesses. The synergy in income tax falls into four categories: tax shield of depreciation and interest;tax deduction and credit of tax preference;asymmetry between income and loss recover, and tax deferral of gain from equity(asset) transfer. Realization of the synergy of income tax is depended on three decision-making processes: evaluating the tax position of the target business in deciding on M&A targets, choosing reasonable types and modes in deciding on M&A transactions, and integrating tax resources in deciding on M&A integration.The present dissertation is an empirical study on the synergy of income tax as one of the M&A motives with data of Chinese listed companies as a sample. The study found the cost motive as a lient consideration in M&A of Chinese businesses. Specifically, the motive is to get tax shield of depreciation and preferential income tax deduction. Thus, preferred M&A targets include businesses with lower proportion of accumulated depreciation, undervalued assets, and lower income tax rates. The study also revealed other motives such as management synergy and financial synergy. Acquirers and mergers prefer target businesses with less efficient management and less financial risk. Having identified synergy of income tax as one of the M&A motives, the dissertation carried further empirical study on the contributing factors of the synergy in the decision making of M&A transaction and integration.Five major contributing factors are found, namely change in business size, change in fixed assets ratio, choice of M&A type, change in ratio of liability with interest, and change in return on total assets(ROTA). M&A transactions which chose taxable M&A types achieved greater synergy of income tax due to an increased ratio of fixed assets and higher financial leverage after the deal.Finally, to improve the synergy of income tax, the dissertation advocates the following measures: comprehensive tax management all through the preparation, execution, and integration of M&A;full evaluation of the tax condition of the target business in deciding on the target; rational choice of M&A types and modes in deciding on the transaction, including giving full play to non-cash payment and choosing suitable tax treatment, and better integration of the tax resources in deciding on the integration, including adjusting ratio of fixed assets and determining financial leverage suitable to the businesses involved.