The document provides an overview of business combinations, defining key concepts such as acquirer, acquiree, and types of combinations including horizontal and vertical mergers. It discusses the objectives behind such combinations, advantages like increased market share, and disadvantages such as potential monopolies. Additionally, the text outlines specific transactions like de-mergers and reverse mergers along with their processes and implications.

1. Business Combination

2. Introduction
• A business combination is defined as an entity obtaining
control of one or more businesses.
• The most common business combination is a purchase
transaction in which the acquirer purchases the net assets
or equity interests of a business for some combination of
cash or shares.

3. An entity may also obtain control of a
business
i. Through the execution of a contract
ii. Due to an action by the acquirer
iii. Without the exchange of consideration
iv. Through transactions that combine multiple companies to form a
single company.

4. An entity to determine whether a transaction or event is
a business combination. In a business combination, an
acquirer might obtain control of an acquiree in a variety of
ways, including any of the following:
• By transferring cash, cash equivalents, or other assets
(including net assets that constitute a business)
• By incurring liabilities
• By issuing equity interests
• By providing more than one type of consideration
• Without transferring consideration including by contract
alone

5. A business combination may be structured in a variety of ways for
legal, taxation, or other reasons, which include but are not limited
to, the following:
• One or more businesses become subsidiaries of an acquirer or the
net assets of one or more businesses are legally merged into the
acquirer.
• One combining entity transfers its net assets or its owners transfer
their equity interests to another combining entity or its owners.
• All of the combining entities transfer their net assets or the
owners of those entities transfer their equity interests to a newly
formed entity (sometimes referred to as a roll-up or put-together
transaction).
• A group of former owners of one of the combining entities
obtains control of the combined entity.

6. Key Elements and Terms of Business
Combinations
• Acquirer: The buyer company is taking over the business and
control of another company.
• Control: It is the power to make significant management
decisions, and the decision is related to the finance and operations
of the business.
• Acquiree: It is the seller company whose net assets or equity
interest is acquired by the acquirer.

7. • Business: It is one of the important elements. It is the group of
activities and assets that can be individually managed and are
capable of providing goods and services to the final customer,
generating interest and dividends for the investors and other
income. In simple words, an integrated system that is capable
of carrying out ordinary business transactions.
• Asset acquisition: Under this scheme, buyers only take over
certain assets and liabilities. The buyer doesn't get complete
control of the entity, and it only assumes risk related to the
purchased assets.

8. Objectives of a Business Combination
• Market extension: Growing business organically is a slow process.
Companies take over businesses of other entities working in the same
industry but have a different market. The main objective is to increase
the market share and client base.
• Product line expansion: To start a product line from scratch is a
tedious and complicated process. Companies can merge with a
company with the targeted product line. In such a combination,
companies are saved from setting up things from scratch, and they
acquire an existing business.

9. • Elimination of competition: Market leaders take over other entities to
eliminate competition in the industry. Bringing companies under the
same control is profitable and helps create a market monopoly.
• Effective management: Employees and expert managers are the
assets of the company. Combining two or more companies also brings
together the best management personnel. Under Business
combinations transactions with assets and liabilities, employees and
management are also taken over. Few mergers took place, especially to
bring experts and experienced managers.

10. Types of Business Combinations
• Horizontal Business Combination: It is a transaction between two or more
companies of the same industry. These companies operate in the same
market and are each other's competitors. Such consolidation results in the
elimination of competition and the extension of the market.
• Vertical combinations: It is also known as process combination or
sequence combination. Companies are operating at different levels. Its aim
is to reduce the unnecessary cost of production and maintain the quality of
the final product or services.
• Lateral Combination: It is the combination of two businesses operating in
different product lines, but at some level, they are relatable. There are the
following types of lateral combinations.

11. • Convergent: It is the combination of small units into one. Like different
raw material suppliers will be combined to form one company. For
example, a combination between a printing press and a paper mill.
• Divergent: It is the merger of related businesses. For example, a
combination of Steel Mill with its dependent entities like a wire
manufacturing company, tube manufacturing company etc.
• Diagonals: It is also known as manufacturing and service combination.
Under this combination, a manufacturing company like a Phone
company acquire a customer support company.
• Mixed Combinations: These combinations are between completely
unrelated businesses. It is also known as a circular combination. For
example, a ship manufacturing company combines with a real state
company.

12. Business Combination Accounting
• The entities are required to adopt the acquisition method for
accounting. Under this method following steps are followed:
A. Identify the acquirer
B. Determine the acquisition date, and it is the date on which control is
transferred to the acquirer.
C. Recognize the assets taken over, liabilities assumed, and any non-
controlling interest in the acquiree.
D. Recognize and measure goodwill or gain on bargain purchases
because of Business combination transactions

13. Advantages
• Competition: The major benefit of a business combination is the
elimination of competition in the market.
• More customers: Combinations result in capturing new markets. This
increased number of new customers will bring in more revenue.
• Low cost: The mergers help in achieving economies of scale. Large-
scale production and the combination of best processes help in
lowering per unit cost.
• Better management: It combines the best managerial personnel that
provide benefits to the combined entity.
• Better services: By taking over a service company, the manufacturing
company will be able to provide customer support services. That will
provide increased customer satisfaction.

14. Disadvantages
• Monopoly: Business combination may result in the concentration of
controlling power in the hands of a single company. The company can
abuse this dominating power, which will not be good for the market
and the customers in the long run.
• Added cost: To initiate a Business combination transaction and
finalise it, a company hire experts, and it is a long and costly process.
• Uncertainty in employees: The takeover of a company creates
uncertainty in the minds of the employees of the acquiree company.
This might result in a hostile attitude from the labour force.
• It might fail: It is not guaranteed that every business combination will
result in profit and gain.

