accounting for m&a

7/27/2019 Accounting for M&A

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ACCOUNTING FORMERGERS &

ACQUISITIONS

ARPITA KALUBARME 84


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Introduction

Benefits / Risks

Types of M&A

Legal Perspective

Takeover defences

Journal Study & Accounting Standards

CONTENTS


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TYPES OF MERGERS AND ACQUISITIONS

A merger in which two firms in the same industry combine Often in an attempt to achieve economies of scale and/or

scopeHorizontal

A merger in which one firm acquires a supplier or anotherfirm that is closer to its existing customers

Often in an attempt to control supply or distributionchannels

Vertical

A merger in which two firms in unrelated businessescombine.

Purpose is often to diversify the company by combining

uncorrelated assets and income streams

Conglomerate

Also called as Market-Extension Merger to help expandthe market base of the product

A merger or acquisition involving a Canadian and aforeign firm a either the acquiring or target company

Cross-border(Interntl)

M&As


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TYPES - LEGAL PERSPECTIVE

With willingness and consent of acquire companys executives or Board ofDirectors

Takeover by change in its management & control through negotiationsbetween the existing promoters and prospective investor

Generally, friendly takeover takes place as per the provisions of Section 395of the Companies Act, 1956

Friendly Takeover

Target has no desire to be acquired

The hostile takeover takes place as per the provisions of SEBI (SubstantialAcquisition of Shares and Takeover) Regulations

Defense Tactics used by target : Shareholder Rights Plan, Poison Pill, WhiteKnight, Crown Jewels

Hostile Takeover

For financially weak companies which at the end of the previous financialyear accumulated losses which has resulted in erosion of more than 50% butless than 100% of its net worth

Takeover of a financially sick company by a financially rich company

Usually, as per the provisions of Sick Industrial Companies (SpecialProvisions) Act, 1985 to bail out the former from losses

Bail Out Takeover


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TAKEOVER DEFENSES

White KnightFriendly potential acquirer sought by a target threatened by

an unwelcome suitor

Shark RepellentAmendments to a company charter made to forestall

takeover attempts.

Poison Pill

Measure taken by a target firm to avoid acquisition; forexample, the right for existing shareholders to buyadditional shares at an attractive price if a bidderacquires a large holding.


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PARTICIPANTS IN THE M&A PROCESS

Target

Organisation

Buyer Seller

M&A Lead Advisor M&A Lead Advisor

Stakeholder Public

Shareholder

Board ofdirectors

Antitrust division

Customer

Employees

Banks

Internal

&external

experts Strategy advisors

Tax experts Legal experts

Accountants

Financing partners

Industrial

specialists

Investor Relation /

Communication

Stakeholder Public

Shareholder

Board of directors

Antitrust division

Customer

Employees

Banks

Internal

&external

experts Strategy advisors

Tax experts

Legal experts

Accountants

Financing partners

Industrial specialists

Investor Relation /

Communication

One of the few

processes which is

cross functional in

an organisation


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M&A DEAL PROCESS

Strategic PlanningAssess and

Execute deal

Documentation &

Closure

Implementation &

monitoring ofoutcomes

Value Creation

Rationale/

Strategy for

M&A

Target

Selection

Due

Diligence

Negotiations

Binding Bid & SPA /

SHA

Completion

Closure

- M&A success depends on value creation through the entire continuum

Indicative bid

- Valuation

- Risk

- Key issues

- Warranties

- Indemnities

- Disclosure

- Audit/Review

- Settlement

Integration

- People

- Review

- MIS

- Financing

Appoint

advisors


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THE MICHIGAN BUSINESS LAW

JOURNAL SUMMER 2008

Mergers & acquisitions in India: A Primer was apiece written by Ashish Joshi in this journal

This article gives the background of the Indian

economy- closed economy in the pre-1991 era andliberalization post 1991

Mergers and acquisitions by Indian companieswere very less in the pre-1991 era, but 2005onwards they increased phenomenonally

The article gives the legal details of the clauses ofmergers and acquisitions as per Indian laws- of theCompanies Act 1956, Companies (Court) Rules,1959, and Income Tax Act, 1961


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CONTINUED

Accounting Standard 14 of the Institute ofChartered Accountants of India relates toaccounting for amalgamations

The Accounting Standard distinguishes between

two types of amalgamation- i) An amalgamation inthe nature of merger & ii) An amalgamation in thenature of purchase/acquisition

The accounting treatment of the amalgamationdepends on the nature of the amalgamation

In the case of a merger, the pooling of interestsmethod is to be applied, and for an acquisition thepurchasemethod is to be adopted


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CONTINUED

Under the pooling of interests method, the assets

and liabilities of the merging companies areaggregated and recorded by the transferee

company at their existing carrying amounts except

to the extent necessary to ensure uniformity of

accounting policy

Similarly, the reserves appearing in the balance

sheet of the transferor company are carried into the

balance sheet of the transferee company

The difference between the amount recorded as

share capital issued consequent to the swap ratio

and the amount of the share capital of the transferor

company is adjusted in the reserves


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CONTINUED

Under the purchase method, the assets and liabilities ofthe transferor company are incorporated into the booksof the transferee company either at their existingcarrying amounts or at their fair values on the date ofamalgamation

The excess of purchase consideration (whetherconsisting of shares, cash, or other assets) over the netbook value of assets (i.e., minus liabilities) is treated asgoodwill that has to be amortized on a systematic basisover a period not exceeding five years, unless a longer

period can be justified as its useful life In case of a shortfall, the difference is adjusted as a

capital reserve


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Pooling of Interest

The transferee company records theassets, liabilities and reserves of the

transferor company at the existingamount, after makingthe adjustments to wipe off the effectof divergent accounting policies, ifany

The identity of the reserves of thetransferor company is preserved andthese appear in the same form in thebooks of the transferee company aswell

Purchase Method

The transferee company is free

to restate the assets and liabilities ofthe transferor company at theirfair value instead of book value

The identity of the reservesother than statutory reserves likeDevelopment Rebate Reserve,Investment Allowance Reserve etc,is not preserved

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