BU487 Chapter 3: Chapter 3 - Business Combinations
Chapter 3 – Business Combinations
Business combination – when one company (the acquirer) unites with or obtains the control of a
business
Two key aspects:
oControl
oBusiness
Two Key aspects:
Inputs
Processes applied to those inputs
Reasons for Business Combination
Defend a competitive position
Diversify into a new market and or geographic region
Access to new customers, products or services, expertise or capabilities (technology)
Control – all 3 must be met for the investor to have control, if so then the investor is called the parent
and the investee is called the subsidiary
Three characteristics:
oThe investor has power to direct activities of the investee
oThe investor has exposure, or rights, to variable returns from its involvement with the
investee
oThe investor has the ability to use its power to affect the amount of return he/she is
going to receive
The definition of control requires that the investor has the ability to use its power over the investee to
affect the amount of return he is going to receive
Owning more than 50% of the voting shares usually but not always indicates control, how to have
control if you have less than 50%:
Irrevocable agreement with other shareholders to convey voting rights to you
If a company is holding less, but has the options or warrants to purchase shares which is
converted or exercised gives it more shares than, he could have the potential to have control
Other shareholders do not actively cooperate when they exercise their votes, e.g. deemed
control
Forms of Business Combinations
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