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A business combination is the situation whereby a company takes control of one or more businesses. The most common cases are mergers, acquisition of equity or shares of the company that can be total or partial.
The main goal of the business combination is the total or partial acquisition to manage the target company. This is achieved well when the percentage of control of the company is greater than 50%, or when it is a majority shareholder, but does not exceed 50%. In the latter case it should be reflected in the company by laws that, despite not having the absolute majority, the relative majority is accepted as a way of possessing total management.
For strategic purposes, the business combination can serve among other purposes for:
- Diversify line of products or services.
- Get more market share in a sector.
- Avoid hatching a new competitor in the market.
- Start in a different place, but in the same sector.
- Acquire assets or patents directly, instead of buying them.
Types of business combinations
As we mentioned earlier, a business combination can occur in different ways:
- Fusion or cleavage of companies. It consists of the union or division of companies respectively.
- Acquisition via assets. Try to acquire assets, rights and obligations of the company.
- Acquisition of Actions or participations. It arises from obtaining via primary and / or secondary market.
- Other ways that trigger the takeover without explicit investment. Although they are not very frequent, it is usually the case, for example, as a result of a conditional agreement between both parties.
How a business combination is done
To properly develop a business combination, certain phases must be carried out:
- Determine the “acquiring company”, which will be the one that absorbs the “acquired company”. According to PGC in order to know what each one is, some significant differentiating element must be taken into accounts, such as the volume of income, net worth or fair value if applicable. When there is a case where there is a technical tie between the two companies, instead of stating that “A” absorbs “B”, it is said that “A” and “B” gives rise to a new company “Z”.
- After determining the role of each company, you have to calculate the fair value of the company to acquire, since, although the value may appear in accounting, a fair value of the transaction must be established as of business combination.
- Subsequently, the accounting process is liquidated so that the operation takes effect, being able to originate goodwill during the process.
Examples of business combinations
Here are three examples of real business combinations:
- Case of acquisition of the car of Spanish origin “Seat” by the German “Volkswagen”. The acquiring company is “Volkswagen” and the acquired “Seat”. The operation was executed for a value of 80,000 million pesetas (about 480 million euros) for an amount of 51% of the value of the company, thus obtaining an absolute majority in the management of the company.
- Case of merger between Banco Bilbao, Banco Vizcaya and Argentaria Public Banking. The companies are of similar sizes and there is not one that stands out in any significant value, so the merger of the three entities gives rise to a new company, “BBVA” (Banco Bilbao Vizcaya Argentaria).
- Case of company spin-off, as was the case between “eBay” and “Paypal”. Initially “Paypal” was a service integrated in the online giant “eBay”, but with the rise of the sector Fintech and the need for “Paypal” to have its own brand, the split was created creating a new company.