Merger: When two firms agree to go forward as a single new
company rather than remain separately owned and operated. Acquisition: When one company takes over another and clearly establishes itself as the new owner. Types: 1. Horizontal, e.g. HP-Compaq, Mittal-Arcelor, British Airways-BMI 2. Vertical, e.g. Time Warner Cable-Turner Corp, Google-Android, Google-Motorola Mobility 3. Conglomerate, e.g. Walt Disney-ABC, Microsoft-Skype 4. Market-Extension, e.g. Tata-Jaguar-Land Rover, WalgreenAlliance Boots, HK Exchange-London Metal Exchange 5. Product-Extension, e.g. Facebook-Instagram, KKR-Prisma Capital Rationale for/ Synergies from M&A: 1. Economies of Scale 2. Economies of Vertical Integration 3. Complementary Resources 4. Use of Surplus Funds 5. Elimination of Inefficiencies 6. Industry Consolidation 7. Additional Debt Capacity 8. Tax Benefits Takeover Tactics 1. Congenial 2. Hostile Takeover Bids a. Tender Offer, offer directly to shareholders, going over management head b. Proxy Fights, secure the rights to represent shareholder at AGM Takeover Defenses 1. Shark Repellent, e.g. supermajority requirement, restricted voting rights, etc. 2. White Knight, friendly acquirer sought 3. Poison Pill, e.g. the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding Accounting Treatment: Recording the transactions for M&A Two options available: Purchase vs. Pooling Method
Pooling method records the assets of the acquired company at
their book values, not recording the actual consideration paid against the acquisition anywhere Hence, pooling method will only be possible under a full stock acquisition - an acquisition has to be financed entirely with the stock of the bidding firm (no cash paid; because if extra cash is paid over book value it has to be recorded against something) Purchase method records assets of the acquired company at their fair values and posts any excess amount paid on top of this fair value as goodwill
Example: Zeta Inc acquired Alpha Corporation, through a full stock
acquisition, valued at $20 million dollars. The assets of Alpha carried a book value of $5 million and a fair value of $8 million. Show how the transaction will be recorded under a) The Pooling method b) The Purchase method Pooling Method: Asset account of Zeta Dr 5 m Equity account of Zeta Cr 5 m Purchase Method: Asset account of Zeta Dr 8m Goodwill Account of Zeta Dr 12 m Equity account of Zeta Cr 20m (had the payment been made in cash, cash account would have been credited and equity account would not have been impacted) N.B these accounting treatments have no connection with the financial gain to the selling and buying parties as shown in the previous examples.