Custom «Business Acquisition» Sample Essay
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There is no magic formula to make successful acquisitions. As the acquisition is processed, it is impossible to predict whether it is good or bad, the same as in case of marketing. Each transaction in acquisition has to have its own strategic logic. In the current experience, buyers have certain accurate ideas of the movement in acquisitions and value creation in the most successful agreements. For less successful transactions, a strategic justification such as establishment of the international scale, filling portfolio intervals, or constructing the third stage of a portfolio is typically uncertain.
Different Types of Acquisitions
Acquisitions of companies can be made in the form of acquisition of an asset or of stocks. A buyer buys all or some assets / obligations for this purpose directly from a seller. If all assets are acquired, the purpose is achieved. In the case of stock acquisition, the buyer buys target stocks from shareholders.
One has to pay attention to the sale of shares and their target shareholders (which can be the legal entity). The seller is usually a legal entity. Thus, the type of acquisition will define which person pays transaction taxes and the sum of the taxes. Shareholders are subjects to payments based on tax rates applicable to the seller.
Additionally, executives must not confuse types of an acquisition form. The buyer can use cash or actions (or their combination) as an instrument in exchange for targeted assets or stocks.
Ways of Acquisitions
During the sale of assets, certain assets and liabilities of the seller are sold to the buyer. The buyer can choose what assets and liabilities he/she wants to receive, avoiding undesirable assets and liabilities for which he/she is not ready to pay or does not want to take the responsibility for. Assets and transactions of purchase and sale between the buyer and the seller will be listed or will describe values of each asset (or responsibility) that will be acquired, including each asset from office paper to goodwill. The objective cost of each asset (or responsibility) can be expensive. Besides, some assets such as government contracts can be difficult to transfer without consent of business partners or regulators (Abd-Kadir, Selamat, and Idros 6).
In case if acquired assets do not belong to a separate legal entity, they have to be bought during the sale of an asset. However, it should not be sale of shares if they are to be regulated as a separate legal entity before sale. A branch of united companies will often be organised as separate legal entities while the production facility, as a rule, does not work.
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In case of stock acquisition, all assets and liabilities of the seller are sold after a transfer of stock of the seller to the buyer. Besides, no tiresome assessment of separate liabilities and assets of the seller is required and the agreement is simple. The customer does not receive expansion of taxes in the acquired net assets and it is rather a basis of transfer. Any goodwill gained in stock acquisition is exempt from taxation.
Advantages and Risks
However, the Tax Code contains section 338 and the buyer of stock is considered as an object for taxation. In section 338, elections grant the buyer the right for the increasing tax base not to be exposed to tax goodwill, but one should also account for tax profit of trigger mechanisms during a hypothetical sale of assets.
Though the buyer gets all assets and liabilities during the purchase of shares, there can be undesirable obligations according to the contract concluded with the seller, for instance, an obligation to seel these shares back to the seller. In the acquisition of a branch under section 338, elective sale of the founder’s company can use tax signs or its other branches to compensate for its profit from the sale of trust actions. However, the parent organisation cannot use tax signs of target branch because it has lost the buyer in the transaction and is exposed to restrictions according to section 382.
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Sometimes, acquisitions occur in the form of hostile absorption. It occurs when management of the target company does not want to conduct negotiations with the buyer. Then, the target company is bought against its will and stops its existence. There are various reasons why hostile absorption may happen. One reason consists in the fact that the target company is bought for less than potential profit. Other reason consists in getting access to technology of the target company, know-hows, assets, brand, client base, and channels of distribution. Factors are the same for hostile and friendly acquisitions. However, hostile absorption happens when managers feel that conditions are unfair and they lose workplaces or the cost of the company decreases. Sometimes, groups of investors or the company buy enough stock to begin acquisition. They already have a controlling stake (Torre-Enciso, Martinez, and Bilbao 280).
Advantages of buying companies are:
- One knows the business;
- Ability to accumulate savings through economy due to increase in production;
- Geographical extension;
- The best situation to estimate the valid cost;
- Vertical integration;
- Filling of the production line.
Risks of acquisition include:
- Mistaken branding;
- Integration of the enterprise;
- Inability of the seller to explain potential responsibility;
- Inappropriate assessment of management of detention;
- Suppliers of the seller may not wish to sell goods to the buyer;
- Inappropriate accounting control (Conyon et al. 32).
Steps of Acquiring
Many countries have had an awful economy that exhausted the small business. Many still operate, but are about to suffer from a total failure. How does one find good application for this information? Well, there are steps in the acquisition process.
- One speaks with CPA, bank, and other known companies, which have financial difficulties. Ethically, they cannot tell the company to look on, but they can advise clients that they know people with whom it could be necessary to speak.
- Within one’s attention (the industry or the company), it is important to see what happens in the market. Opening of an unfortunate company is not difficult currently.
- One will assume and find the company, relations of which with the bank/credit are strained. Often, the bank transfers the relations into special assets.
