Consolidation (business)

In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the Halsbury's Laws of England, amalgamation is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company or the transfer of one or more companies to an existing company".

For other uses, see Consolidation (disambiguation).

Overview[edit]

Consolidation is the practice, in business, of legally combining two or more organizations into a single new one. Upon consolidation, the original organizations cease to exist and are supplanted by a new entity.^[1]

Access to new technologies/techniques

Access to new clients

Access to new geographies

Cheaper financing for a bigger company

Seeking for hidden or nonperforming assets belonging to a target company (e.g. real estate)

Bigger companies tend to have superior bargaining power over their suppliers and clients (e.g. )

Walmart

Synergies

Statutory Merger: a business combination that results in the liquidation of the acquired company's assets and the survival of the purchasing company.

Statutory Consolidation: a business combination that creates a new company in which none of the previous companies survive.

Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the of the acquired company and both companies survive.

Common stock

Variable interest entity

There are three forms of business combinations:

Parent-subsidiary relationship: the result of a stock acquisition where the parent is the acquiring company and the subsidiary is the acquired company.

Controlling Interest: When the parent company owns a majority of the common stock.

Non-Controlling Interest or : the rest of the common stock that the other shareholders own.

minority interest

: when the parent owns all the outstanding common stock of the subsidiary.

Wholly owned subsidiary

In an amalgamation, the companies which merge into a new or existing company are referred to as transferor companies or amalgamating companies. The resultant company is referred to as the transferee company.

Direct costs, indirect and general costs: the acquiring company expenses all acquisition related costs as they are incurred.

Costs of issuing securities: these costs reduce the issuing price of the stock.

Reporting intercorporate interest—investments in common stock[edit]

20% ownership or less—investment[edit]

When a company purchases less than 20% of the outstanding common stock, the purchasing company's influence over the acquired company is not significant. (APB 18 specifies conditions where ownership is less than 20% but there is significant influence.)

The purchasing company uses the cost method to account for this type of investment. Under the cost method, the investment is recorded at cost at the time of purchase. The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.

Liquidating dividends: Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition. Regular dividends are recorded as dividend income whenever they are declared.

Impairment loss: An impairment loss occurs when there is a decline in the value of the investment other than temporary.

20% to 50% ownership—associate company[edit]

When the amount of stock purchased is between 20% and 50% of the common stock outstanding, the purchasing company's influence over the acquired company is often significant. The deciding factor, however, is significant influence. If other factors exist that reduce the influence or if significant influence is gained at an ownership of less than 20%, the equity method may be appropriate (FASB interpretation 35 (FIN 35) underlines the circumstances where the investor is unable to exercise significant influence).

To account for this type of investment, the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.

Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.

Purchase differentials have two components: