Amalgamation Presentation

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Transcript of Amalgamation Presentation

AMALGAMATION OF COMPANIES

ACCOUNTING PERSPECTIVE

Contents

Business scenario Inorganic expansion Intent and structure of acquisitions Amalgamation - attributes Types of merger and steps involved Accounting for mergers Two types of methods of accounting InterInter-company holdings and transactions Innovative accounting

Business ScenarioIn globalised scenario, businesses increasingly need to reinvent themselves in order to grow, remain relevant and profitable. Constant need for:

Expansion Diversification Consolidation Backward/forward integration Reducing competition or even monopolisation organic inorganic

Strategies:

Inorganic ExpansionDifferent strategies for acquisition of business:

Acquisition of a running business on `going concern basis` Acquisition of assets Acquisition of business through management control

Intent of AcquisitionAcquisitionSmithlkine Beechem (now Glaxo)s acquisition of `Crocin`

IntentSmithkline intended to acquire only the brand and related assets as it had manufacturing facilities of its own Tatas wanted a pie of the lucrative European market for which it was imperative to have manufacturing facility within Europe Sangli Bank had a large branch network in Maharashtra which ICICI in its rapid expansion was eyeing

Tata Steels acquisition of Corus

ICICI Banks acquisition of Sangli Bank

Intent drives the Structure of AcquisitionAcquisitionSmithlkine Beechem (now Glaxo) acquisition of `Crocin` brand and related business

IntentBuyer only wanted the brand and assets. The seller wanted out of crocin business

StructureOutright Purchase Smithkline bought the assets and the seller got money. Consideration went to the seller company and not to its shareholders. Purchase of Shares Tata Steel paid cash to shareholders of Corus and took management control of Corus. Shareholders of Corus got money. Amalgamation/Merger Sangli Bank merged itself into ICICI Bank. Shareholders of Sangli Bank got shares of ICICI Bank.

Tata Steels acquisition of Corus

Largest shareholder in Corus intended to sell the shares. Tatas intended to acquire the shares and take control of Corus.

ICICI Banks acquisition of Sangli Bank

The shareholders of Sangli Bank intended to continue in the business of banking. ICICI was interested in rapid branch expansion under its own brand.

Amalgamation - Attributes

Amalgamation is also referred to as `merger`. Fusion of two or more existing companies. The company getting merged is called the `Transferor Company` Company in which it merges is called the `Transferee Company` All assets and liabilities of the transferor company gets transferred to the transferee company The transferee company pays consideration by issue of its equity shares/debentures and/or payment in cash The transferor company gets extinguished The shareholders of the transferor company become shareholders of the transferee company

Example of a MergerSay, A Ltd. acquires B Ltd. and they opt for a merger; then:

B Ltd.: Transferor Company will extinguish on merger A Ltd.: Transferee Company it will survive All the assets and liabilities of `B` will become assets and liabilities of `A` `A` being the buyer needs to pay compensation for the merger Shareholders of `B` are the sellers and therefore need to be compensated `A` will therefore pay compensation to shareholders of `B` by way of : issue of equity shares of `A` debentures of `A` and/or cash payment

Merger Two TypesForward Merger normal merger a bigger company acquires a smaller company and merges the smaller company into itself Reverse Merger though a bigger company acquires a smaller company; the structure given to the transaction is that the bigger company merges into the smaller company.

Generally, `forward merger` is followed except in exceptional cases where `reverse merger` is beneficial to achieve a specific motive like tax exemption or listing. Example of a reverse merger - merger of Spicejet into Modiluft; Modiluft; later Modilufts name was changed to Spicejet. Spicejet.

Steps in a Merger

Board of directors of both companies transferor and transferee decide to merge Companies appoint valuers to ascertain fair value of shares of both the companies A scheme of merger is framed which among other things, will provide for :

The basis of payment of consideration by the transferee company i.e. shares, debentures, cash Share exchange ratio - on the basis of share valuation

A petition is made to the High Court seeking permission to merge as per the scheme The Court directs the companies to hold meetings of shareholders and creditors to approve the merger After approval by shareholders and creditors, the Court passes an order of merger as per the scheme Companies pass necessary entries in their books of account recording the merger

Accounting for Mergers

In order to ensure uniformity in accounting (recording of transactions), the Institute of Chartered Accountants of India (ICAI) has prescribed Accounting Standards laying down standard accounting practices for different kinds of transactions. ASAS-14 deals with accounting of mergers. The AS-14 is mandatory for companies to follow. ASASAS-14 prescribes two types of methods for accounting for mergers:

Pooling of Interest Purchase

Pooling of Interest Method

As the name suggests merger is a genuine pooling of assets, liabilities, business and shareholders interest of both the companies In objective terms, this method is to be followed where:

All assets and liabilities of the transferor company become assets and liabilities of the transferee company The consideration for merger is discharged by the transferee company by issue of its shares only The business of the transferor company is intended to be carried on. The value of assets and liabilities are taken over at their book values line by line consolidation of values of assets, liabilities and reserves reserves of the transferor company will retain their identity and will be treated similarly in the transferee companys accounts

It is like sum total of both the balance sheets:

Any excess or shortfall between the net book values of assets of the transferor company and the value of shares issued by transferee company is adjusted in the reserves of the transferee company

Purchase Method

As the name suggests merger reflects a purchase by the transferee company The transferee company accounts for assets and liabilities (of the transferor company) at their fair values and not necessarily book values It may also account for certain assets or liabilities which are not recorded in the books of the transferor company (e.g. trade mark, brand, copyright) The consideration for the merger is discharged by the transferee company by issue of its shares or a mix of shares, debentures and cash Consideration paid in excess of fair values of net assets is treated as goodwill If the consideration paid is lower than the fair values of net assets, then, the difference is treated as a `Capital Reserve`.

InterInter-company Transactions Inter-company Inter

Holdings

Where either of the company holds shares in the other, then, to that extent share capital is cancelled Example of merger of subsidiaries of Nicholas Piramal India Limited Example of RCVLs merger with Reliance Capital Ltd.

Inter-company Inter

Balances and Stocks

While consolidating the accounts of the transferee company, internal balances are squared-off and cancelled squaredWhere either of the company holds stocks/inventory of goods sold by the other, then the profit element therein is nullified and adjusted

Innovative Accounting Recent Developments

Instead of treating the excess consideration as goodwill, it is adjusted against other reserves of transferee company Example of Sangli Banks merger with ICICI Bank Example of Go4i.coms merger with Hindustan Times

Instead of treating the short consideration as capital reserve, it is treated as general reserve or share premium reserve Example of IPCLs merger with Reliance Industries

In case of inter-company holdings, instead of canceling equity intershares, such shares are transferred in a trust as treasury stock Example of merger of M&Ms subsidiaries

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