Name: Ester Intan Sukma

ID: 11190002
Chapter 1 – Business Combination

Definition of Business Combination:

Business Combination is a union of two or more separate and independent companies to
become under the control of a single management team business entities.

The 3 Types of Business Combinations:

1). Horizontal integration: The 2 companies work in the same business and markets.
Example: The company of tempe acquire the company of tahu.
2). Vertical integration: The 2 companies have different operations, but are related in stages
of production or distribution.
Example: The company of medicine acquire the main company of medicine, so after
acquisition hope will reduce cost of shipping.
3). Conglomeration: The 2 companies are unrelated and offer different products or services.
Example: The company of food acquire the company of shoe, that’s the different of
product and service, then this acquisition hope will reduce risk and compensate for changes
in income.

Advantages for Business Combinations:

-Cost Advantage→ After the acquisition will make it cheaper for the company to obtain the
required facilities through the merger than through the development.
-Lower Risk→ Buying established product lines (strategies) and markets is usually less risky
than developing new products and markets. This business combination is less risky especially
when the goal is diversification (trying profit opportunities from products or services).
-Fewer Operating Delays→ factory facilities acquired through a business combination can be
expected to operate immediately and comply with regulations related to environmental
standards, whereas the construction of new company facilities may result in a number of
delays, for example having to obtain a permit from the government.
-Avoidance to take overs→ several companies join forces to prevent acquisitions between
them, because smaller companies tend to be more vulnerable to takeovers. Some of them use
an aggressive buyer strategy as the best defense against attempted takeovers by other
companies.
-Acquisition of Intangible assets→ A business combination involves combining both
intangible and tangible assets. Thus, the acquisition of patent rights, management expertise
may be the main factors motivating a business combination.
-Other Reasons→ In addition to expansion, companies may choose to merge to obtain tax
benefits, e.g. Land and Building Tax, corporate tax, etc.

The Legal Form of Business combinations:

-Merger→ When one company transfers its net assets to another.

-Consolidation→ When companies transfer their net assets to a new formed corporation.

The Accounting Concept of Business Combinations:

1. One or more corporation become subsidiaries
2. One company transfers it net assets to another
3. Each company transfers its net assets to newly formed corporation.
Alternative approaches to the financing of mergers and acquisitions.
-Pooling Method uses historical book values to record combinations rather than recognizing
fair values of net assets at the transaction date. Most of the detailed issues related to pooling
concern the original recording of the combination.
-Purchase Method, Purchase accounting requires the recording of assets acquired and
liabilities assumed at their fair values at the date of combination.