Mergers and Aquisitions

Mergers and Acquisitions -Basics
1. Mergers:
a. Company A and B comes together and forms a new company named company C.
this is consolidation merger. In this merger brand new company is formed.
Acquiring companies often prefer this type of merger because it can provide them
with a tax benefit. Acquired assets can be written-up to the actual purchase
price, and the difference between book value and purchase price of the assets can
depreciate annually, reducing taxes payable by the acquiring company (we discuss
this further in part four of this tutorial).
b. Company A, B and C companies together and only A is running now. This is
purchase merger. Tax terms are again same as that of the consolidate merger.
2. Varieties of merger:
a. Horizontal merger: two companies that are in direct competition in the same
product lines and markets.
b. Vertical merger: a customer and company or a supplier and company. Think of a
cone supplier to an ice cream maker.
c. Market-extension merger: Two companies that sell the same products in different
markets.
d. Product-extension merger: Two companies selling different but related products in
the same market.
e. Conglomeration: Two companies that have no common business areas.
3. Acquisitions:
a. Acquisitions are slightly different from the mergers.
b. In acquisitions, one firm always acquires/purchases the.
c. Generally, all acquisitions are congenial (having similar business interest) in nature.
d. In merger, Payment can be made by the issue of shares, cash or in both. Or
acquiring company can buy all the assets of the company and make payment in
cash. The other company will have only cash left and debt if any it had already.
4. Reverse Acquisition:
a. It is a deal that enables a private company to get publicly listed in a relatively short
time period.
b. A reverse merger occurs when a private company that has strong prospects and is
eager to raise financing buys a publicly-listed shell company, usually one with no
business and limited assets.
c. The private company reverse merges into the public company, and together they
become an entirely new public corporation with tradable shares.
5. Types of Acquisitions:
a. All the types are same as that of mergers. Following two are additional ways if
acquisitions.
b. Another way to acquire a firm is to buy the voting stock. This can be done by
agreement of management or by tender offer. In a tender offer, the acquiring firm
makes the offer to buy stock directly to the shareholders, thereby bypassing
management. In contrast to a merger, a stock acquisition requires no stockholder
voting. Shareholders wishing to keep their stock can simply do so. Also, a minority
of shareholders may hold out in a tender offer.
c. A bidding firm can also buy another simply by purchasing all its assets. This
involves a costly legal transfer of title and must be approved by the shareholders of
the selling fi rm. A takeover is the transfer of control from one group to another.
Normally, the acquiring firm (the bidder) makes an offer for the target fi rm. In a
proxy contest, a group of dissident shareholders will seek to obtain enough votes to
gain control of the board of directors.
6. Objective of Merger/Acquisition:
a. All mergers and acquisitions have one common goal: they are all meant to create
synergy that makes the value of the combined companies greater than the sum of
the two parts.
b. The success of a merger or acquisition depends on how well this synergy is
achieved.
7. Synergy:
a. Synergy in simple words means after the merger/acquisition, the combined entity
must have benefits in various ways or we can say the value of the combined entity
should be more than the separate values of the each entities.
b. Synergy can be in the form of the :
i. Staff reduction.
ii.
iii.
iv.
v.
vi.
Economies of scale
Acquiring new technology.
Improved market reach and industry visibility
revenue enhancement
cost savings
Mergers and Acquisitions - Accounting
1.
There are two methods for the accounting:

a. Pooling of interest method. (Used for the Mergers)
b. Purchase method (Used for acquisition/purchase way)
2. AS 14 gives the following way to differentiate whether the amalgamation is in the nature
of the merger or purchase. If following 5 conditions are full filled then acquisition is in the
nature of purchase or even if one condition is not followed then amalgamation is in the
nature of purchase.
a. All the assets and liabilities of the transferor company are to be taken by the
transferee company at the book value.
b. Shareholders not less 90% of the transferor company must agree to be the
shareholders of the transferee company.
c. Consideration has to be discharged by the way of the issue of shares. Only the
amount in fractions has to be paid off in cash.
d. The transferee company must have intention to carry the business of the
transferee company.
e. No adjustments are to be made in the book values of the assets and liabilities of
the transferor company except for harmonizing the policies.
3. Pooling of Interest Method ( In the nature of merger):
a. The assets, liabilities and reserves of the transferor company are to be recorded at
their existing carrying amounts and in the same form as it was appearing in the
books of the transferor company.
b. The identity of the reserves of the transferor company is to be kept intact in the
balance sheet of the transferee company.
c. Difference between the amounts of share capital issued plus any other additional
consideration paid by the transferee company and the amount of the share capital
of the transferor company should be adjusted in Reserves.
d. The goodwill/capital reserve doesnt arrive in this case.
e. Since the assets are taken at the book values, there is no chance of additional
depreciation here. (see point 4(e) of purchase method.
4. Purchase method:
a. The assets and the liabilities of the transferor company are to be recorded at their
existing carrying amounts or, alternatively, the consideration should be allocated to
individual assets and liabilities on the basis of fair values at the date of
amalgamation while preparing the financial statements of the transferee company.
b. The identity of the reserves of the transferor company other than the statutory
reserves is not preserved. The identity of the statutory reserves is preserved in the
same form and is recorded in the books of the transferee company by a
corresponding debit to the amalgamation adjustment a/c.
c. Excess or shortfall of consideration over the value of net assets acquired should be
credited/ debited as capital reserve/goodwill, as the case may be. It is appropriate
to amortize goodwill over a period of not exceeding 5 years unless a longer period
is justified.
d. However, the amortization expense is deducted from the current years income but
it cannot be deducted from for the tax purpose.
e. Since assets in this method are taken at the fair market value and market value is
generally is more than the book value. The additional depreciation is charged on
the increase in the value of the assets. But for the tax purpose, increased
depreciation wouldnt be deductible.
5. Disclosure:
a. General
i. Names and general nature of business of the amalgamating companies
ii. Effective date of amalgamation for accounting purposes
iii. Method of accounting used to reflect the amalgamation and Exchange
Ratio
iv. Particulars of the scheme sanctioned by the Court
b. If Pooling of Interest Method is used:
i.
c.
Description and number of shares issued, together with the percentage of

each company equity shares exchanged.
ii. The amount of any difference between the consideration and the value of
net identifiable assets acquired and the treatment thereof.
If Purchase Method is used:
i. Consideration for the amalgamation and description of consideration
paid/payable
ii. The amount of difference between the consideration and the value of net
identifiable assets acquired and the treatment thereof including the period
of amortization of any goodwill arising on amalgamation.
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Mergers and Acquisitions -Basics

There are two methods for the accounting:

Description and number of shares issued, together with the percentage of

Entries of the Vendor Company

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