15. Business combination under common
control (BCUCC)
• Business combination under common control (BCUCC)
refers to a specific type of business combination in which two
or more entities that are ultimately controlled by the same
party or parties come together to form a single reporting
entity. In other words, the combining entities have the same
controlling shareholders, parent company, or group of
individuals in control.

16. Characteristics:
• Common Controlling Party: The combining entities are under the
control of the same parent company, controlling shareholder, or a group
of individuals. This controlling party has the power to direct the
financial and operational policies of the entities involved.
• No Exchange of Consideration: Unlike business combinations not
under common control (BNUCC), where consideration is typically
exchanged, BCUCC usually involves the transfer of assets, liabilities,
and equity interests without an exchange of consideration. Instead, the
entities are already under the control of the same ultimate owner, and the
combination is more of an internal restructuring.

17. • Historical Cost Accounting Basis: In many jurisdictions and
accounting standards, such as International Financial Reporting
Standards (IFRS), business combinations under common control are
often accounted for using the historical cost method. This means that the
assets and liabilities transferred are recorded at their carrying amounts in
the books of the transferring entity at the time of the combination.
Consequently, there is no fair value adjustment to recognize any
potential gain or loss on the transfer.
• Financial Reporting Implications: While business combinations under
common control result in a change in the legal structure and possibly the
name of the reporting entity, the financial statements are typically
presented as if the combination had occurred from the beginning of the
earliest period presented (retrospective application).

18. De-Merger
• A de-merger, also known as a demerger or divestiture, is the
opposite of a merger. It is a corporate restructuring strategy in
which a single company with multiple business divisions or
subsidiaries decides to separate and become independent
entities again. In other words, a de-merger involves breaking
up a company's business units or assets into separate,
individual companies, each operating independently of the
others.

19. Types of De-Merger
• Spin-Off: The parent company distributes shares of one of its
subsidiaries to its existing shareholders, creating a new independent
company. Shareholders of the parent company become shareholders of
the new entity in proportion to their existing ownership.
• Carve-Out: A portion of the parent company's assets or business
division is sold to the public through an initial public offering (IPO),
making it a separate publicly traded company. The parent company
retains some ownership of the new entity.
• Equity Carve-Out: Similar to a carve-out, but instead of selling
assets, the parent company sells a minority stake in the subsidiary to
the public, retaining a controlling interest.
• Split-Up: The parent company divides its operations into multiple
companies, each taking ownership of specific assets and liabilities, and
then distributes the shares of these new companies to its shareholders.

20. Reverse merger
• A reverse merger, also known as a reverse takeover (RTO) or
reverse IPO, is a type of corporate transaction where a private
company acquires a public company. Unlike a traditional
merger, where one company merges with and absorbs another
company, in a reverse merger, the private company becomes
the controlling entity and takes over the public company.

21. The process of a reverse merger typically
involves the following steps:
• Selection of a Public Company: The private company seeking to go
public through a reverse merger identifies a suitable public company
with an existing listing on a stock exchange. This public company is
sometimes referred to as a "shell company" because it may have
limited operations or assets but maintains its public trading status.
• Negotiation and Agreement: The private company negotiates a deal
with the owners or shareholders of the selected public company. The
terms of the agreement may involve the issuance of new shares of the
private company to the shareholders of the public company, effectively
giving them ownership in the combined entity.

22. • Shareholder Approval: Shareholders of both the private and public
companies must approve the merger, as per the applicable laws and
regulations.
• Legal and Financial Due Diligence: The private company conducts due
diligence on the public company to assess its financial and legal standing
and ensure its suitability for the reverse merger.
• Transaction Completion: Once all approvals and due diligence are
completed, the private company acquires the public company, and the
ownership structure of the combined entity changes. The private
company's shareholders now become the majority owners of the newly
formed public company.
• Public Trading Status: Following the merger, the public company's
stock is typically rebranded with the name of the private company and
its trading symbol. The private company's shares are now publicly
tradable on the stock exchange.

23. Reverse acquisition
• A reverse acquisition, also known as a reverse takeover (RTO) or
reverse merger, is a corporate transaction in which a public company
acquires a private company, resulting in the private company
becoming the controlling entity. This process is "reverse" because the
private company takes over the publicly traded company, contrary to a
typical acquisition where a larger company acquires a smaller one.

24. The Key Elements Of A Reverse
Acquisition:
• Selection of a Public Company: The private company seeking to gain
public listing and access to the capital markets identifies a suitable
public company to acquire. This public company is often referred to as
a "shell company" or a "listed company" because it already has a stock
exchange listing but may have limited or no significant operations.
• Negotiation and Agreement: The private company negotiates a deal
with the owners or shareholders of the selected public company. The
terms of the agreement may involve the issuance of new shares of the
private company to the shareholders of the public company, which
results in the public company's shareholders becoming the majority
owners of the combined entity.

25. • Due Diligence: As part of the process, the private company conducts due
diligence on the public company to assess its financial and legal standing
and ensure its suitability for the reverse acquisition.
• Shareholder Approval: Shareholders of both the private and public
companies must approve the reverse acquisition, as per the applicable
laws and regulations.
• Transaction Completion: Once all approvals and due diligence are
completed, the private company acquires the public company, and the
ownership structure of the combined entity changes. The private
company's shareholders now become the majority owners of the newly
formed public company.
• Post-Acquisition Operations: Following the reverse acquisition, the
operations and business of the private company become the core
activities of the publicly traded company. The public company's stock is
typically rebranded with the name of the private company, and its trading
symbol may be changed as well.

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