- If there is a mutual interest at the end of due diligence, one must be very careful and make sure one has hired an accredited analyst for assessment.
- If one recognises credits of the company as special assets, one will conduct negotiations on their purchase from the bank (Eccles, Lanes, and Wilson 140).
During acquisition of the business, banks will finish grants or losses on credits. It creates an opportunity for levers at negotiations. Everything that one has to make is ask: "Have you already included this loan in the restraint for possible losses on the credits?" If they have reduced credit cost to $0, then any profit has to be returned to bank. One can often make purchases that include the name of the company, trademarks, copyright, selling information, client base, etc. (Duksaitė and Tamošiūnienė 25).
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If the company still has a solid reputation among its clients, it can continue use the name of the company to reconsider relations with sellers that probably will be released. This creates the client base.
Business acquisition has integral risks. Geographical expansion increases the client base and, therefore, sales. It also opens a possibility for more potential advertising in the mass media to be inefficient in a limited area. In the best situation, one must estimate the valid cost. Placement of exact costs of acquisition will be extremely important for investing of retained earnings. It is recommended that calculation of the valid cost is used as the main tool. Firms with history of the income plus good prospects of future income will make rather exact calculation of their valid cost (DeYoung, Evanoff, and Molyneux 90).
An example of acquisition is an Indian company Ranbaxy-Sun Pharmaceuticals. This is the limited liability pharmaceutical company. It is considered to be a multinational pharmaceutical company with its main office in Mumbai that is occupied with production of active pharmaceutical ingredients and sale of pharmaceutical products. In India, the US firm bought Ranbaxy laboratories. The transaction, as it was expected, was finished in December 2014.
Ranbaxy-Sun Pharmaceuticals Limited received 4 shares of the Sun of Pharma for each 5 stocks of Ranbaxy. The agreement worth $4 billion has led to 16.4 reproduction "in the authorised capital of the sun of Pharma” (Nguyen and Kleiner 447).
Thus, it is believed that purchase of this company accelerates growth of the business. The company has $10 million in sales and shows profit of $1 million. Physical assets and monetary assets are quite low, i.e. only $500,000, and recent growth has been modest, reaching 4%. The owner wants $20 million for the company. Obviously, from a purely financial point of view, this transaction does not look especially attractive (Seegert and Ohrn).
Things to Consider When Making a Perfect Acquisition
Integration of new production lines, technologies, and marketing strategy can demand various practices of management, controlling, and financial strategy. The target company has no competitors, clients, and business partners except for the client base of the buyer and competitors. Risks are also connected to unexpected expenses, delays, and other problems that are results of the integration of systems, operations, the personnel, and practice of business relations. Other risks include sales volume, size, and return of investments. Some purposes will demand considerable investments into new equipment. Loans to the commercial enterprise, money due to suppliers, and other obligations are some other factors to be considered. At last, risk and uncertainty will also depend on the ability of the buyer to develop a new marketing strategy, start new product lines, introduce the most successful practices, and service licenses of a product (Netter, Stegemoller, and Wintoki 2316).
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Acquisition is a process by which a business buys most or all stocks of the target company. Actually, business acquisition has less integral risks in the comparison with starting a new company. Everything is already in place: sales, profit, and organisation. All this make uncertainty removed from acquisition (Morosini and Steger 10).
Reasons to Acquire
The main reason consists in an opportunity to develop the business and reduce risk. The risk increases when the company invests capital in large volumes in one industry or sector. Companies facing potential bankruptcy frequently look for businesses to buy them. Corporations and large companies have liquid assets, access to sources of financing, and a good practice of management with respect to the cash flow. Acquisition can also increase possibilities of companies to get access to an action and debt financing. Tax privileges are other advantage for companies with net losses. Transfer of tax losses is applied when losses are reported in the tax declaration and are used to reduce obligations.
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Generally, there are factors to be considered in acquisition evaluation: value of the company’s assets; financial cost; strategic impact on the company; possible value of liquidation of the company and its assets; technological influence; influence on the market; work of human resources; and influence distribution.
Additionally, these key issues should be taken into account. A buyer considers EBITDA of the company. From the investor’s point of view, EBITDA shows future cash flows. Revenue growth for the buyer must not be fast. It is better to assume 5 to 10 percent annual rate. EBITDA margin gives an ability to calculate the degree of the company’s success and efficiency over time.
Thus, there are many sources of information to estimate acquisition purpose and cost from the financial point of view. In some articles, scientists have considered strategic objectives of acquisition and factors that will make purposes more strategically attractive. However, some strategic factors can actually change assessment and the purpose of acquisition. As the acquisition is processed, it is impossible to predict whether it is good or bad. Everything depends on the type of acquisition and on transactions made. Each transaction in acquisition has to have its own strategic logic.
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In the acquisition process, there are things to consider like integration of new production lines, technologies, and marketing strategy that can demand various practices of management, controlling, and financial strategy. The target company should have no competitors, clients, and business partners except for client base.
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