Acquisitions and Mergers

ACCA P4 考試： Acquisitions and Mergers

An acquisition is where one company (the predator) buys the share capital of another company (the target or victim); creating a parent and subsidiary in a group. Both companies continue to exist as legal entities.

A merger is where two companies of similar size cancel their share capital and pool their net assets together into a new entity. The new entity then issues shares to the previous shareholders in an agreed ratio.

For financial management whether the transaction is classified as an acquisition or as a merger is not usually critical. It is often a more important distinction for financial reporting where merger accounting tends to report better results than acquisition accounting—although International Financial Reporting Standards no longer permit merger accounting due to past abuses.

Advantages of Acquisitions

Speed — often quicker than organic growth.

Entry costs — if the cost of entering a new market is high it may be better to acquire a business already operating in that market.

Barriers to entry — acquisition may be the only method of entry into a new market.

Risk — organic growth may be riskier than acquiring an existing business.

Undervaluation — "asset stripping" may be possible in an acquisition.

Disadvantages of Acquisitions

Cost — the control premiums paid over the existing market price are considerable, typically over 40%.

Shareholder wealth — if the bidder pays too high a price for the target company this will reduce the bidding company shareholders' wealth.

May attract the attention of regulatory authorities if there are concerns about damage to the public interest.