Introduction to Acquisitions & Mergers (Cambridge (CIE) A Level Accounting): Revision Note

Introduction to acquisitions & mergers

What is an acquisition?

• An acquisition (or takeover) occurs when one business purchases another

• The acquired business ceases to exist as a separate entity

• The acquiring business continues to trade

  • It absorbs the purchased business

What is a merger?

• A merger occurs when two or more businesses combine to form an entirely new business entity

• All original businesses cease to exist as separate entities

• The new entity inherits combined assets and liabilities

What are the advantages of an acquisition or a merger?

• Synergy

  • The new business can take advantage of bulk buying discounts

  • This reduces costs and raises profits

• Elimination of competition

  • The new business has a bigger market share

  • This reduces the pressure to have the best prices

• More customers

  • The new business has access to more customers

  • This could potentially raise profits

• Diversification of products

  • The new business might now offer different products

  • This reduces reliance on a single product

What are the disadvantages of an acquisition or a merger?

• Loss of existing customers

  • The existing customers of the old business might not transfer to the new business

• Loss or dilution of ownership and control

  • The owners of the old businesses might not be owners of the new business

  • The owners of the old business may hold a smaller percentage of the new business

    • This means they might have less control

• Risk of disputes

  • The new partners, shareholders or directors might disagree over management decisions

• Legal costs

  • The acquisition or merger requires services from solicitors, accountants and valuers

• Overvaluation of goodwill

  • Goodwill that is paid on acquisition or merger might exceed its true worth

  • This would lead to future impairments