BUSINESS ACQUISITION AND COMBINATIONS

DEFINITION: *one business is combined with another business. *occurs when one company acquires either the net assets or control of other business.

FRS 3 : BUSINESS COMBINATIONS bringing together a separate entities or businesses into one reporting entity. the acquirer ,obtains control of one or more other businesses, the acquires.

The acquirer has to pay a specific sum to the owner of the business-purchase price. *Purchase price = purchase consideration* Purchase price could be settled by cash, shares, debentures or combination of them.

NATURE OF COMBINATION Friendly Combination Agreed to each other to combine. BOD combines with mutual agreement terms. Hostile Combination The BOD of the company targeted resists the combination. Deal directly with individual shareholders.

REASONS Operating synergies Globalisation *vertical combination *easy to enter new -elimination of certain markets. costs related to negotiation & bargaining. *horizontal combination -pooling of sales forces, facilities & elimination of duplication costs. Financial synergy Diversification *financial support. * easy to expand to *take advantage of tax another business area. laws. Eg : acquisition financed by debt , the interest payment is tax deductible.

DISADVANTAGE Loss of valuable goodwill. Monopolies conditions (not good for general public)

TYPES OF BUSINESS COMBINATION amalgamations absorptions *2 or more companies combined *when 1 dominant company together to form a new company. acquired the assets & liabilities of another company. A Bhd + B Bhd = AB Bhd A Bhd B Bhd = A Bhd Characteristics: -new company. Characteristics: -old company wound up. -A Bhd becomes bigger. -old shareholder become new -B Bhd will be liquidate. shareholder. -no new company formed. - B Bhd Shareholder absorbed to A Bhd. merger & acquisition

PURCHASE PRICE Amount that the new company has to pay to acquire the assets & liabilities. Refers to agreed value to be paid by buyer to seller. Could be settled in form of: Cash, shares, debentures, combination of all Purchase Price = Purchase Consideration

FACTORS TO BE CONSIDERED TO DETERMINE PURCHASE PRICE 1. Net assets taken over the buyer. (only tangible assets will be taken over) -fictitious assets (e.g : preliminary expenses, trademarks, goodwill) will not be acquired by buyer. -assets revalued to fair value by professional valued. 2. Liabilities taken over by the buyer. (sometimes liabilities acquired a fair value) 3. Goodwill-difference between purchase price and fair value. +ve goodwill = PP > FV -ve goodwill = PP < FV 4. Liquidation expenses expense incurred in conversion process & purchasing company agreed to pay, the purchase price will include this cost.