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MEMORANDUM
TO: Chief Executive Officer
FROM: Accounting Team
DATE: July 19, 2011
SUBJECT: Acquisition
Undertaking an acquisition is one of the ways through which a firm can attain an optimal market position (Ross, 2011, para. 1). The resultant effect is that the firm’s competitive advantage is enhanced. In undertaking an acquisition, a significant amount of money is required for the acquisition to be successful. Prior to implementing an acquisition decision, a firm’s management team should conduct a comprehensive analysis to determine whether it is prepared to undertake the acquisition. One of the ways through which a firm can attain this is by evaluating its financial stability. The aim of conducting a financial analysis is to determine whether the acquisition will result into attainment of the desired synergy. In most cases, acquisitions are characterized by a 50-50 probability of succeeding. In the event of financial instability, the probability of attaining the desired synergy is limited. Upon conducting a financial analysis of the firm’s financial statements, it was evident that the firm was facing a serious financial instability. Firstly, the share price of the company was relatively low. This means that the acquisition would not lead into value addition through improvement in the share price of the acquiring company. In this case, the Chief Executive Officer (CEO) of Riordan Company intends to improve the price of the firm’s share through the acquisition. However, this can only be achieved if the firm is operating at a profit. Entering into acquisition means that the profitability of the firm will be negatively affected. This will limit the manager’s objective of maximizing the shareholders’ wealth. The shareholders objective is to maximize the value of their investment (Hitt, Ireland & Hoskisson, 2009, p. 189). Therefore, the acquiring

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