In business acquisitions, mergers, and acquisitions are complex transactions where the total ownership of certain business enterprises, other small business corporations, or their operating units are acquired or merged with other enterprises. For large acquisitions, there are several steps involved before the acquisition closes. The first step is the analysis of the business case by senior management. This includes determining the target market, the most suitable financing method, the most attractive operational model, the most viable ownership structure, and the most efficient operation procedures. Once all the necessary details are analyzed, a suitable business acquisition solution is designed.
In order to acquire a target market, the acquisition strategy must be tailored to the target market. In a merger or acquisition, a business acquisition specialist plays an important role. They first analyze the financial statements of the target company. Next, they identify the business models that they think will be most attractive to potential customers. These models are then translated into specific strategies such as pricing, advertising, selling, and selling points, as well as the amount of available market share.
There are two common business acquisition methods: buyouts and equity transactions. A buyout consists of a large cash outlay, usually in the range of tens of millions of dollars, used to execute a successful deal. The buyout may be accomplished using either a private equity firm or a venture capital group. Usually, buyouts require the services of an experienced broker.
An acquisition transaction is a combination of buyouts or mergers, where one or more of the targeted firms makes an acquisition offer to the target firm. The target firm accepts the acquisition offer, providing partial financing and assets to the acquiring firm. This combination is the more conventional method of acquisition.
Mergers are an equally common method of business acquisition. In a merger, two or more acquirers combine their resources in order to achieve a predefined target. The target companies often have overlapping operations or may operate in different markets. Mergers can also involve the purchase of substantially diluted stock from the target company and the transfer of control of the combined company’s stock into the hands of the acquiring firm.
A key question in determining the value of a business acquisition is whether it will have a material effect on the company’s income statement, its balance sheet, and its future financial statements. To answer this question, an accountant typically must perform a financial statement review that examines the effect of the acquisition on the company’s income statement, balance sheet, and other financial reporting instruments. Business acquisitions affect the target company’s debt and equity markets, the goodwill and long-term liabilities of the target company, and its credit ratings. Goodwill is a positive term arising from the acquisition of the target company. Long-term liabilities refer to those liabilities that will not be ameliorated within the target company’s operating finances in the future. Consolidation will reduce the size and net worth of the target company and its marketable securities.
A company’s market share is its shares of the total market for its target industry. Good acquisitions will dilute the target’s market share and create incremental dilutive income and book value. Dividends are a dividend payment made by the acquiring firm to its stockholders. Purchase of shares represents a purchase of a portion of the target’s shares; therefore, the purchase of shares is a direct effect on the market price of the target’s stock.
Business acquisitions are a necessary part of managing a growing organization. Acquisitions may be required to address a management issue, to take advantage of a situation, or to bring a new technology or product to the market. For these reasons, business acquisition professionals should have extensive experience in identifying acquisition opportunities and in evaluating potential purchase candidates.