Ch.1_notes

Ch.1_notes - Chapter 1 Business Combinations Business...

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Chapter 1 Business Combinations Business Combination – The combination (union) of the net assets of two previously separate entities. I. Forms of Business Combinations (Technical Definition) A. Consolidation – A new corporation is formed to take over the assets and operations of two (or more) entities. The previous separate entities are dissolved. (A) (B) (C) dissolved. B. Merger – One entity acquires all the net assets of another company and the acquired company is dissolved. (X) (Y) Step i – Company X issues stock (or gives cash) to Y’s shareholders in exchange for their stock in Y. Step ii – Company Y is dissolved and X acquires the net assets of Y. Note: If Company Y is not dissolved then Y is a subsidiary of X. 1
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II. The Desire to Merge Years 1992 to 2001 witnessed the largest wave of mergers ever over a ten-year period, with 8 consecutive record years. In 2000 (the largest year), the total value of announced mergers in the U.S. was $1.75 trillion. Over this 10-year period, the 50 largest U.S companies were involved in roughly 6,000 mergers or acquisitions. For example, Cisco Systems Inc. growth was fueled as a result of 71 acquisitions between 1993 and 2000. A. Why Do Firms Merge? 1) Achieve Integration (see Part B below) 2) Acquisition of Intangibles (e.g., patents, customer lists, trademarks, FCC licenses, airport landing rights) provide the surviving firm with a competitive advantage). 3) Less Risk – expansion through purchase of established product lines is less risky than developing new products. 4) Less Costly – Acquisition of existing manufacturing plants and facilities that meet current environmental standards and regulations is less costly than self constructed assets. 5) Avoidance of being taking over themselves. B. Achieving Integration through Mergers a. Horizontal Integration – takes place between firms that compete in the same markets or operate in the same line of business. The surviving company increases market share and achieves economies of scale. Example: UsAir Group acquisition of Pacific Southwest Airlines The Xinhua General Overseas News Service DECEMBER 9, 1986, TUESDAY HEADLINE: usair group expands in latest u.s. airline merger DATELINE: washington, december 9; ITEM NO: 1209193 BODY: usair group inc . announced monday it has agreed to buy pacific southwest airlines in a 400-million-u.s.- dollar deal, the latest of a series of mergers in the u.s. airline industry, the local press reported today. usair said the purchase will strengthen its position in the american market. the merger would enable usair, an east coast carrier with its headquarters in washington, to operate on the west coast and become the sixth largest carrier in the u.s. in terms of domestic passengers carried . this transaction follows the pattern of mergers in recent months, in which propering airlines have snapped up struggling carriers to
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Ch.1_notes - Chapter 1 Business Combinations Business...

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