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Merger is a corporate strategy that deals with selling, buying and dividing of different companies or some parts of the company in order to ensure rapid growth in its corporate sector. There is no clear distinction between mergers and acquisition although both are used as corporate mechanisms to increase industrial competitiveness. However, the two concepts differ slightly.
Acquisition is the purchase of one business by another commonly known as takeover. The purchase can either be on full purchase or on a partial purchase term. It is further divided into public or private acquisition which depends when whether the acquiree is listed or not listed in the stock market. The legal concept of the merger has nothing to do with the power grab which can be achieved only on legal grounds. In legal terms, merger happens when two firms agree to move forward as a single business rather than remain as separately owned and operated entities.
From the recent merger activity between Long Success International Ltd with City Faith Investments Ltd, the merger was worth $3.2 million. The merger was facilitated by the following agencies Hong Kong stock exchange, Bermuda Monetary authority and other financial regulatory bodies with the objectives indicated below.
The key drivers for merger are the following factors:
- Synergy- this involves having an improved managerial economies like increase in managerial specialisation. It also entails having more purchasing economies due to increase in size.
- Taxation- merger allows a company to reduce its taxation rate because the authorities apply tax to the company as a single entity.
- Cross-specialisation- this practice is more common to corporate sector when a bank buys a stock broker to offer brokerage services
- Economies of scale- this refers to a practice where the combined com[any reduces its fixed costs by eliminating duplicated departments relative to a similar revenue stream therefore increasing the profit margin.
- Increase in market share- this assumes that the customers will maintain their loyalty to the company and thus the combined companies acquire market power through an increased market capture.
The merger creates more value to the company’s stakeholders by reducing the per unit price of their products, increased speed in production, wider reach in the market and improved efficiency. This value is realised when the two or more companies combine their efforts to meet the new organisations objectives. Different companies present their capabilities, abilities and market share to form one force that shakes the industry.
Accounting approach in merger business
Merger accounting is either done by a method purchasing or pooling of interest. Some difference exists between the two methods where in the purchase method, liabilities and assets of the two companies are presented in their respective market value on the exact date of acquisition. This ensures the accounting process reflects the current market value as compared to their value on purchase. Therefore, the total liabilities of the company are the sum of individual liabilities of both firms. Although, in this method, the values can be overrated due to depreciation charges assigned to each company. To account for retained earnings under the purchase method, prior earnings are not allowed to be brought forward in the consolidated books of accounts. The new company begins accounting for its earning from the date of consolidation.
In Pooling of risk method, the transactions are considered the same as exchange of their securities. In this case, the liabilities and assets of both firms are combined according to their book value and not the acquisition date. Thus, the sum of the assets becomes the total value of the assets of the merger. And the accounting income becomes higher than the purchase method because the depreciation in this method is based on the book value of the assets.
Financial statements in a merger
The initial steps to evaluate the financials of a merger are to obtain the target company’s financial and sign a non-disclosure agreement and financial exchange. To analyse a financial merger, it is important to consider the historical and future financial performance of each company. The income statements should illustrate the financial profitability of each company. The combined income statement should show the combined profitability of both companies. When combining the financial statement, special attention should be taken to tax and income expense lines.
The balance sheets of the combined company indicate the major assets like land, equipment’s and the financial leverage. This can be achieved by combining the balance sheets of both companies but the common stocks and goodwill requires complicated accounting to arrive at. The calculation of these items depends on the type of merger acquisition undertaken.