Accounting for Acquisitions

1 Accounting for Acquisitions Introduction Acquisition is defined as the process where the assets or stocks of a company are bought completely or partially by another company. Companies adopting growth strategies opt using acquisitions rather than expanding the existing structures. When a company is acquired, the acquiring company may pay the other company in cash or acquire the stock of the company or the two options can be combined. Companies may acquire other companies in a hostile or friendly manner. A friendly acquisition occurs when there is an agreement from the two companies. Hostile acquisitions happen when a company is forced to accept selling its assets or stocks to another company. In this discussion I will define and explain business acquisition as well as provide the advantages and disadvantages of acquisitions in modern business environment. Acquisitions are of great benefit to a company and managers should consider taking this as a growth strategy.

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2 Advantages of Acquisition The acquiring company is able to penetrate a specific market niche which could not have been penetrated due to many barriers. There are companies with the competitive advantage of operating in certain market segments and they obtain extra benefits for specializing in these segments. Acquiring such companies provides strength in that a company is able to enter into other markets which could not have been penetrated before (Jarrod Coulhard & Lange, 2005).

The market share of the company increases because the customers of the company are also acquired. The new company expands its products range and is able to attract more customers. A wide variety of commodities are produced by the company and this provides the company with the ability to expand its operations (Jarrod Coulhard & Lange, 2005).

The cost of operation and production is reduced because economies of scale are achieved. As the company continues to expand its operations through acquisitions, more units are produced and this reduces the unit costs associated with production and operation of the company. New technologies are adopted from the acquired company and this improves the efficiency of production and operation in the company (Berry, 2010).

The financial leverage of the company expands because the stocks and assets of the acquired company add to the financial portfolio of the company.

Financial leverage is the power gained by a company when more financial assets are acquired. It is notable that when an acquisition happens, the capital base of the company increases. Investment into capital-intensive projects becomes easier because there are enough finances to cater for such activities (Berry, 2010).

3 The overall profitability of the company is improved and in addition, the earning Per Share (EPS) increases. Due to improvement in productivity as well as increased stock, the company generates more incomes. Shareholders earn more from the expansion of the company and this attracts more investors to buy the shares of the company. Profits are also generated from the diversity of products sold by the company (Jarrod, Coulhard & Lange, 2005).

Disadvantages of Acquisitions The cost of acquiring another company can be very high due to the legal costs and costs of buying the assets of the other company among other associated costs. The company must have adequate funds to carry out the acquisition process.

In some cases a company borrows funds to acquire other companies. It may take long for the company to repay the debts because there are costs associated with the debts (Jarrod, Coulhard & Lange, 2005).

In the short run, the expected profits may not be achieved because the company has not yet penetrated the new market. There are short term barriers which may hinder the profitability of the company and if the company is not able to overcome these barriers, it may be impossible to progress on with normal operations (Jarrod, Coulhard & Lange, 2005).

The opportunity cost of operating acquisition is high in the short run.

Opportunity cost refers to the forgone benefits if the company could invest the same funds in another project with higher financial returns. The decision to acquire another company must put into consideration the forgone benefits in the run because if the acquisition does not overcome this cost it may end up collapsing (Jarrod, Coulhard & Lange, 2005).

4 The customers and shareholders are affected by the acquisition. When a company is acquired the management of the entire company is done by other people. The new employees may not know specific needs of the customers of the company. On the other hand, the shareholders may not be satisfied by the new management and this may be a threat such that they can opt selling their shares (Berry, 2010).

Conclusion Even though acquisitions are found to be advantageous to a company, there are several bottlenecks associated with strategy. Acquisitions bring benefits to all stakeholders of a company by generating more profits, expanding the market share, and other benefits. On the other hand acquisition are costly to operate, there is high opportunity costs involved in the short run and other drawbacks which may hinder a company from adopting acquisition strategy. Generally, acquisitions are of great benefit to a company and managers should consider taking this as a growth strategy.

5 References Berry, A. W. (2010). Advantages and disadvantages of acquisitions and mergers.

Retrieved October 27, 2010 from; http://www.helium.com/items/1561489mergers-and-acquisitions Jarrod M., Coulhard, M., and Lange, P. (2005). Planning for a successful merger: A lesson form an Australian case study.' Journal of Global Business and Technology, 1(2).

Pahl, N. and Richter, A. (2009). International strategic alliances and cross-border mergers & acquisitions. GRIN Verlag. ISBN 3640303296, 9783640303298.

Reed, S. F., Lajoux, A. R. and Nesvold, H. P. (2007). The art of M & A: a merger, acquisition, buyout guide. McGraw-Hill Professional. ISBN 0071403027, 9780071403023.