6. Acquisition of a Majority Interest
Cash
80%
Acquiree
Acquirer Shares
80% 20% Noncontrolling interest
Acquiree
Editor's Notes
A business combination occurs when the acquiring company, in this case PCO, identifies and targets an acquiree, in this ECO. There are a number of ways that PCO can go about buying the business of ECO. This is referred to as deal structure. Let’s explore the various alternatives.
The first alternative is for PCO to approach ECO and offer to purchase the assets and the business itself from ECO. PCO in this case pays cash to ECO as consideration. At the end of the transaction, PCO now owns the assets of ECO and the business. ECO is sitting on a pile of cash that it received from PCO and is free to do whatever it wants with that cash.
Another way to accomplish largely the same thing, however without cash, is to pay ECO with PCO shares as consideration for the ECO assets. ECO carries on as an owner, but as an owner of PCO. The PCO legal entity now carries on the ECO business using the assets it purchased.
A third deal structure is for PCO to make an offer to purchase the shares of ECO from the ECO shareholders. If successful, ECO the company and the business within the company, will become a subsidiary of PCO. PCO will pay cash to the ECO shareholders, who will no longer have any interest in the either PCO or ECO going forward.
The fourth deal structure, similar to the third has PCO acquiring the ECO shares from the ECO shareholders. Instead of paying cash, PCO uses its own shares as considerations. The ECO shareholders now become minority shareholders in PCO.
The acquisition of GCO looked like this. PCO acquired 80% of GCO’s shares by paying cash of $4,120. PCO now holds GCO shares as a majority controlled subsidiary with a 20% noncontrolling interest held by the previous shareholders. PCO will have to consolidate GCO in preparing its annual financial statements to comply with GAAP. So far, no differences from what was discussed in the previous module.
