A Combination of Factors

Realistically, what would the ROA change be? It would be a combination of both a decrease in the cash flow margin and asset turnover. If the impacts we described above were combined, the result would look something like Exhibit 7-6.

Exhibit 7-6: Effect of a decrease in both cash flow margin and asset turnover on return on assets.

	Cash Flow Margin		Asset Turnover	=	Adjusted ROA
Your Company	12%		4	=	48%
Combined Companies	10%		3.5	=	35%

The result is a decline of 13 percent in ROA. Drops in ROA are a normal short-run occurrence in M&A activity.