12.1 — Overview of Module
Types of Merger / Acquisition
Mergers and acquisitions can be classified according to the nature of the enlarged group.
Horizontal Integration — Results when two entities in the same line of business combine. Example: Recent bank and building society mergers.
Vertical Integration — Results from the acquisition of one entity by another that is at a different level in the chain of supply. Example: UK breweries have moved heavily into the distribution of their products through public houses.
Conglomerate — Results when two entities operating in unrelated businesses combine.
Terminology
The term 'merger' is usually used to describe the joining together of two or more entities.
Strictly, if one entity acquires a majority shareholding in another, the second is said to have been acquired (or 'taken over') by the first. If the two entities join together to submerge their separate identities into a new entity, the process is described as a merger.
In fact, the term 'merger' is often used even when an acquisition/takeover has actually occurred, because of the cultural impact on the acquired entity—the word merger makes the arrangement sound like a partnership between equals.
Indicative Syllabus Content
- Recognition of the interests of different stakeholder groups in mergers, acquisitions and company valuations.
- The reasons for merger or acquisitions (e.g. synergistic benefits).
- Forms of consideration and terms for acquisitions (e.g. cash, shares, convertibles and earn-out arrangements), and their financial effects.
- The post-merger or post-acquisition integration process (e.g. management transfer and merger of systems).
- The function/role of management buy-outs and venture capitalists.
- Types of exit strategy and their implications.
- The reasons for (e.g. strategic change, opportunity cost of investment) and mechanisms of demerger or divestment.
- The implications of regulation for business combinations. (Note: Detailed knowledge of the City Code and EU competition rules will not be tested).
Relevant IFRS / IAS Standards
The following standards from Module 14 — IFRS and IAS apply directly to the concepts covered in this section.
| Standard | Why Relevant to This Section |
|---|---|
| IFRS 3 — Business Combinations | The primary standard governing all acquisitions and mergers — acquisition method, goodwill calculation, and fair value of consideration (cash, shares, convertibles) |
| IFRS 10 — Consolidated Financial Statements | Post-acquisition, the enlarged group must be consolidated; the control definition determines what enters the consolidation |
| IAS 36 — Impairment of Assets | Goodwill arising from a business combination must be tested for impairment annually, regardless of whether indicators exist |
| IAS 32 — Financial Instruments: Presentation | Forms of consideration — shares and convertibles — are classified as equity or financial liability under IAS 32 |
| IFRS 9 — Financial Instruments | Earn-out arrangements and contingent consideration are financial instruments measured under IFRS 9 |
| IFRS 5 — Non-current Assets Held for Sale | Relevant to exit strategies and divestments mentioned in the syllabus — assets being disposed of are classified and measured under IFRS 5 |
| IAS 12 — Income Taxes | Deferred tax arises on fair value adjustments made at acquisition; the acquirer inherits the target's tax base differences |