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Mergers and Acquisitions: Definition, Advantages and Tips

Learn more about mergers and acquisitions, including what they are, how they're beneficial and their advantages and disadvantages with tips for navigating them.

Mergers and Acquisitions: Definition, Advantages and Tips

Indeed Editorial Team

Updated February 4, 2023

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Mergers and acquisitions are business terms to describe situations in which businesses consolidate or one business acquires another. Companies may complete this process for a variety of reasons, including financial gains and industry advantages. Working to ensure a smooth transition is critical in avoiding merger and acquisition problems.

In this article, we explain what mergers and acquisitions are and how they can be beneficial and provide a list of advantages and disadvantages of mergers, with tips for undergoing this process.

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What are mergers and acquisitions?

Mergers and acquisitions are business transactions in which one business consolidates with another, known as a merger, or one business takes over another, known as an acquisition. In business, people often refer to the entire process as acquisitions and mergers, even though the two words technically have different meanings. You may also see the term shortened to M&A. Acquisitions and mergers can generate significant profits for the companies involved, as well as the investment banking industry, which is often involved in the M&A legal process.

Related: A Complete Guide To Investment Banking

Differences between mergers and acquisitions

Although the two terms are often used interchangeably, certain situations are mergers and others are acquisitions, depending on the terms of the business deal. If a company does not wish to be taken over by another, this situation is regarded as an acquisition and may be referred to as a hostile takeover. The difference often presents in the way the employees, board of directors and shareholders learn of the merger or acquisition. Though, many merger and acquisition situations are mutually beneficial and allow companies to grow their presence and expand their reach. Some more differences between them include:

Business name: In an acquisition, the company acquiring the other company typically maintains its business name, legal structure and operations. In a merger situation, the companies involved may choose a new name that better reflects the vision of the new, joined company, or they may choose to use one of the existing company names to maintain brand awareness and loyalty.

Legality: From a legal standpoint, the company acquired by another company essentially ceases to exist under its previous name and as its own legal entity. It's absorbed by the acquiring company, and if the acquired company sold or traded stock, the stock is owned and managed by the acquiring company.

Related: What Is a Corporate Merger? A Guide to Combining Companies

Advantages of mergers and acquisitions

Merging companies or acquiring another company can bring several benefits to those involved with the business. Some advantages relate to how the business can interact with and serve its customers, while others improve efficiencies for employees. Here are some advantages that can come with mergers and acquisitions:

Improved economic scale

A larger business, or one that has joined forces with another business, typically has higher needs in terms of materials and supplies. By purchasing the necessary raw materials and/or supplies at higher volumes, the business can improve its scale through lower costs. This can also be beneficial to consumers, as the company can potentially pass those lower costs onto them.

Related: What's the Definition of a Financial System?

Lower labor costs

A merger or acquisition may result in multiple staff members doing the same job at each individual company. By coming together and eliminating extraneous staff, a business can reduce its overall labor costs while maintaining a stronger, more effective labor force. Those involved in the M&A may review the performance of individuals in similar roles and choose the best talent for each position in the new company.

Related: What is Labor Cost? Definition, Direct vs. Indirect Costs and Examples

Increased market share

When two companies come together that operate in the same industry or provide similar goods or services, the newly formed company can enjoy a greater market share, tapping into the resources that both bring to the business deal. This can help companies offer more products to consumers. It may also help a brand gain recognition regarding the type of product. For example, a company with a large market share of make-up may earn recognition for its wide variety of cosmetics.

Related: What Is Market Share? (With Definition and How To Increase)

More financial resources

All companies involved in a merger or acquisition pool their financial resources, increasing the overall financial capacity of the new company. New investment opportunities may present or the company may be able to reach a wider audience with a larger marketing budget or more significant inventory capabilities. This is especially beneficial to a company whose owners might want to merge or consolidate due to debts.

स्रोत : www.indeed.com

What is the Acquisition Method?

Find out why the acquisition method is used, the steps to follow when using this method of accounting, and how it affects financial statements.

7 Min. Read

What is the Acquisition Method?

December 7, 2021

The acquisition method is a way of accounting for the purchase of assets. When an organization acquires assets, it must record them as financial statements. This would be at their fair market value. This means that all intangibles and fixed, tangible assets are recorded on the balance sheet. This balance sheet is a record under the name of the organization that purchased them.

This article will discuss the acquisition method in detail. Topics will include what it is, types of acquisition methods and more.

Acquisition Method Accounting Explained

Types of Acquisition Method

Full vs Purchase Acquisition Method – Which One Should You Use for Accounting Purposes?

The Acquisition Method in Business Combination

The Fair Value in the Acquisition Method

How to Report Acquisitions on Your Balance Sheet?

Key Takeaways

Acquisition Method Accounting Explained

The acquisition method is often used when an organization purchases another company. This only requires the acquiring company to record identifiable assets. It needs to include their fair market values on its balance sheet. It also requires extra reporting of assets and liabilities from both companies. It is recorded in a combined balance sheet. The reason for this is that the two companies must usually merge into one for tax purposes. The acquiring company must combine all its assets with those of the acquired company.

