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An alternative scenario might arise in which the acquiring company obtains control of the target
but does not acquire all of the target’s outstanding shares. For example, if the acquiring company in
the above example were able to acquire only 85% of the target’s outstanding shares, there would be
a 15% non-controlling interest in the target (this 15% is also known as a minority interest). The
acquiring company would still recognise 100% of the fair value of the target’s assets and liabilities
in its consolidated financial statements. In addition, it would recognise either the fair value of the
non-controlling interest, or the proportionate share of identifiable net assets acquired, as an equity
item, and would calculate goodwill as the difference between the amount it paid for the target plus
the value attributed to the non-controlling interest and the fair value of the target’s net assets.12 What is goodwill in the context of merger accounting? What must an acquiring company do if the
value of an acquired company is revealed to have declined after a merger?13 Describe target companies you think would yield substantial goodwill once acquired.CONCEPT REVIEW QUESTIONS 21-5
21-6 REGULATION OF MERGERS AND
ACQUISITIONS
In this section, we describe the most important regulations that govern corporate control activities, and
explain why international corporate control regulations have recently become much more important.21-6a ANTITRUST REGULATION
Mergers, especially horizontal mergers, present the possibility of creating corporate giants that have the
potential to reduce competition. For this reason, antitrust enforcement seeks to prevent mergers that are
deemed anticompetitive. The following sections outline the major aspects of various antitrust laws, starting
with the guidelines established by regulatory agencies for determining the anticompetitive potential of a merger.
As discussed below, international regulation of M&A activity has increased in importance in recent decades.Determination of anti-competitiveness
The Herfindahl Index (HI) (also known as the Herfindahl–Hirschman Index) is often used to determine
market concentration. The HI is calculated as the sum of the squares of each company’s percentage
of sales within a market (industry). For example, if there are three companies in an industry, and they
account for 50%, 30% and 20% of total sales, the HI Index would be 3,800 (50^2 + 30^2 + 20^2 ). If the smaller
two companies merged, the HI Index would increase to 5,000.
The HI can be used to establish a range of concentration levels within a market or industry:HI > 2,500 Highly concentrated
HI = 1,500 to 2,500 Moderately concentrated
HI < 1,500 Not concentratedLO21.5