Chapter 1

1. Chapter 1 Introduction to Business Combinations and the Conceptual Framework

2. Growth • Internal (Grow from within the company) • Company is profitable • Company offers low dividend payouts • External (Acquire another company) • Reasons for: • Operating synergies • Diversification • Global positioning • Tax benefits

3. How External Growth is Achieved • Friendly Takeover • Management of both companies agree and convince existing stockholders that the transaction makes sense • Hostile Takeover • Company to be acquired (“Target Company”) doesn’t want to be acquired • Target company tries to prevent the transaction

4. Defense Tactics • Poison Pill • Target Company sells additional shares of stock to existing stockholders at a very low price • Green Mail • Target Company buys back stock from acquiring firm at an increased price • White Knight • Target Company convinces a third party to buy them instead

5. Defense Tactics (Continued) • Pac Man • Target Company turns the table and attempts a hostile takeover of the acquiring firm • Selling the Crown Jewels • Target Company sells its more/most valuable assets • Leveraged Buyouts (LBOs) • A small number of individuals borrow money to buy all outstanding stock and take the Target Company private

6. Terminology • Statutory Merger • Statutory Consolidation • Stock Acquisitions

7. Terminology • Statutory Merger • One company acquires all the net assets of another company thru the exchange of stock, payment of cash, issuance of debt, or a combination of these A + B = A • Note: • Acquiring company survives • Acquired company ceases to be a separate legal entity

8. Terminology • Statutory Consolidation • A new corporation is formed to acquire two or more other companies A + B = C • Note: stockholders of both original companies become stockholders of the new company

9. Terminology • Stock Acquisitions • One company pays cash or issues stock/debt for all or part of voting stock of another company • “Acquired” company remains a separate legal entity • If a controlling interest is acquired (+50%), then a parent/subsidiary relationship is established Financial Statements (A) + Financial Statements (B) = Consolidated Financial Statements (A & B)

10. Types of “Acquisitions” • Asset Acquisitions • Stock Acquisitions • Either can be accomplished with cash, debt, stock issuance, or a combination of all three

11. Types of “Acquisitions” • Asset Acquisition • Assets and liabilities (i.e., net assets) of acquired company are transferred to the books of the acquiring company • “Books” of acquired company are closed Note: Must acquire 100% of net assets Chapter 2

12. Types of “Acquisitions” • Stock Acquisition • Acquiring company can gain “control” by purchasing GTE 50% of voting common stock • Acquired company remains intact • Advantages over “Asset Acquisitions” • Typically, lower total cost • Acquired company remains separate legal entity • Limited liability • Limits effect of regulators Chapter 3-7

13. Accounting for Consolidated Entities: Theoretical Approaches (2) • Parent Company Concept • Focus: provide relevancy to controlling interests • Parent company effectively controls assets & operations of subsidiary • Subsidiary’s stockholders have no ownership of parent • Approach implies that Non-Controlling interests s/b presented on consolidated financial statements as • a liability in consolidated financial statements • Treated as claim against consolidated entity • Doesn’t fit FASB’s technical definition of liability because there’s no obligation to pay cash or release other assets

14. Accounting for Consolidated Entities: Theoretical Approaches (2) • Economic Unit Concept • Both Controlling (Parent) & Non-Controlling (Subsidiary) treated as contributors to the economic unit’s capital • Approach implies that Non-Controlling interests s/b presented on consolidated financial statements as • a component of equity • But…subsidiary’s stockholders have no ownership of parent

15. Current Practice • Consistent with Economic Unit Concept • On consolidated financial statements, non-controlling (minority) interests reported after liabilities but before stockholders’ equity