LESSON 1: INTRODUCTION TO BUSINESS COMBINATION
Growth
Expanded operations
Enhanced market presence
Increased revenue
Why?
Long-term survival
Creates more jobs and opportunities
Increase business value
Help achieve mission and vision
How?
a. Increase sales
b. Expand market reach
c. Product development
d. Investing in technology
e. Merger and acquisition (relates to bus. combination)
Business Combination
Occurs when one company acquires another or when two or more companies
merge into one.
Business combination is an acquisition transaction.
Acquirer/ Acquiree/
Parent Subsidiary
2 Most Common Types of Acquisition
1. Net Asset Acquisition
2. Stock Acquisition
Net Asset Acquisition
All assets are acquired and liabilities are assumed in exchange for
consideration.
Consideration: payment from ER to EE (via cash/non-cash assets)
Equity will be distributed to shareholders and undergo liquidation process.
Asset Acquisition:
When purchasing inventory, IAS 2 is used
When it’s PPE inventory, IAS 16 is used
Must acquire 100% of net assets
Involves when only the acquirer survives
The books of acquiree are closed
The assets and liabilities are transferred to the books of the acquirer.
Stock Acquisition
Acquirer obtains control over the acquire by acquiring majority ownership
interest in voting rights
Purchase majority to obtain control
50% or more of voting stock
Other Terms:
1. Statutory Merger – one company acquires all net assets by paying
consideration
2. Statutory Consolidation– new company is formed
3. Stock Acquisition – acquisition through issuance of shares
According to Strategy:
1. Friendly Combination – the board of directors of potential combining
companies negotiate mutually agreeable terms of proposed combination.
2. Unfriendly Combination – the board of directors resist the combination.
Ways for Acquiree to ____
1. Poison Pill – issuing stock rights to existing shareholders enabling them to
purchase additional shares at a price below market value, but exercisable
only in the event of a potential takeover.
2. Greenmail – a defensive tactic wherein there’s a purchase of my shares held
by the would-be acquiring company at a price substantially in excess of their
fair value. The purchased shares are then held as treasury stock or retired.
3. White Knight or White Squire – encouraging a 3rd firm more acceptable to
be the target company management to acquire or merge with the target
company.
4. Pac-Man Defense – attempting an unfriendly takeover of the would-be
acquiring company.
5. Selling the Crown Jewels – the sale of valuable assets to others to make
the firm less attractive to the would-be acquirer. The negative aspect is that
the firm, if it succeeds, is left without some important assets.
Why Undergo Business Combination?
1. External expansion
2. Operating synergies
3. Compete more effectively in the international marketplace
4. Take advantage of income tax laws
5. Diversification
Structures of Business Combination
1. Horizontal Integration – companies involved in the same industry that
have previously been competitors.
2. Vertical Integration – two companies involved in the same industry but are
different levels.
o could be forward or backward
3. Conglomerate Combination – is one involving companies in unrelated
industries having little, if any, production or market similarities.
4. Circular Combination – entails some diversification, but does not have a
drastic change in operation as a conglomerate.