Mergers & Acquisitions

Merger: When two firms agree to go forward as a single new

company rather than remain separately owned and operated.
Acquisition: When one company takes over another and clearly
establishes itself as the new owner.
Types:
1. Horizontal, e.g. HP-Compaq, Mittal-Arcelor, British Airways-BMI
2. Vertical, e.g. Time Warner Cable-Turner Corp, Google-Android,
Google-Motorola Mobility
3. Conglomerate, e.g. Walt Disney-ABC, Microsoft-Skype
4. Market-Extension, e.g. Tata-Jaguar-Land Rover, WalgreenAlliance Boots, HK Exchange-London Metal Exchange
5. Product-Extension, e.g. Facebook-Instagram, KKR-Prisma
Capital
Rationale for/ Synergies from M&A:
1. Economies of Scale
2. Economies of Vertical Integration
3. Complementary Resources
4. Use of Surplus Funds
5. Elimination of Inefficiencies
6. Industry Consolidation
7. Additional Debt Capacity
8. Tax Benefits
Takeover Tactics
1. Congenial
2. Hostile Takeover Bids
a. Tender Offer, offer directly to shareholders, going over
management head
b. Proxy Fights, secure the rights to represent shareholder
at AGM
Takeover Defenses
1. Shark Repellent, e.g. supermajority requirement, restricted
voting rights, etc.
2. White Knight, friendly acquirer sought
3. Poison Pill, e.g. the right for existing shareholders to buy
additional shares at an attractive price if a bidder acquires a
large holding
Accounting Treatment: Recording the transactions for M&A
Two options available: Purchase vs. Pooling Method

Pooling method records the assets of the acquired company at

their book values, not recording the actual consideration paid
against the acquisition anywhere
Hence, pooling method will only be possible under a full stock
acquisition - an acquisition has to be financed entirely with the
stock of the bidding firm (no cash paid; because if extra cash
is paid over book value it has to be recorded against
something)
Purchase method records assets of the acquired company at
their fair values and posts any excess amount paid on top of
this fair value as goodwill

Example: Zeta Inc acquired Alpha Corporation, through a full stock

acquisition, valued at $20 million dollars. The assets of Alpha carried
a book value of $5 million and a fair value of $8 million. Show how
the transaction will be recorded under a) The Pooling method b) The
Purchase method
Pooling Method:
Asset account of Zeta Dr 5 m
Equity account of Zeta Cr 5 m
Purchase Method:
Asset account of Zeta Dr 8m
Goodwill Account of Zeta Dr 12 m
Equity account of Zeta Cr 20m (had the payment been made in
cash, cash account would have been credited and equity account
would not have been impacted)
N.B these accounting treatments have no connection with the
financial gain to the selling and buying parties as shown in the
previous examples.