Operations Management

Chapter 2

Business Growth through Mergers and Acquisitions

A business combination is a form of economic activity. In our society, accounting serves to record and report the financial effects of economic activities.

Combinations where dissolution takes place

▪ Merger—two firms combine but only one survives as a legal and reporting entity.

A B

A

▪ Consolidation—a new company emerges from combining two or more previous firms.

A B

C

Combinations with separate incorporation

▪ Subsidiary investment—each company continues its separate formal existence.

A B

Owns voting stock

Parent Subsidiary

The parent controls the subsidiary through the ownership of a majority of the subsidiary’s voting shares.

Mergers and Acquisitions as a Business Strategy

▪ Operating synergies (cost reduction, R&D, distribution channels)

▪ Accelerated growth in face of competitive pressures (revenue and costs).

▪ Larger firms enjoy greater negotiating power with suppliers.

▪ Manager compensation is often a function of firm size.

▪ Control with less than 100% ownership—steady supplies or sales.

▪ Tax advantages.

▪ Diversification.

▪ Global footprint.

Acquisition Method (FASB ASC 805)

The acquiring firm records the acquisition at fair value. Fair values are expected to be primarily determined by the price paid (consideration transferred) by an acquirer for a target firm. However, in some cases other measures of the value of the acquired firm (e.g., discounted cash flows, comparables, etc.) may be more reliable than the consideration paid by the acquirer.

Valuation basis of net assets acquired = Fair value of acquired firm

Classifications of combination transaction types

A parent company that acquires a 100% controlling financial interest in...