Mergers and Acquisitions

AuthorBernard Newman, Mary Oliverio
Pages511-514

Page 511

Mergers and acquisitions (M&A) are often the means chosen by company boards of directors to meet strategic goals such as expansion of products, services, or revenues.

Page 512

As the terms imply, a merger is a combination of two existing businesses; an acquisition is a purchase of a company by another company. Since both processes legally unite companies, the transactions are called consolidations. Since the two processes are similar, the term mergers and acquisitions is the typical reference used for consolidations in the United States. The detailed differences of such transactions, though, influence the accounting treatment in the company's records. The Financial Accounting Standards Board (FASB) has promulgated rules and practices for the accounting treatment for each of the four variations of consolidations recognized in U.S. accounting standards.

The sections that follow include: consolidation movements in the United States, motivations for M&A, the process, accounting for M&A, and after the merger or acquisition. The range of strategies used by companies to undertake cooperative ventures is not discussed here. Furthermore, the potential tax effects of consolidations are beyond the scope of the discussion provided in this article.

CONSOLIDATION MOVEMENTS IN THE UNITED STATES

Distinct periods for consolidations have been identified in the United States. J. Fred Weston and Samuel C. Weaver, for example, identified four periods with the circumstances that initiated each:

1893–1903—Fueled by consolidation of railroads and industrial enterprises

1920s—Motivated by interest in vertical consolidation to control the entire supply chain

1960s—Spurred by interest in diversification, the building of conglomerates

1980s—Stimulated by availability of junk-bond financing

Writers in the early twenty-first century identified a fifth wave that began in the mid-1990s. For example, Patrick Gaughan noted that by "1993 we were once again in the throes of a full-scale merger wave" (2002, p. 3). The literature about events since 2000 has demonstrated mixed judgment, with some writers indicating that the fifth wave was continuing (as of 2006).

CONTEMPORARY MOTIVATIONS FOR M&A

Consolidations that began in the 1990s have had common motivations identified in the press and in empirical reviews of M&A activity in the United States.

To Enhance Market Position Quickly

The board of directors, viewing a high level of cash reserves and high market value for the company stock, may determine that acquiring a company that has a particular product line or customer base will heighten its position in the market. For example, ConocoPhillips, formed through a series of mergers, continued to grow through mergers through 2005. As of November 2005, it realized that it could become the third-largest oil company with the contemplated purchase of one of the largest independent oil companies in the United States. The target of their interest, Burlington Resources, was attractive owing to Burlington's use of new drilling technologies and because of the possibilities of expanding internationally by gaining access to this company's inroads in countries such as Canada and Ecuador. The outcome of a possible acquisition is seldom clear because other interested parties could appear before the completion of the process.

Larger Size Can Meet Perceived Demand

Businesses such as banks, accounting firms, law firms, and management...

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