lThe aspects of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can make a more competitive, cost-efficient company on the market. It helsp a growing company in a given industry grow rapidly without having to create another business entity.
Definition
Merger: when two companies(shareholders from both companies), often equal sizes, agree to exist as a single new company
- Horizontal merger: the combination of two firms from the same industry
Example: Boeing-McDonnell Douglas
- Vertical Merger: merging with suppliers
Example: Time Warner Inc.
- Conglomerate Merger: merging with firm that has unrelated business ties, there are two types of conglomerate mergers( pure and mixed)
Example: Cardinal Healthcare-Allegiance
Acquisition: one firm is bought by another firm
- Reverse merger: is a type of acquisition, a private company takes over a public listed company
Example: acclaim Entertainment (AKLM) and non-operating Tele-Communications
Takeover: the control (ownership) is transferred from one firm to another one
Distinction
Merger: shareholders of both firms agree to merge, often equal size, stocks of both companies are surrendered and the new stocks under the name of new companies are issued
Acquisition: the bigger and more powerful firm acquire another smaller firm. Unlike merger, the stocks of both firms continue to be traded on the stock market
History of Merger and Acquisition
The first wave( 1897-1904): during this period, merger occurred between firms that were monopoly in the same industries. The first wave was mostly horizontoal mergers that happened in heavy manufacturing industries. Most mergers were failed due to the fact that greater effiicency couldn’t be reached and the supreme court passed an act that anticompetitive mergers could be stopped
The second wave( 1916-1929): most mergers happened between oligopolies due to the economic boom. Lot of technological develpments such as railroads and transportation by motor vehicles let mergers occurred. Government had a policy that also encouraged companies to work together. The types of mergers were mainly horizontal and conglomerate mergers. Food products, primary metals, petroleum products, transportatins euqipments and chemicals were the indusitries that chose to merge. Also, investment banks started helping firms to merge and acquisitate. The wave was stopped by the Great Depression.
The third wave( 1965-1969): the type of merger that occurred during this phrase were mainly conglomerate mergers which were motivated by extreme high stock price, strict antitrust laws and interest rate. Invest banks didn’t play the vital role because mergers were all financed from equities. The poor performance of conglomerate mergers resulted in the end of the third wave.
The fourth wave(1981-1989): the target firms were often larger in size than the third wave mergers. Industries that went mergers were oiland gas, pharmaceuticl, banking and airline. Foreign takeovers had been common since this phrase. The antitakeover law led to the end of this wave.
The fifth wave(1992-2000): globalizatin, stock market boom an deregulation caused the rise of the fifth wave merger which mainly invloved banking and telecommunications industries. Most mergers were euqity financed and firms mainly looked for long term profit motives. The stock market bubble led to the end of the merger.
Pros and Cons
Pros
- A merger is tax-free activity
- A merger allows shareholders of smaller company increase their net worth
- More innovated technical skills
Cons
- Conflict objective between the combined firms
- Diseconomis of scale
- Need approval from both sets of shareholders
Example of merger and acquisition:
- eBay is an Americna online auction and shipping internet company
- People and business can buy and sell a broad variety of goods and services worldwide
In the late 1990s, eBay made its first attempt at securing an in-house electronic payment system by acquiring Billpoint. However, Billpoint was less popular than its competitior and this lack of following led to frustration and lack of familiarity for eBay’s users, who wanted to conduct buy or sell transactions with ease. After acquiring Billpoint, eBay made a run at the much more popular PayPal in the fall of 2002, for an acquisition price of $1.5 billion.
•
PayPal is an e-commerce business. Allowing payments and money transfers to be made through the Internet.
Timeline:
Timeline of combination of eBay and PayPal
Problem afteracquisition:
•Shill bidding is bidding that is used to inflate the price of a certain item. It is usually carried out with “shill” account(s), either the seller under an alternate account or another person in collusion with the seller. Shill bidding is detered by eBay. However, eBay has been criticized for not doing enough to combat the problem.
Future Outlook
- •By acquiring PayPal, both entities leveraged each other’s customer base and strategic positioning
- By offering complementary services, It will propel more business for each operation
- However, the frauds may reduce reputation and good faith degree. If they do not fix up frauds properly, It will surely exert a significant influence on the future of their developmen
Accounting Impact The purchase method: the purchasing company treats the taret firm as an investment, simply adding the target’s assest to its own fair market value
The pooling of interest method: two firms merge as euqal, in another word, either a new company is created or one company remains with the another company which become a part of the remaining company
Comparison:
Purchase Method: The goodwill is created due to excess of fair market value and needs to be amortized against expense.
Pooling of interest method: it dones’t result in the creation of goodwill which leads to the higher value on the income statement. The value of assests and liabilities on each company’s book are carried forward to the new combined company.
Future Outlook
M & A activity will increase in 2011, companies will pursue stragetic acquisiton and merger
The huge demand come from Asia for commodities still increase as investors have been active in Canada
Oil, gas and mining merger and acquisition will keep dominating in Canada
Most Canadian companies will contiune to acquire U.S. institutions because economy in United State has been tough on companies
The demand for renewable energy is high espeically for firms of carbon-heavy industry because they need to reduce carbon footprinting and pre-empt regulation
Government of Canada has been strict and tough on foreign acquisition that contains national security, wealth funds which could be hard for foreign companies to complete acquisition
A successful merger and acquisition
Strategy
- good for the company
- new market shares and customers
- improving technical skills
Motive
- understand why the target company is being sold
Price
- a low price cant gurantee a good deal
Fit
- people issues is important because it can affect financial performance
Integration
- make the annoucement of integration plan as soon as the decision of acquisition is being taken into consideration
Grade 12 Accounting 