Mergers & Acquisitions

Business owners explore various corporate strategies aimed at growth and expansion provided it is suitable for the business’s mode of operation and market. One of these strategies is Merging and Acquisition.

Merging is a term used to describe the joining together of two firms to become one. The formerly separate firms will now bear one name and operate under one management. Acquisition, on the other hand, occurs when a business purchases majority of the shares of another business allowing full take control of its operations. The acquisition will be discussed in detail in the latter part of this article.

Mergers

Merging for some businesses is the rescue mission that is needed but can also be doom for some. The several forms that merging can take are discussed below.

A horizontal merger occurs when similar businesses in the same industry join to reduce cost and competition. A vertical merger occurs between businesses at different stages of the production process. That is, purchasing of a supplier firm or a distribution firm e.g., purchasing of a cement factory by a construction company. A conglomerate involves merging in different industries and carries out unrelated business, e.g. A merging of a food processing business and a clothing line.

Perks associated with Merging includes:

Synergy — A popular saying goes thus “two heads are better than one”. The productivity level of this merged firm will exceed the sum of each individual firm. Greater efficiency is attained because of more inputs, more innovations, more resources, etc.

Economies of scale — An increase in size will benefit the firm in various ways such as getting discount for buying large quantities, increased customer base, reduced overhead cost as well as increased market share, the percentage of the total market sales earned by the entity will increase as a result of joining resources together. There is mutual benefit from the quality of staff and intellectual property.

Helps survival: Small companies that are struggling to stay on their feet will be better off merging with another rather than closing down totally. Shutting down operations will lead to loss of customers, the employees losing their jobs, and other adverse effects.

Gives room for competition: Small companies have better chances of competing in the international markets while merged than separated. The totality of both entities ’ assets will be substantial, this will help to prevent monopoly of the market by big firms and small companies struggling to survive.

Risk-sharing; The more the sources of income, the less the potential impact of risks. The capacity of the firm to bear risk will increase with the merging.

Downsides of Merging:

The increase in size makes it difficult for management to handle: Skill is required to manage a bigger firm and bureaucracy in merged firms can lead to slow decision making.

The merged business may monopolize the market; The merged firms can amass enough power to control the whole market. Thereby increasing prices of the products against the interest of the consumers.

Difficulty in integration: Separate firms coming together might encounter difficulty if they have different organizations' culture and values. Workers have to relearn the Standard Operating Procedure of the new business.

Reorganization: The organogram of the firm will change, If the structural changes do not favor some employees, it might lead to demotivation and some workers whose services are no longer needed will be laid off.

Acquisitions

Acquisition leads to the cessation of the absorbed company and the acquiring company does not change its name or its structure. Mostly, the financially strong firm acquires the smaller one.

An acquisition can be in two forms; Stock purchase, which entails buying the majority of the target company’s stock from the owners thereby taking over most of the firm’s voting right. An asset purchase involves buying the assets and liabilities in the purchase agreement, the buyer can choose which assets he’ll buy and which liabilities to assume.

Although the acquisition is considered to be more hostile than merging, most of the benefits of merging can also be said for acquisition which is improving economies of scale, expansion, increase in resources, etc.

Vertical, Horizontal, and Conglomerate acquisitions are the types of acquisition, the distinction between these have been treated above when explaining mergers.

Although mergers are considered to be a more friendly restructure for firms because there has to be a voluntary agreement between both parties, business owners in a bid to expand the business must consider both options critically to avoid challenges in the future. It is also important to study the market in which the business exists before selecting which type of merger or acquisition to implement.

How accounts help with mergers and acquisitions

A business combination is an important aspect of accounting that has principles that must be applied to it. Accounting for Mergers and Acquisition is guided by IFRS 3- Business combination. There are several way accountants help in Mergers and Acquisition:

This entails determining the cost of acquisition, comprising of the fair value of the assets and liabilities as at when acquiring and other attributable expenses. This amount is paid by the acquirer to the acquiree.

Accounting for Goodwill is another important aspect of the Business combination done by the accountant. The goodwill is calculated by comparing the purchase consideration with the fair value of identifiable net assets as at the acquisition date.

Measurement of Non-controlling interest is also the responsibility of the accountants. This helps to determine the portion of the business that is owned by the minority.

The above mentioned and many more shows the importance of having highly skilled accountants to handle a business combination, one of which is accounteer.

Planning to perform any merger or acquisition and need professional accountants to prepare your books, send an email to team@accounteer.com.