 rationally mergers are undertaken to reap the benefits of synergy. Now synergy takes place if the value of a combined firm after the merger is greater than the sum of the values of individual firms participating in the merger process. In fact, there are incremental cash flows that work as a driving force behind the concept of synergy. Now this energy comes from many sources like revenue enhancement, cost reduction, lower taxes and capital requirements. So how revenue enhancements can result in incremental cash flows? In fact, a combined firm may generate greater revenues than two separate firms through this process of merger. Then we have marketing gains, improved marketing can yield incremental cash flows for the combined firm in the form of enhanced operating revenues. Then we have strategic benefits which is the likelihood of more options than a standard investment opportunity. For example, acquiring a computer firm by a swing machine, firm MIM allow the swing machine to manufacture and deliver computer operated swing machines. Market or monopoly power, acquisition of a firm may reduce computation to increase the prices which helps in earning a monopolistic profit. Cost reduction, a combined firm may operate more efficiently than the two individual firms. Economy of scale, average cost falls as the production level increases and this economy of scale is best fit for the horizontal mergers. Economy of vertical integration, this is the coordination of closely related operating activities which become easier and efficient. For example, most airline companies own airplanes, they purchase their own hotels and car rental firms, then there are no more inefficient management in the acquired firm. So, the change of the firm's management by board of directors allow often increase in the firm's value, tax gains. So, reduction in taxes is a powerful incentive behind the merger processes. When we talk about net operating losses, the firms with taxable profits take advantage of potential losses. In the firm that the firm's profitable division can offset the losses of other unprofitable divisions. So, the overall reduction in the tax bill of the firm can take place but this benefit cannot be reaped by the participating firms in their individual status. To reap the benefit of tax shield, there is a tool of using the debt in the combined firm. So, mergers allow firms for increased debt and achieve a larger tax shield. We discuss now two cases to check this happening of tax shield. The first is the case of unused debt capacity. High-risk firms generally cannot borrow much debt. A firm's debt may be low, optimal level because of two reasons. The one reason is that its managers are risk averse and the second reason is that the managers are unable to assess the debt capacity of their firm. So, at optimal level of debt, marginal cost of financial distress equals the marginal tax shield. So, we can say that a firm with too little debt may not increase its value and this in fact invites the merger. As a result, the acquirer raises the target, confirms the debt level in order to create a bigger tax shield for itself. The case two we have where the case is regarding the increased debt capacity. Combined firm is less risky in relation to the individual participating firms and the bank will fully lend to the combined firm more than the total of what they can lend to the individual firms. So, the post merger, higher interest payments can reduce the tax bills of the combined firm more than the sum of the pre-merger tax bill of the individual firms participating in the merger. And this increased debt capacity after a merger can reduce the taxes. Another source of energy is the surplus funds. Acquirer can use free cash flows for acquisition with no taxes. For example, if the profits are used as a dividend payment from the acquired firm, these dividend payments are tax free.