Business Acquisition And Merger (Copy)

Chapter 28: Business Acquisition and Merger

Introduction to Business Acquisitions and Mergers

• Definition: A business acquisition occurs when one company buys another, whereas a merger happens when two businesses combine to form a new entity.
• Purpose:
  • Increase efficiency and reduce costs.
  • Expand market share and customer base.
  • Gain expertise and technology.
  • Strengthen financial stability.
  • Remove competition.
• Examples:
  • Disney acquiring Pixar to dominate animation film production.
  • Google acquiring Android to enter the mobile market.

28.1 Reasons for Acquisitions and Mergers

• Efficiency Gains:
  • Eliminates duplicate departments and processes.
  • Reduces costs via economies of scale.
• Market Growth:
  • Expands into new geographical regions.
  • Accesses new customer bases.
• Supply Chain Control:
  • Owning suppliers eliminates third-party markups.
  • Reduces dependence on external distributors.
• Eliminating Competition:
  • Reduces market rivalry.
  • Increases pricing power.

28.2 Mergers vs. Takeovers

Mergers

• Two companies mutually agree to combine.
• Shareholders of both firms receive shares in the new entity.
• Example: Disney-Pixar merger.

Takeovers (Acquisitions)

• One company buys another company.
• Can be hostile (without consent) or friendly (with agreement).
• Example: Google acquiring YouTube.

28.3 Accounting for Mergers and Acquisitions

• The acquiring company must record the fair value of assets and liabilities.
• Goodwill Calculation:

  Goodwill = Purchase Price - (Assets - Liabilities)
  

• Example:

  Purchase Price = $500,000
  Assets = $400,000
  Liabilities = $50,000
  Goodwill = 500,000 - (400,000 - 50,000) = $150,000
  

• Journal Entries for Acquisition:

  Debit: Assets Acquired 400,000
  Debit: Goodwill 150,000
  Credit: Liabilities Assumed 50,000
  Credit: Cash/Bank 500,000
  

28.4 Goodwill in Business Acquisitions

• Purchased Goodwill:
  • Arises when a company pays more than the net assets of the acquired firm.
  • Recorded in the financial statements as an intangible asset.
• Inherent Goodwill:
  • Value derived from reputation, customer base, and brand strength.
  • Not recorded in financial statements.

28.5 Purchase of a Sole Trader or Partnership by a Limited Company

• The acquiring company takes over assets and liabilities.
• Example journal entries:

  Debit: Non-Current Assets 200,000
  Debit: Inventory 50,000
  Debit: Trade Receivables 30,000
  Credit: Trade Payables 20,000
  Credit: Bank (Payment) 260,000
  

28.6 Purchase of Assets vs. Purchase of Business

• Buying a Business:
  • Includes goodwill, assets, and liabilities.
• Buying Only Assets:
  • No goodwill is paid.
  • Liabilities remain with the original owner.

28.7 Financial Statements After Mergers or Acquisitions

• The newly formed company must prepare updated Statements of Financial Position.
• Example Balance Sheet for Merged Company:

  Non-Current Assets: $500,000
  Current Assets: $150,000
  Total Assets: $650,000
  
  Equity & Liabilities:
  Share Capital: $400,000
  Retained Earnings: $150,000
  Goodwill: $100,000
  Total Equity: $650,000
  

28.8 Advantages and Disadvantages of Mergers and Acquisitions

Advantages:

• Increased Market Power:
  • More influence over pricing and supply chains.
• Financial Strength:
  • Larger businesses attract more investors and better loan terms.
• Diversification:
  • Reduces reliance on a single product or market.

Disadvantages:

• Integration Issues:
  • Merging different corporate cultures can cause conflict.
• High Costs:
  • Acquisitions require significant financial investment.
• Job Losses:
  • Redundancies due to overlapping roles.

Conclusion

• Business acquisitions and mergers are strategic moves aimed at growth, efficiency, and market dominance.
• Proper accounting treatment, goodwill valuation, and financial statement adjustments are necessary to ensure transparency.
• The success of mergers and acquisitions depends on effective integration and management.