Definition
A business combination is a transaction or event in which an acquirer gains control over a business, such as another company, a subsidiary, or a division. This can be achieved through various methods, including mergers, acquisitions, or consolidations. The purpose is often to grow rapidly, gain market share, or achieve economies of scale.
Key Takeaways
- A Business Combination is a transaction in which an acquirer gains control over a business. The acquired business may be another company, a subsidiary, or a division of another company. Essentially, it’s about one business gaining control over another.
- This process is more than just a simple purchase of assets, as the acquirer takes over management decision rights, receives the expected return of profits and bears the risks of losses of the acquiree. Thus, business combinations can influence the competitive landscape of industries and sectors significantly.
- Business combinations can take various forms such as mergers, acquisitions, and purchases of assets. While the financial aspects can be complex, they also offer potential benefits including growth, increased market share, economies of scale, and cost-saving synergies. However, they can also entail significant risks such as integration difficulties, cultural clashes, and assuming liabilities.
Importance
A Business Combination is a critical financial concept as it pertains to the merging of two or more separate businesses into a single entity.
This process often leads to significant economic benefits such as cost efficiencies, expansion into new markets, diversification, gaining advanced technologies, or increasing customer base, which in turn can lead to increased competitive advantage.
It enables companies to grow or diversify their operations more rapidly than the organic growth.
Besides, it’s also important from the perspective of financial reporting as it forms the basis for determining how the transaction is recognized and measured on the combining entities’ financial statements.
Therefore, understanding business combination is crucial for investors, analysts, and stakeholders in predicting future cash flows and assessing company’s value.
Explanation
A business combination serves as a strategic tool used by many organizations to achieve key business objectives. The purpose of a business combination, which includes mergers, acquisitions, and consolidations, is often to create growth or value, especially when internal growth opportunities may be limited.
Companies engage in business combinations to gain competitive power, enter new markets, diversify their product line, or streamlining their operations which otherwise would have taken a significant amount of time and resources if achieved organically. Business combinations are primarily used for improving a company’s market position and achieving economies of scale.
They can help combine complementary strengths, eliminate overlapping overheads, and create synergies. For instance, a company with a strong product portfolio but weak geographic presence may combine with a company that has a wide distribution network but lacks competitive products.
Thus, allowing both companies to strengthen their weaknesses and capitalize on their strengths. As a result, business combinations are pivotal to strategic growth and business manoeuvring in many industries.
Examples of Business Combination
Walt Disney Company and 21st Century Fox: In 2019, the Walt Disney Company finalized a $3 billion acquisition of 21st Century Fox. This business combination significantly extended Disney’s portfolio, allowing Disney to expand content production and distribution capabilities, not to mention adding to its extensive library of films and television series for its streaming platform Disney+.
Amazon and Whole Foods: In 2017, e-commerce giant Amazon.com purchased the grocery chain Whole Foods Market for $7 billion. This business combination gave Amazon a significant physical presence in the grocery sector and allowed them to enhance their grocery delivery service.
Google and YouTube: Google’s parent company, Alphabet, acquired the video-sharing platform YouTube for $65 billion in stock in
After this business combination, Google was able to monetize the video-sharing platform by integrating it into its advertising network and has seen significant growth in this area ever since.
FAQs for Business Combination
What is a Business Combination?
A Business Combination is a transaction or event where an acquirer obtains control of one or more businesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in IFRS 3.
What are the types of Business Combinations?
There are several types of Business Combinations: Mergers, Acquisitions, and Amalgamations. Each type has its own legal and financial implications.
What is the purpose of a Business Combination?
Business Combinations are strategic decisions taken for expansion, diversification, cost reduction, or to enter into a new market segment. The aim can be to increase market share, reduce competition, or access vital product resources.
How is a Business Combination accounted for?
Business Combinations are accounted for using the ‘acquisition method’, which recognizes the acquiree’s identifiable assets and liabilities at their fair values at the acquisition date.
What are the risks associated with a Business Combination?
Business Combinations come with several risks, including financial risks, integration risks, and valuation risks. It is crucial to conduct a thorough due diligence process to minimize these risks.
Related Entrepreneurship Terms
- Merger
- Acquisition
- Consolidation
- Takeover
- Joint Venture
Sources for More Information
- Investopedia: This website provides an expansive range of finance and investing terms and concepts including business combination.
- Accounting Tools: This site contains comprehensive information about various accounting and finance topics.
- IAS Plus: This website offers resources related to international financial reporting standards and definitions, such as business combination.
- FASB – Financial Accounting Standards Board: FASB sets the accounting standards in the United States and offers up-to-date information about different finance terms.
