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ACCOUNTING FOR MERGERS & ACQUISITIONS

ARPITA KALUBARME 84

CONTENTS
Introduction Benefits / Risks

Types of M&A
Legal Perspective Takeover defences Journal Study & Accounting Standards

BENEFITS & RISKS ASSOCIATED


RISKS Leadership Post-Merger Integration After-Effects

BENEFITS Undervalued Target Revenue Synergies Cost Synergies Financial Synergies Diversification Market Share

TYPES OF MERGERS AND ACQUISITIONS


Horizontal
A merger in which two firms in the same industry combine Often in an attempt to achieve economies of scale and/or scope
A merger in which one firm acquires a supplier or another firm that is closer to its existing customers Often in an attempt to control supply or distribution channels A merger in which two firms in unrelated businesses combine. Purpose is often to diversify the company by combining uncorrelated assets and income streams Also called as Market-Extension Merger to help expand the market base of the product A merger or acquisition involving a Canadian and a foreign firm a either the acquiring or target company

Vertical

Conglomerat e Cross-border (Interntl) M&As

TYPES - LEGAL PERSPECTIVE


Friendly Takeover
With willingness and consent of acquire companys executives or Board of Directors Takeover by change in its management & control through negotiations between the existing promoters and prospective investor Generally, friendly takeover takes place as per the provisions of Section 395 of the Companies Act, 1956

Hostile Takeover
Target has no desire to be acquired The hostile takeover takes place as per the provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations Defense Tactics used by target : Shareholder Rights Plan, Poison Pill, White Knight, Crown Jewels

Bail Out Takeover


For financially weak companies which at the end of the previous financial year accumulated losses which has resulted in erosion of more than 50% but less 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 (Special Provisions) Act, 1985 to bail out the former from losses

TAKEOVER DEFENSES
White Knight
Friendly potential acquirer sought by a target threatened by an unwelcome suitor

Shark Repellent
Amendments to a company charter made to forestall takeover attempts.

Poison Pill
Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.

PARTICIPANTS IN THE M&A PROCESS


Buyer Seller

M&A Lead Advisor

Target Organisation

M&A Lead Advisor

Internal & external experts


Strategy advisors Tax experts Legal experts Accountants Financing partners Industrial specialists Investor Relation / Communication

One of the few processes which is Stakeholder cross functional in an organisation 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

Stakeholder
Public Shareholder Board of directors Antitrust division Customer Employees Banks

M&A DEAL PROCESS


Strategic Planning Assess and Execute deal Due Diligence - Valuation - Risk Documentation & Closure Binding Bid & SPA / SHA - Warranties - Indemnities - Disclosure Implementation & monitoring of outcomes

Rationale/ Strategy for M&A

Closure - Financing

Target Selection Appoint advisors Indicative bid

Negotiations - Key issues

Completion - Audit/Review - Settlement

Integration - People - Review - MIS

Value Creation

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

THE MICHIGAN BUSINESS LAW JOURNAL SUMMER 2008


Mergers & acquisitions in India: A Primer was a piece written by Ashish Joshi in this journal This article gives the background of the Indian economy- closed economy in the pre-1991 era and liberalization post 1991 Mergers and acquisitions by Indian companies were very less in the pre-1991 era, but 2005 onwards they increased phenomenonally The article gives the legal details of the clauses of mergers and acquisitions as per Indian laws- of the Companies Act 1956, Companies (Court) Rules, 1959, and Income Tax Act, 1961

CONTINUED
Accounting Standard 14 of the Institute of Chartered Accountants of India relates to accounting for amalgamations The Accounting Standard distinguishes between two types of amalgamation- i) An amalgamation in the nature of merger & ii) An amalgamation in the nature of purchase/acquisition The accounting treatment of the amalgamation depends on the nature of the amalgamation In the case of a merger, the pooling of interests method is to be applied, and for an acquisition the purchase method is to be adopted

CONTINUED
Under the pooling of interests method, the assets and liabilities of the merging companies are aggregated 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

CONTINUED
Under the purchase method, the assets and liabilities of the transferor company are incorporated into the books of the transferee company either at their existing carrying amounts or at their fair values on the date of amalgamation The excess of purchase consideration (whether consisting of shares, cash, or other assets) over the net book value of assets (i.e., minus liabilities) is treated as goodwill that has to be amortized on a systematic basis over 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

Pooling of Interest
The transferee company records the assets, liabilities and reserves of the transferor company at the existing amount, after making the adjustments to wipe off the effect of divergent accounting policies, if any

Purchase Method
The transferee company is free to restate the assets and liabilities of the transferor company at their fair value instead of book value

The identity of the reserves of the transferor company is preserved and these appear in the same form in the books of the transferee company as well

The identity of the reserves other than statutory reserves like Development Rebate Reserve, Investment Allowance Reserve etc, is not preserved