Consolidation, mergers, and joint ventures are the concepts of the business when a business acquires another business. The arrangements may be different from company to company, or the joining scheme may be different. Let’s discuss other concepts related to consolidation, mergers, and joint ventures.
Consolidation
Consolidation is when assets, liabilities, and other items of the financial statements of two or more companies are joined together. The combination of the businesses results in the parent and subsidiary relation. There can be more than one subsidiary in the company with different relations with each other. The consolidation process takes place when the company’s controlling interest (subsidiary) is acquired by acquiring company (parent).
The process of consolidation results in the goodwill of purchase on the bargain option. Goodwill is recorded in the books of the parent when consideration is given more than net assets acquired from the company. On the contrary, if consideration given is less than net assets acquired, it results in purchasing the bargain option.
In the process of consolidation, both companies remain separate legal entities and liable to their own contracts. However, the consolidated financial statement adjusts intra balance balances and profits/losses on inta group transactions. However, individual financial statements of the company shall report these balances and the impacts of the financial transactions.
Mergers
A merger is when two companies combine to produce one new entity. A newly formed company presumes the contractual assets and liabilities of both companies. Mostly, companies merging with each other are equal in size and agree on mutual terms.
Why the companies use a merger?
Following are the reasons that companies go for the merger,
1-) To gain market share
The merger provides a quick way to expand in some new markets. An existing company in the new market is merged that provides operating excellence. The excellence is brought by the local expertise of the existing company in a new market. Hence, merger helps in gaining of the market share.
2-) To reduce the cost
The merger provides synergy as the abilities of the two companies are combined. This increases operational efficiency and effectiveness of the operations. Hence, synergy arising due to mergers helps in the reduction of cost.
3-) To gain the brilliant growth
The merger opens new horizons of development and financial growth for the company. Combined revenue streams of the companies tend to produce higher financial matrices.
Types of the merger
1-) Conglomerate
A Conglomerate merger is when combining companies have unrelated businesses. If companies have nothing in common, it’s a pure conglomerate. However, if companies have unrelated businesses and target to gain some specific market/product is a mixed merger. Even, geographical locations of the companies can be different from each other.
2-) Congeneric
A congeneric merger is when companies combine similar products. Different aspects of the products like research & development, production, marketing, sales, after-sales, and other aspects of the product sales. The congeneric merger seems to provide a boost and further strength to the merger activity.
3-) Market expansion
The horizontal merger takes place between companies on the same level in the supply chain. If the companies on the same level of the supply chain merge their product or activities, it’s called Horizontal expansion.
The vertical expansion takes place between the companies on a different level of the supply chain. Operations-related activities are expected to be merged in this type of merger.
Joint venture
A joint venture is a formal arrangement where companies combine their resources to achieve some specific task. The companies share revenue and expenses from the venture. A joint venture increases the chances of success for a particular project because the different companies’ resources, expertise, and synergies are combined to produce some specific goals.
There are three main attraction for the company in a joint venture. These include resource leverage, cost savings, and combining of the resources.
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