ACCA AFM Syllabus C. Acquisitions And Mergers - Acquisitions and mergers as a method of corporate expansion - Notes ^{3 / 6}

is the combining of two or more companies

Generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

The table below presents relevant data for A Ltd and B Ltd, two identical companies planning to merge through a share-for-share exchange:

	A Ltd	B Ltd
Market value before merger	$22m	$28m
% shareholding after merger	40%	60%

Synergies with a net present value (NPV) of $6 million have been identified.

Following the merger, the gain to the shareholders of A Ltd will be:

Value of combined entities ($22m + $28m + $6) = $56 million

A Ltd shareholders have 40% of combined group = 40% x $56m = $22.4 million

Therefore gain for A Ltd = ($22.4m - $22m) = $0.4 million

normally involves a larger company (a predator) acquiring a smaller company (a target).

Reasons for acquisition:

A demerger involves splitting a company into two separate companies which would then operate independently of each other.

The equity holders in the company would continue to have an equity stake in both companies.

is that a company may simply purchase the assets of another company rather than acquiring its business, goodwill, etc.

Suppose a company decides to expand.

Its directors will produce criteria (size, location, finances, products, expertise, management) against which targets can be judged.
Directors and/or advisors then seek out prospective targets in the business sectors it is interested in.
The team then examines each prospect closely from both a commercial and financial viewpoint against criteria.
In general businesses are acquired as going concerns rather than the purchase of specific assets.

Horizontal merger
Similar line of business
Vertical acquisition
- Forward = buy a customer
- Backward = buy a supplier
Conglomerate M&A
- Related = similar business
- Unrelated = completely different areas