Page 535 - Encyclopedia of Business and Finance

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Mergers and Acquisitions

As the terms imply, a merger is a combination of two To Enhance Market Position Quickly. The board of
existing businesses; an acquisition is a purchase of a com- directors, viewing a high level of cash reserves and high
pany by another company. Since both processes legally market value for the company stock, may determine that
unite companies, the transactions are called consolida- acquiring a company that has a particular product line or
tions. Since the two processes are similar, the term merg- customer base will heighten its position in the market. For
ers and acquisitions is the typical reference used for example, ConocoPhillips, formed through a series of
consolidations in the United States. The detailed differ- mergers, continued to grow through mergers through
ences of such transactions, though, influence the account- 2005. As of November 2005, it realized that it could
ing treatment in the company’s records. The Financial become the third-largest oil company with the contem-
Accounting Standards Board (FASB) has promulgated plated purchase of one of the largest independent oil com-
rules and practices for the accounting treatment for each panies in the United States. The target of their interest,
of the four variations of consolidations recognized in U.S. Burlington Resources, was attractive owing to Burling-
accounting standards. ton’s use of new drilling technologies and because of the
possibilities of expanding internationally by gaining access
The sections that follow include: consolidation
to this company’s inroads in countries such as Canada and
movements in the United States, motivations for M&A,
Ecuador. The outcome of a possible acquisition is seldom
the process, accounting for M&A, and after the merger
clear because other interested parties could appear before
or acquisition. The range of strategies used by companies
the completion of the process.
to undertake cooperative ventures is not discussed here.
Furthermore, the potential tax effects of consolidations
Larger Size Can Meet Perceived Demand. Businesses
are beyond the scope of the discussion provided in this
such as banks, accounting firms, law firms, and manage-
article.
ment consulting firms have all experienced mergers and
acquisitions during the economic development of the
CONSOLIDATION MOVEMENTS IN United States. Banks, for example, undertake mergers and
THE UNITED STATES acquisitions as customers and potential customers
Distinct periods for consolidations have been identified in required larger pools of funds than available in a bank
the United States. J. Fred Weston and Samuel C. Weaver, with limited resources.
for example, identified four periods with the circum-
stances that initiated each: Technological Shifts. A period of intense technological
changes encourages mergers and acquisitions. It is not
1. 1893–1903—Fueled by consolidation of railroads uncommon for a mature company to identify the innova-
and industrial enterprises tion of an emerging company as a good match to extend
2. 1920s—Motivated by interest in vertical consolida- their product lines or provide new services. In December
tion to control the entire supply chain 2005 the New York Stock Exchange (NYSE), a tradition-
ally functioning stock exchange that began operations in
3. 1960s—Spurred by interest in diversification, the 1792, concluded that expansion of services electronically
building of conglomerates was critical for its future. Thus, their acquisition of Arch-
4. 1980s—Stimulated by availability of junk-bond ipelago, an electronic trading network, is illustrative of
financing this motivation. As of early 2006, the newly formed
NYSE Group Inc. was scheduled to shift from a not-for-
Writers in the early twenty-first century identified a profit organization to a publicly owned entity with
fifth wave that began in the mid-1990s. For example, extended services for clients.
Patrick Gaughan noted that by “1993 we were once again
in the throes of a full-scale merger wave” (2002, p. 3). The Growth in Revenues. Sometimes competitors realize that
literature about events since 2000 has demonstrated they can achieve far more together than separately. The
mixed judgment, with some writers indicating that the extensive number of mergers and acquisitions during the
fifth wave was continuing (as of 2006). final decade of the 1800s and the first years of the 1900s
is often cited as a key factor in the establishment of a
CONTEMPORARY MOTIVATIONS national economy in the United States.
FOR M&A
Consolidations that began in the 1990s have had com- THE PROCESS
mon motivations identified in the press and in empirical There are many aspects to the achievement of a successful
reviews of M&A activity in the United States. merger or acquisition. The process may take a relatively

512 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION