question: How do companies make money from an acquired company?
comment: Most acquisitions are done for either or both of the following reasons: market expansion and market consolidation. The former happens when a company buys another company that makes things the purchasing company doesn't. This is done to either gain control of a profitable market segment, or improve supply chain efficiency (vertical integration). For instance, Google (software company) bought Motorola (cell phone company) so that Google could make its own cellphones without starting a division from scratch. This saved Google a ton of R & D money, and made their supply chain more efficient. Market consolidation is when a company buys a competitor in the same market to gain more control of that market, so they can set higher prices, reach more consumers, and have higher negotiating power in the industry. For example, when Alaska Airlines acquired Virgin America, where both companies did the same thing, and competed against each other. Alaska can now make more money by overtaking Virgin America routes, and saves money by not having to compete with Virgin on the same routes (and being able to set the price higher).
passages: Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter. They receive stock in the company that is purchasing the smaller subsidiary.
  
  Section::::Financing.:Financing options.
   The term "acqui-hire" is used to refer to acquisitions where the acquiring company seeks to obtain the target company's talent, rather than their products (which are often discontinued as part of the acquisition so the team can focus on projects for their new employer). In recent years, these types of acquisitions have become common in the technology industry, where major web companies such as Facebook, Twitter, and Yahoo! have frequently used talent acquisitions to add expertise in particular areas to their workforces.
  
  Section::::Different types.:Merger of equals.
   There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:
  
  BULLET::::- The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.
   BULLET::::- Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.
   Merger of equals is often a combination of companies of a similar size. Since 1990, there have been more than 625 M&A transactions announced as mergers of equals with a total value of US$2,164.4 bil. Some of the largest mergers of equals took place during the dot.com bubble of the late 1990s and in the year 2000: AOL and Time Warner (US$164 bil.), SmithKline Beecham and Glaxo Wellcome (US$75 bil.), Citicorp and Travelers Group (US$72 bil.). More recent examples this type of combinations are DuPont and Dow Chemical (US$62 bil.) and Praxair and Linde (US$35 bil.).
   The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company which may or may not become separately listed on a stock exchange.
  
  As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is ever challenging issue because of organizational differences. Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition:
   Section::::History.:The Great Merger Movement: 1895–1905.:Long-run factors.
   Section::::History.:Acquisitions.
   BULLET::::- Backward integration: This is a process by which a company acquires another company that produces the raw material or the ancillaries which are used by the former. This type of takeover guarantees, to a certain extent, an uninterrupted supply of raw materials and components at fair prices.
   There are a variety of reasons why an acquiring company may wish to purchase another company. Some takeovers are "opportunistic" – the target company may simply be very reasonably priced for one reason or another and the acquiring company may decide that in the long run, it will end up making money by purchasing the target company. The large holding company Berkshire Hathaway has profited well over time by purchasing many companies opportunistically in this manner.
   "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.
   BULLET::::- In an amalgamation, the companies which merge into a new or existing company are referred to as transferor companies or amalgamating companies. The resultant company is referred to as the transferee company.
  
  Section::::Accounting treatment (US GAAP).
  
  A parent company can acquire another company by purchasing its net assets or by purchasing a majority share of its common stock. Regardless of the method of acquisition; direct costs, costs of issuing securities and indirect costs are treated as follows:
  
  BULLET::::- Direct costs, Indirect and general costs: the acquiring company expenses all acquisition related costs as they are incurred.
   BULLET::::- Forward integration: It is a process by which a company acquires another company that make use of its products to manufacture finished goods. This type of acquisition can go up to the point of retail outlets.
   The vast literature on empirical studies over value creation in cross-border M&A is not conclusive, but points to higher returns in cross-border M&As compared to domestic ones when the acquirer firm has the capability to exploit resources and knowledge of the target's firm and of handling challenges.
   The economic history has been divided into "Merger Waves" based on the merger activities in the business world as:
  
  Section::::History.:Objectives in more recent merger waves.
  
  During the third merger wave (1965–1989), corporate marriages involved more diverse companies. Acquirers more frequently bought into different industries. Sometimes this was done to smooth out cyclical bumps, to diversify, the hope being that it would hedge an investment portfolio.
  
  Starting in the fifth merger wave (1992–1998) and continuing today, companies are more likely to acquire in the same business, or close to it, firms that complement and strengthen an acquirer's capacity to serve customers.
   BULLET::::- Hiring: some companies use acquisitions as an alternative to the normal hiring process. This is especially common when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires ("acquhires") the staff of the target private company, thereby acquiring its talent (if that is its main asset and appeal). The target private company simply dissolves and few legal issues are involved.
   Megadeals—deals of at least one $1 billion in size—tend to fall into four discrete categories: consolidation, capabilities extension, technology-driven market transformation, and going private.
  
  Section::::Motivation.:Other types.
  
  However, on average and across the most commonly studied variables, acquiring firms' financial performance does not positively change as a function of their acquisition activity. Therefore, additional motives for merger and acquisition that may not add shareholder value include:
   Kimberly-Clark bought Scott Paper in 1995 for $9.4 billion. In 1997, Kimberly-Clark sold its 50% stake in Canada's Scott Paper to forest products company Kruger Inc. and bought diaper operations in Spain and Portugal and disposable surgical masks maker Tecnol Medical Products. Augmenting its presence in Germany, Switzerland, and Austria, in 1999 the company paid $365 million for the tissue business of Swiss-based Attisholz Holding. Adding to its offerings of medical products, the company bought Ballard Medical Products in 1999 for $774 million and examination glove maker Safeskin in 2000 for about $800 million.
   Section::::Documentation.
  
  The documentation of an M&A transaction often begins with a letter of intent. The letter of intent generally does not bind the parties to commit to a transaction, but may bind the parties to confidentiality and exclusivity obligations so that the transaction can be considered through a due diligence process involving lawyers, accountants, tax advisors, and other professionals, as well as business people from both sides.
   The majority of companies acquired by Cisco are based in the United States (U.S.) and a total of 149 companies have been acquired . Most of the companies acquired by Cisco are related to computer networking, with several LAN switching and Voice over Internet Protocol (VoIP) companies included in the list of acquisitions.
  
  Section::::Acquisitions.
   Section::::Acquisition.
   Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:
  
  Section::::Financing.:Cash.
  
  Payment by cash. Such transactions are usually termed acquisitions rather than mergers because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.
  
  Section::::Financing.:Stock.
   By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. The owner may also inherit debt and even litigation.
   Corporate acquisitions can be characterized for legal purposes as either "asset purchases" in which the seller sells business assets to the buyer, or "equity purchases" in which the buyer purchases equity interests in a target company from one or more selling shareholders. Asset purchases are common in technology transactions where the buyer is most interested in particular intellectual property rights but does not want to acquire liabilities or other contractual relationships. An asset purchase structure may also be used when the buyer wishes to buy a particular division or unit of a company which is not a separate legal entity. There are numerous challenges particular to this type of transaction, including isolating the specific assets and liabilities that pertain to the unit, determining whether the unit utilizes services from other units of the selling company, transferring employees, transferring permits and licenses, and ensuring that the seller does not compete with the buyer in the same business area in the future.
   To account for this type of investment, the purchasing company uses the equity method. Under the equity method, the purchaser records its investment at original cost. This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.
  
  Treatment of "Purchase Differentials": At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.
  
  Purchase differentials have two components:
  
  BULLET::::- The difference between the fair market value of the underlying assets and their book value.
  