Introduction to Acquisitions & Mergers (Cambridge International A-Level Accounting)

Spec point — the nature and purpose of the merger of different types of businesses to form a new business entity the advantages and disadvantages of the acquisition or merger

Introduction to acquisitions & mergers

What is an acquisition?

• An acquisition (or takeover) occurs when one business purchases another

• The acquired business ceases to exist as a separate entity

• The acquiring business continues to trade

  • It absorbs the purchased business

What is a merger?

• A merger occurs when two or more businesses combine to form an entirely new business entity
• All original businesses cease to exist as separate entities
• The new entity inherits combined assets and liabilities

What are the advantages of an acquisition or a merger?

• Synergy

  • The new business can take advantage of bulk buying discounts
  • This reduces costs and raises profits

• Elimination of competition

  • The new business has a bigger market share
  • This reduces the pressure to have the best prices

• More customers

  • The new business has access to more customers
  • This could potentially raise profits

• Diversification of products

  • The new business might now offer different products
  • This reduces reliance on a single product

What are the disadvantages of an acquisition or a merger?

• Loss of existing customers

  • The existing customers of the old business might not transfer to the new business

• Loss or dilution of ownership and control

  • The owners of the old businesses might not be owners of the new business

  • The owners of the old business may hold a smaller percentage of the new business

    • This means they might have less control

• Risk of disputes

  • The new partners, shareholders or directors might disagree over management decisions

• Legal costs

  • The acquisition or merger requires services from solicitors, accountants and valuers

• Overvaluation of goodwill

  • Goodwill that is paid on acquisition or merger might exceed its true worth
  • This would lead to future impairments

Exam Hint If you are asked to explain the benefits of an acquisition or merger, then you must state the required number of benefits and then develop them by explaining why they are benefits. You get 1 mark for the benefit and 1 mark for the development.

If you are asked to discuss or evaluate options involving acquisitions or mergers, then you must state two or three advantages and two or three disadvantages. You must then write a conclusion involving a decision.