We can use the acquisition method of accounting for the buying of extra assets of a company. Data-dependent acquisition accounting is used in any situation where one company acquires another. It is also used when an organization disposes of a part of its own business, known as an operating segment. Let’s say Company A sold off a division for $60 million. Company A records $60 million on its balance sheet under “assets held for sale.”

Types of Acquisition Method

There are 3 types of acquisition methods such as:

Full Acquisition Method

Partial Acquisition Method

Purchase Acquisition Method

Full Acquisition Method

The full acquisition method is used when a company acquires another completely. This applies when an organization buys another company’s assets and liabilities. It also includes the buying of the overall business. In other words, this is when an organization purchases another company fully. This only requires the acquiring company to record assets at their fair market values on its balance sheet. It also requires extra reporting of assets and liabilities from both companies. It is recorded in a combined balance sheet. The reason for this is that the two companies must be merged into one for tax purposes. So the acquiring company must combine all its assets with those of the acquired company.

Partial Acquisition Method

The method applies when an organization has purchased some of the assets and liabilities from another company. In other words, this is when an organization purchases some of the assets. It does not buy all of them, or it does not buy any of the liabilities. In these cases, a company records only purchased assets on its balance sheet. The balance sheet will list both companies’ liabilities. Any difference between the buying price and the fair market value of the assets will be recorded as its intangible asset. This method may result in a party with a non-controlling interest.

Purchase Acquisition Method

The purchase acquisition method is used when an organization purchases assets or services from another company. With the purchase method, one can determine the fair value of the company’s assets and liabilities in an acquisition in many ways.

Full vs Purchase Acquisition Method – Which One Should You Use for Accounting Purposes?

The decision between the full acquisition method and the purchase method is as follows.

The full acquisition method applies when one company acquires another fully. Purchase acquisition requires that one records only purchased assets. The purchase method of accounting is when an organization buys assets or services from another company. You will also want to analyze the income statement.

A company purchases the capital assets of another one for $200 million. It will have to record those assets on its balance sheet. This means that the acquiring company will have to record everything that the other company owns. It includes both tangibles and intangibles under “Assets held for sale”.

Company A purchases the assets of Company B along with all its liabilities for $100 million. It will have to record only the assets held by Company B on its balance sheet under “Assets held for sale”. Be sure to check for an alternate source of income or liabilities. Both companies must combine all liabilities onto Company A’s balance sheet. It will go under the liabilities section of the affected business unit.

स्रोत : www.freshbooks.com

Mergers and Acquisitions (M&A): Types, Structures, Valuations

The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major assets through financial transactions between companies.

Mergers and Acquisitions (M&A): Types, Structures, Valuations

By ADAM HAYES Updated November 03, 2022

Reviewed by MARGARET JAMES

Fact checked by VIKKI VELASQUEZ

What Are Mergers and Acquisitions (M&A)?

Lara Antal/Investopedia

The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major business assets through financial transactions between companies. A company may purchase and absorb another company outright, merge with it to create a new company, acquire some or all of its major assets, make a tender offer for its stock, or stage a hostile takeover. All are M&A activities.

The term M&A also is used to describe the divisions of financial institutions that deal in such activity.

KEY TAKEAWAYS

The terms "mergers" and "acquisitions" are often used interchangeably, but they differ in meaning.

In an acquisition, one company purchases another outright.

A merger is the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name.

A company can be objectively valued by studying comparable companies in an industry and using metrics.

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What's an Acquisition?

Understanding Mergers and Acquisitions

The terms mergers and acquisitions are often used interchangeably, however, they have slightly different meanings.

When one company takes over another and establishes itself as the new owner, the purchase is called an acquisition.

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On the other hand, a merger describes two firms, of approximately the same size, that join forces to move forward as a single new entity, rather than remain separately owned and operated.

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This action is known as a merger of equals. Case in point: Both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. Both companies' stocks were surrendered, and new company stock was issued in its place.

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In a brand refresh, the company underwent another name and ticker change as the Mercedes-Benz Group AG (MBG) in February 2022.

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A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies.

Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions. A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors, employees, and shareholders.

M&A deals generate sizable profits for the investment banking industry, but not all mergers or acquisition deals close.

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Types of Mergers and Acquisitions

The following are some common transactions that fall under the M&A umbrella.

Mergers

In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval. For example, in 1998, a merger deal occurred between the Digital Equipment Corporation and Compaq, whereby Compaq absorbed the Digital Equipment Corporation.

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Compaq later merged with Hewlett-Packard in 2002. Compaq's pre-merger ticker symbol was CPQ. This was combined with Hewlett-Packard's ticker symbol (HWP) to create the current ticker symbol (HPQ).

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Acquisitions

In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation's 2004 acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.

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Consolidations

Consolidation creates a new company by combining core businesses and abandoning the old corporate structures. Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm. For example, in 1998, Citicorp and Travelers Insurance Group announced a consolidation, which resulted in Citigroup.

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Tender Offers

In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price. The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors.

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For example, in 2008, Johnson & Johnson made a tender offer to acquire Omrix Biopharmaceuticals for $438 million.

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The company agreed to the tender offer and the deal was settled by the end of December 2008.

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Acquisition of Assets

In an acquisition of assets, one company directly acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders. The purchase of assets is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms.

स्रोत : www.investopedia.com