Business Combinations Handout Summer I 2009

Business Combinations Handout Summer I 2009 - Accounting...

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Accounting 401 Business Combinations Summer I 2009 I. Basic Concepts A. Business combinations represent accounting transactions in which two or more accounting entities are brought together under common control. The result is a larger single entity than that which existed before the transactions. B. In general, business combinations can be categorized in three ways: Economic structure, legal form, and accounting method. II. Control over other companies can be obtained by acquiring all of the target company’s assets or by acquiring more than 50% of the target company’s outstanding voting common stock. A. Economic Structure 1. Horizontal Integration 2. Vertical Integration 3. Conglomerate 4. Hostile Takeover B. Legal Form 1. Statutory Merger 2. Statutory Consolidation 3. Stock Acquisition C. Accounting Methods 1. Purchase 2. Pooling of Interests* *SFAS 141 requires that only the purchase accounting method be used for business combinations after June of 2001. Economic Structure 1. Horizontal Integration – Companies acquire their competitors so as to expand their geographic markets. For example, two airline companies combine or two computer software companies combine. 2. Vertical Integration – Combinations involve companies having a supplier/customer relationship. For example, a manufacturing company merges with a mining company or an automobile company acquires automobile dealerships.
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3. Conglomerate Merger – The combining companies in a business combination are unrelated. This is a procedure for companies that want to diversify. For example, a manufacturing company acquires a financial services company. 4. Hostile Takeovers – Acquiring Company extends an offer for the stock of some target company. Management and directors of the target company oppose the offer. Several standard mechanisms for defending against this type of takeover have evolved over time (for example, a “white knight” which has been set up by the target company to outbid the original acquiring company). Legal Form 1. Statutory Merger – One company (the combinor) acquires all of the voting stock or all of the assets of one or more other companies (combinee or combinees) such that only the combinor survives as a separate legal entity. The combinee or combinees may be liquidated or continue operating as a division of the combinor. Consideration in the transaction may be cash, stock, debt, or a combination of these forms. 2. Statutory Consolidation – A new company is formed from the net assets of two or more old companies. Only the new company survives as a separate legal entity. The old companies are dissolved. Consideration may be in the form of cash, stock, debt, or a combination of these forms. 3.
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This note was uploaded on 03/08/2012 for the course ACCT 401 taught by Professor Staff during the Summer '08 term at Texas A&M.

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Business Combinations Handout Summer I 2009 - Accounting...

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