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Accounting Business Combinations

Business Combinations
A merger boom comparable to those of the 1960s and mid-1980s occurred in the 1900s and into the new century. The merger activity of the 1960s was associated with increasing stock prices and heavy use of pooling of interests accounting. The mid-1980s activity was associated with a number of leverage buyouts and acquisitions involving junk bonds. Merger activity in the early 1990s, on the other hand, appeared to involve primarily purchases with cash and standard debt instruments. By the mid-1990s, however, many business combinations were being effected through exchanges of stocks.

Problem:

a) Which factors do you believe were the most prominent in encouraging business combinations in the 1990s? Which of these was the most important? Explain why.
b) If a major review of the tax laws were undertaken, would it be wise or unwise public policy to establish greater tax incentives for corporate mergers? Propose three incentives that might be used.
c) If the FASB were interested in encouraging more mergers, what action should it take with regard to revising or eliminating existing accounting standards? Explain.
d) Why were so many of the business combinations in the middle and late 1990s affected through exchanges of stock?

Solution Preview

a) Which factors do you believe were the most prominent in encouraging business combinations in the 1990s? Which of these was the most important? Explain why.
The most prominent factors that were responsible for the boom of combinations were to increase the size of the company, building up an empire through a jump in size, market gains, getting technological edge, for entering different markets, increasing efficiency, increasing economies of scale, increasing shareholder value, lowering the cost of capital, reducing bankruptcy costs and increasing the debt capacity.
Mega-merger deal of $182 billion AOL-Time Merger: This is the most important deal because it gives the conglomerate the ability to enter any of the US homes and reach every American through one media or the other. It gave the company a dominating position in music, publishing, news, entertainment, cable and internet industry. ...

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