Merger and Acquisition Finals

Question 1

A.) i.) Definition of Goodwill. (9 marks)

Goodwill is the established reputation of a business regarded as quantifiable

asset. Goodwill is an intangible asset that arises as a result of the acquisition
of one company by another for a premium value.

ii.) How do you estimate goodwill from the accounting point of view?

Goodwill are calculated in the functional currency of the foreign Sub and then
re-translated at closing date. The rate previously used is the rate at the
acquisition date. Exchange difference is recognized in Other Comprehensive
income (OCI) and credited to foreign exchange reserve within equity.

B.) In the open market, how do you build up a stake, advantages and
disadvantages (at least 3-5 each) (16 marks)

Question 2

A.) Study conglomerate merger, advantages and disadvantages. (15 marks)

A conglomerate merger is a merger between firms that are involved in totally
unrelated business activities. There are two types of conglomerate mergers
which is pure and mixed. Pure conglomerate mergers involve firms with
nothing in common, while mixed conglomerate mergers involve firms that are
looking for product extensions or market extensions.

ADVANTAGES OF CONGLOMERATE MERGER

DIVERSIFICATION OF BUSINESS

Conglomerate merger enables the company to diversify its business. It helps to overcome
risks associated with the vulnerable market. If one business sector is declining, the
business has the opportunity to overcome the unfavorable situation by performing well in
the other diversified sector. It is also termed as a conglomerate diversification strategy.
GAIN SYNERGIES

A combined entity always performs better than each individual entity. It brings synergies
by increasing the sales and revenue of the combined entity.

UTILIZATION OF EXCESS CASH

When a business has excess cash but does not have enough opportunity to expand in its
sector, then the business invests such excess cash into another company of different
sector to utilize the idle funds.

IMPROVES CUSTOMER BASE

With this type of merger, the company can cross-sell its products to the customers of the
other company. This helps to build a broader customer base. This, in turn, helps to
increase the sales and profits.

UTILIZATION OF HUMAN RESOURCES

The business has the option to utilize the managers from different sectors into its business,
whenever the need arises. This leads to best usage of human resources.

ECONOMIES OF SCALE

It helps the business to achieve economies of scale. Various costs of business like
Research and development costs, cost of advertising, etc. are spread out to numerous
business units. It helps in reducing the production cost per unit and helps in achieving
economies of scale.

DISADVANTAGES OF CONGLOMERATE MERGER

NO PAST EXPERIENCE

In a conglomerate merger, the companies merging together do not have any past
experience about the functionalities of each other. This can lead to severe
mismanagement in the organization.
SHIFT IN FOCUS

In a conglomerate merger, two unrelated companies merge. Management requires a lot of

efforts to understand the new business sector, operations of business, etc. Hence,
companies shift their focus from core business activity to other business areas which can
lead to poor performance in all the sectors.

COMPLICATION

It leads to the merger of different human values and employees, who have experience of
working in the different industry. This leads to complication in human relationships and
behavior.

GOVERNANCE ISSUE

When two companies come together will different background, governance is a big issue.
All the past customers with their accounts are transferred into the new company which
may be following different accounting method. This creates a lot of problem for the
management.
B.) Problem in integration ( Foreign company take over a local company) (10marks)