The New CFO Financial Leadership Manual, Second Edition

Chapter 21. Mergers and Acquisitions

There are a great many kinds of analysis needed when a company is contemplating an acquisition. For a full acquisition, involving the assumption of all financial, environmental, and legal liabilities, as well as all assets, there are a great many subsets of analysis to perform. However, for a lesser acquisition, such as the purchase of all or specific assets, the number of analyses is substantially less. In this chapter, the types of acquisition analysis are broken down into a wide range of categories, which makes it easier for a CFO to select just those needed for a specific type of acquisition. In addition, a complete checklist of merger and acquisition analysis questions is included in Appendix C.

Once due diligence is complete, the CFO must estimate the valuation of the acquiree, which can result in a broad range of possible prices. Several methods are described for making this determination.

The CFO must account for merger and acquisition transactions. The only allowable method used is the purchase method. There are also many situations where a company merely makes a small investment in another company, rather than making an outright purchase. This requires three possible types of accounting, depending on the size of the investment and the degree of control attained over the subject company—all three methods, which are the cost, equity, and consolidation methods, are described here. We also delve into special topics associated with mergers ...