A business combination occurs when two or more business entities combine into a single reporting entity.
Under U.S. GAAP, a combination occurs between an acquirer and an acquiree(s). The acquirer is the firm acquiring while the acquiree is the firm being acquired. These two designations can be misleading, as they are distinct from the size of the firms involved. In other words, the smaller company can be the acquirer.
The three forms of business combinations are mergers, acquisitions, and consolidations.
A business combination among two entities is considered a merger when only one entity remains after the combination. Thus, the acquirer completely absorbs the acquiree.
A business combination is an acquisition when the acquirer and acquiree remain as distinct entities. Thus, with an acquisition, the acquirer becomes the parent company and the acquiree becomes the subsidiary company. An additional feature of an acquisition is that the acquirer need not purchase 100% of the outstanding shares of the acquiree. Rather, the acquirer must purchase enough shares to exert control over the acquiree. In most cases, this is a minimum of 50% of the outstanding shares of the acquiree. However, in some cases the acquirer can exert control over the acquiree with less than 50% of the outstanding shares.
A business combination is a consolidation when the two operations combine into a completely new entity. In other words, a new entity is created to take over the assets of the two business entities.
