Examples of Mergers and Acquisitions Methods

Where to Get Mergers and Acquisitions Checklist Help

examples of mergers and acquisitionsMergers and acquisitions are often included in finance courses whether you are majoring in finance, or if you have another major that requires you take some finance courses. Some students encounter difficulties with various aspects involved in this part of finance. Examples of mergers and acquisitions problems students have to include understanding the concepts involved, keeping track of the many variables that must be considered and the various calculations that need to be performed. Our company provides finance homework help that includes mergers and acquisitions services to assist you with any problems you may run into.

Examples of Mergers and Acquisitions Methods and Tools

When the combined value of two (2) entities is greater than the value of each entity accounted individually, a ‘synergy’ is created. The creation of synergy is what pushes companies to move towards mergers and acquisitions, in view that it will help strengthen their financial capability. Business combinations can be classified into two (2), namely mergers and acquisitions.

The common process for mergers and acquisitions is the Merger happens when one company agrees to merge with another company to operate jointly as a single entity. On the other hand, the acquisition is where a company takes over another which results in a newly formed company.

To simply put it:

 Merger:  Company A + Company B = Company AB
 Acquisition:  Company A + Company B = Company C

Several methods may be employed to finance mergers and acquisitions, some of which include payment by cash from retained earnings or bonds, leveraged buyout, or a combination of cash and debt issuances.

There are three (3) types of merger and acquisition that can form between the contracting parties:

Types of Merger Definition
1 Horizontal A type of merger and acquisition wherein Company A merges with Company B, who is a competitor that operates in the same industry or is selling identical products or services.
2 Vertical A type of merger and acquisition wherein Company A merges with Company B, who is a customer or supplier, regardless whether on their geographical area.
3 Conglomerate A type of merger and acquisition wherein Company A merges with Company B, regardless whether they operate in the same industry or is selling identical products or services.

Methods for Accounting Mergers and Acquisitions

There are different ways to account for mergers and acquisitions, which includes:

  1. Pooling method
 Company A Company B  Company AB
 Assets1  Assets2  Assets1+Assets2
 Liabilities1  Liabilities2 Liabilities1+Liabilities2
 Equity1  Equity2  Equity1+Equity2
 Income1  Income2  Income1+Income2
 Expenses1  Expenses2  Expenses1+Expenses2


Illustration 1.
On October 31, King Kong Company entered into a business combination with Princess Company, whose respective financial statements are as follows:

correct examples of mergers and acquisitions

What will be the combined financial statement of the two (2) companies as a reslt of the merger?

Solution:

Statement of Assets and Liabilities
Princess Company
Current Assets
Cash $66,150
Accounts Receivable – net 36,075
Inventory 14,350
Prepaid Expense 4,400 120,975
Non-Current Assets
Property, plant and equipment – net 46,525
TOTAL ASSETS $167,500
Current Liabilities
Accounts Payable $31,900
Short-term Loans Payable 13,500
Interest Payable 1,350 46,750
Non-Current Liabilities
Long-term Loans Payable 14,650
Total Liabilities 61,400
Common Stock 50,000
Retained Earnings 56,100
Shareholder’s Equity 106,100
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY $167,500

2. Purchase Method (preferred)

Under the purchase method, the purchase price and cost of acquired assets are allocated to the fair value of net identifiable assets and liabilities (ratio and proportion method). Goodwill shall be recognized when purchase price exceeds the fair value of net assets, which is common in most cases. Any gains on losses on the merger or acquisition shall be recorded by the acquiring company in its financial statements retrospectively. Generally, the purchase method computes for the goodwill that may be recognized as a result of the business combination, which shall be computed as:

Goodwill=Purchase Price-Fair Value of Net Identifiable Assets

Illustration 2. On December 31, Miss Terry Company, the acquiring company, entered into a business combination with Mister Yus Company for a purchase price of $650,000, which was paid in cash. The statement of financial position of Mister Yus Company as of acquisition date is as follows:

good examples of mergers and acquisitionsgood examples of mergers and acquisitions

Additional information on the financial assets and liabilities of Mister Yus are as follow:

  • One of its customers declared bankruptcy, whose corresponding accounts receivable of $900 is now deemed uncollectible and should be written-off.
  • A typhoon hit the warehouse of Mister Yus Company during the year, which resulted in some of its inventory worth $750 to be damaged and should be written-off.
  • The company’s depreciation on property, plant and equipment – net is understated by $500
  • Interest expense of $650 was not accrued for the period ending.

Calculate the amount of goodwill to be recognized as a result of the business combination.
Solution:

Purchase Price $650,000
Less: Fair Value of Net Assets
Carrying value of net assets
(total assets – total liabilities)
$36,950
Excess (deficit) of fair values over carrying value on net assets
Write-off of accounts receivable a -$900
Overstatement of inventory b -750
Understatement of depreciation expense c -500
Accrual of interest expense d -650 -2,800 34,150
Goodwill $615,850

An acquisition is when one company takes over another and clearly establishes itself as the new owner. A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. The key principle of mergers and acquisitions is to create synergy. Synergy is achieved when the value of the two companies combined is more than that of the two individual companies. There are many different types of mergers and acquisitions and they may be handled in a number of different ways but they all have the goal of creating synergy.

Some examples of mergers and acquisition methods include:

  • Purchase Mergers – A merger that occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument and the sale is taxable
  • Consolidation Mergers – A merger where a new company is formed and both companies involved are bought and combined under the new company.
  • Reverse merger – A type of acquisition where a private company buys a publicly-listed shell company and reverse merges into the public company to form a new public corporation. This is a way for a private company to go public faster

When acquiring a company it is necessary to determine its value. A mergers and acquisitions checklist of tools to determine a company’s value may include:

  • Price-Earnings Ratio (P/E Ratio) – An acquiring company makes an offer that is a multiple of the earnings of the target company.
  • Enterprise-Value-to-Sales Ratio (EV/Sales) – With this ratio, the acquiring company makes an offer as a multiple of the revenues.
  • Discounted Cash Flow (DCF) – Discounted cash flow analysis determines a company’s current value according to its estimated future cash flows.

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