Mergers and Acquisitions


Regardless of what form a business takes—be it a sole proprietorship, partnership, or a corporation—the chances are reasonably good that its form will evolve over time. Companies of all sizes and types achieve a variety of objectives by merging, dividing, and restructuring. The terms most often used to describe all of this activity are mergers, acquisitions, and leveraged buyouts. The difference between a merger and an acquisition is fairly technical, having to do with how the financial transaction is structured. Basically, in a merger, two or more companies combine to create a new company by pooling their interests. In an acquisition, one company buys another company (or parts of another company) and emerges as the controlling corporation. The flip side of an acquisition is a divestiture, in which one company sells a portion of its business to another company. In leveraged buyouts one or more individuals purchase the company (or a division of the company) with borrowed funds, using the assets of the company they’re buying to secure (or guarantee repayment of) the loan. The loans are then repaid out of the company’s earnings, through the sale of assets, or with stock. Leveraged buyouts do not always work.

Mergers and acquisitions represent relatively radical ways in which companies are combined. On a more modest scale, businesses often join forces in alliances to accomplish specific purpose. In a joint venture, two or more companies combine forces to work on a project. The joint venture may be dissolved fairly quickly if the project is limited in scope, or it may endure for many years.

A consortium is similar to a joint venture, but it involves the combined efforts of several companies. Cooperatives also serve as a vehicle for joint activities. In a cooperative, a group of people or small companies with common goals work collectively to obtain greater bargaining power and to benefit from economies of scale. Like large companies, these cooperatives can buy and sell things in quantity; but instead of distributing a share of the profits to stockholders, cooperatives divide all profits among their members.

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Disambiguating Cash Budget


Most people plan expenditures for food, clothing, and other needs on the basis of expected income. Along with these short-term plans, many individuals and families use income estimates to plan for long-term activities, such as college expenses, the purchase of a house or car. This process of planning for the financial needs of the future is called budgeting. A budget, whether formal or informal, is a plan for utilization of anticipated resources.

The budget of a business serves much the same function as an individual or family budget. Like a personal or family budget, a business budget plans the expenditure of anticipated funds for immediate and long-term goals.

One budget common to both large and small businesses is called the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specific time period. For many companies, this time period is monthly for the first three months of the budget period, then quarterly for the remainder of the year. A typical cash budget is composed of four major sections:

  1. The receipts section. This section consists of the sum of the opening cash balance and estimated cash receipts for the budget period. For many firms, the major source of cash receipts is sales.
  2. The disbursement section. This section consists of all estimated cash payments for the budget period. Examples are payments for labor and materials, taxes, equipment purchases, and advertising.
  3. The cash excess or cash deficiency section. The entries in this section represent the difference between the totals of the receipts section and the disbursements section. If receipts are greater than disbursements, there is an excess of cash. If receipts are less than disbursements, there is a cash deficiency.
  4. The financing section. This section gives an account of any borrowing or loan repayments projected to take place during the budget period.

While the cash budget is useful to all companies, it is especially helpful to small firms because management can exercise more control in matching income with disbursements, in negotiating loans with the most favorable interest rates and terms, and in planning investments when there is an excess of cash.

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please contact www.asifjmir.com