Acquisition Overviews
Acquisition is a form of business combination which is a method of Inter-corporate investments, IFRS doesn’t distinguish between various forms of business combinations, but US GAAP does and according to the same, there is an acquiring company, and a target company, and post-acquisition, both the companies exist but only the acquiring company reports the consolidated balance financial statement including the results of the target company.
Explanation of Acquisition
Under US GAAP, there are four kinds of business combinations:
- Merger implies that the target company ceases to exist post-merger while only the acquiring company exists, and in most cases, post-merger it becomes a bigger entity.
- It implies that both the target & the acquiring companies continue to exist post-acquisition and the acquiring company reports consolidated as well as standalone financial statements while the target company only reports standalone financial statements.
- Consolidation implies that both the target & the acquiring companies cease to exist post-consolidation and a new entity is formed by combining the assets & liabilities of both the companies.
- SPV: Special purpose vehicle is another form of business combination but the usage of this form is mostly to spin off the portions of a company or improving the balance sheet and therefore it is not truly a business combination. At times it is also known as the Variable Interest Entity.
Characteristics of Acquisition
Following are the characteristics are given below:
- Parties Involved: There are two parties to an acquisition transaction, one is the acquirer and one is the target company.
- Percentage of Acquisition: As is the case with most of the business combinations, for a transaction to be categorized as an acquisition the percentage should be at least 50% or more. At times, there are transactions, which are termed as acquisitions with even less than 50% interest but significant controlling influence, and therefore at times this rule is bent slightly.
- Control: In a business combination, the investment gives the acquirer a controlling interest. The acquiring company can make decisions as to the policies of the target company such as the dividend policy and so on. In other forms of inter-corporate investments such as the investment in associates or financial assets, the amount of influence is lower or significant but not controlling.
- Method of Accounting: The method of accounting used for all business combination transactions under both IFRS and US GAAP is known as the ‘Acquisition’ method.
- Minority Interest: When the acquisition is of less than 100% of the target company, the minority interest is shown on the consolidated balance sheet of the acquiring company, as per the guidelines of IFRS or US GAAP, which differ accounting method of goodwill.
Example of Acquisition
In 2011, Google acquired Motorola Mobility but both the companies existed port the acquisition. Motorola operated as an independent entity post-acquisition. The main aim of this was to acquire the patents owned by Motorola and prevent the misuse of Google’s Android software.
Google had significant control over Motorola, wherein it could change key personnel, sell off parts of the company to various entities, and once all the purposes for which it had acquired the company, Google sold it off to Lenovo after owning it for a period of 2-3 years.
This deal involved the payment to the Motorola shareholders in cash, which meant that Google didn’t want to dilute its control after acquisition so that it could take the hard decisions without much of resistance from the Motorola shareholders.
Types of Acquisition
Types are classified on the basis of the nature of businesses the two companies are in:
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1. Horizontal: It is when a company acquires another company in the same business that is a competitor. For example, one telecom company acquiring another.
2. Vertical: It is when a company acquires either a supplier of inputs or a distributor of its products or the company to which it sells its products. For example, a garment company acquiring the source of cotton such as a farm.
Conglomerate: It is when a company acquires a company in a completely different kind of business. This is mostly done for diversification. An example of this would be a food industry company acquiring a company in clothing industry.
Difference Between Acquisition & Merger
In a merger, the target company is dissolved and doesn’t exist at all. All its assets and liabilities are added to the balance sheet of the acquiring company, which becomes bigger in size and operations as an outcome of such a combination. In this, both the Target and the Acquirer continue to exist post-acquisition.
As the target company is dissolved, there is no other form of financial statements than the consolidated ones in a merger transaction. Whereas, the transaction, both the companies exist so both publish their standalone financial statements and the acquirer publishes the consolidated financial statements also.
Benefits
- Both companies exist therefore there is a higher chance of smoother amalgamation of work cultures and best practices of both the companies.
- Companies which have the expertise in their field of work continue to do the same and therefore there a lower chances of disruption of work
- Added facilities lead to greater synchronization of related activities, such as having an in-house courier partner is beneficial for an eCommerce company because it can have greater control over the delivery aspect of its work. Further it doesn’t have to depend on the inefficiencies of a third party courier company
Disadvantages
- From the perspective of costs, the acquisition is more expensive than outsourcing because the fixed expenses need to be borne by the acquiring company and in periods of slow down, these become a huge burden on the profitability. Also, the acquirer has to pay the existing shareholders of the target company a premium over the market value of the stock so that they agree to the acquisition.
- Loss of control of the target company occurs and therefore at times the decisions made by the acquirer may not be in the favour of the target company and it might not be able to do much about the same.
Conclusion
Therefore, we understand that the Acquisition is a form of business combination under the US GAAP classification while under IFRS, no such demarcation is made. Post acquisition, both the entities exist but the acquirer has significant control over the decision making and the assets and liabilities of the target company. It is very common in present times but they differ from mergers because as an outcome of the merger, the target company ceases to exists while that is not the case in an acquisition.
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