Presented By Group 1:

Hesty Oktariza | Renate Shafrila D.P. Rista Marliyani | Siti Rachmanita Z. | Sabrina

President University
June 28th, 2011

FINANCING ON M&A

Financing in M&A
Cash
- Payment by cash. Usually use in acquisitions rather than in merger.

Stock
- Payment in the acquiring companys stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

Cash
Cash on Hand :
- Consumes financial slack, may decrease debt rating, no major transaction cost.

Issue of Debt :
- Consumes financial slack, increase cost of debt, transaction cost include closing cost of 1% to 3% of the face value.

Issue of Stock :
- Increase financial slack, reduce cost of debt, transaction cost include fees for preparation.

Stock
Issue of stock :
- Increase financial slack, reduce cost of debt

Shares in treasury :
- Increase financial slack, improve debt rating and reduce cost of debt. Transaction cost include brokerage fees if shares are repurchased in the market otherwise there are no major cost.

ACCOUNTING IMPLICATIONS OF M&A

Accounting for M&A

Depending on the characteristics of a merger or acquisition, firms could use one of two approaches to account for business combinations:

a) Purchase method b) Pooling-of-interest (pooling) method

Purchase Method VS Pooling Method

Purchase Method
 Used in acquisition, the acquired company is known as investment  No new balance sheet is prepared  Recording the Fair Market Value (FMV)  There is Goodwill  Taxable
Pooling of Interest Method
 Basically used in the merging of two companies  New balance sheet of the combined company is created  Recording the Book Value on the historical basis.  No Goodwill  Free of Tax  Higher reported earning

The Purchase Method

What is Goodwill?
   

Goodwill is the difference between the purchase price and the sum of fair market value of net assets. It can be a positive or negative goodwill. If the FMV > the target firms equity, the excess amount is goodwill and reported as an intangible asset on the left hand side of the balance sheet. Goodwill is considered as the premium that the acquirer paid on its investment on the acquired company. company. Goodwill is used to be amortized over the course of 40 years(until 2001), but it is no longer amortized but must be annually assessed to determine if has been permanently impaired in which case, the value will be written down and charged against earnings per share.

The Purchase Method

In 2006, Nestle Co. Purchased the medical-nutrition division of Novartis AG for $1,250 million in cash.
Ac uisitor Pre Mer er 10,000 6,000 16,000 8,000 2,000 2,000 4,000 16,000 Tar et Fir oo Value 1,200 00 2,000 800 200 00 600 2,000 Tar et Fir Fair Mar et Value 1, 00 900 2,200 800 250 1,250 2, 00

Current assets Lon -term assets ood ill Total Assets Current liabilities Lon -term debt Common stoc etained earnin s Total Claims

Goodwill on the Purchase Method

Ac uisitor Value pre mer er et firm Goodwill = Price paid MV of Tar + Tar et E irm MV = Ac uisitor Post Mer er uity

= $1 250 (MV of target assets MV of target Liabilities) = $1 250 ($2 200 - $1 050) = $100 er Mer
Cu en asse s ong e m asse s ood ll o al Asse s Cu en l ab l es ong e m deb Common s ock e a ned ea n ngs otal Cla ms Ac uisitor Pre 10 000 6 000 16 000 8 000 2 000 2 000 4 000 16 000 Tar et irm ook Value Book 1 200 Values 800 Tar et irm air Market Ac uisitor Post Value Mer er 1 300 11 300 00 6 00 100 2 200 18 300 800 250 1 250 2 300 8 800 2 250 3 250 4 000 18 300

a e not relevant. 2 000

800 200 400 600 2 000

Pooling Method Accounting

Controversy Over Pooling

While more popular in other countries, the pooling of interest is no longer allowed by: CICA in Canada Financial Accounting Standards Board (FASB) in the U.S. and International Accounting Standards Board (IASB)

Pooling Method Accounting

Controversy Over Pooling

Principal reasons to eliminate pooling method are including:  Pooling provide less relevant information to statement users.  Pooling ignores economic value exchanged in the transaction and makes subsequent performance evaluation impossible  Comparing firm using the alternative methods is difficult for investors

TAXATION ON M&A

Tax Considerations
 In general, the targets shareholders pay taxes on the gains or losses immediately when the transaction is concluded, while the acquirer restates the acquired assets at fair market value.  The asset write-up increases the amount of depreciation which is valuable for an acquirer in a tax paying status.  M&As can be tax-free, whereby the targets shareholders recognize a loss or gain only if they sell the assets they receive in payment from the acquirer.

Qualifying for Tax Free Treatment:

Mergers
1. The shareholders of the target have to retain a continuing equity interest in the acquirer. 2. The interest must be substantial in relation to the net assets of the target.


These two rules have been interpreted to mean that the target shareholders have to receive at least 50 percent of their payment in stock of the acquirer.

Qualifying for Tax Free Treatment:

Acquisitions
1. All payment to the shareholders of the target has to be in the form of voting stock. 2. The acquirer must obtain at least 80 percent of the voting stock of the target.

CASE STUDY

Accounting Case in Mergers & Acquisition

 Lehman Brothers
On September 20, 2008 Barclays plc acquire the core business of Lehman for $1.75 billion Barclays Plc use purchase method for this transaction, mainly its $ 60-million headquarters, a 38-story office building Barclays use combination between cash and stock, $47.4 billion in securities and $45.5 billion in trading liabilities Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for $225 million in cash

 On September 2 , 2008, Lehman agreed to sell Neuberger Berman, the bulk of its investment management business, to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15 billion  a 4 % of $2.15 billion paid in common equity interest to Neuberger Berman Group LLC

Finace case
 in 1 2 Rio Tinto company issued stock for raising 2.5 million pounds of Rhodesian copper mining companies consolidated its holdings of these various firms under the Rhokana Corporation  On 14 November 2007, Rio Tinto completed its largest acquisition to date, purchasing Canadian aluminium company Alcan for $38.1 billion

 The company sold three major assets in 2008, raising approximately $3 billion in cash  Rio Tinto has reached agreements to acquire the Corumba iron mine and the Jacobs Ranch coal mine, and completed sales of an aluminium smelter in China and the company's Potash operations, for an additional estimated $2.5 billion

Taxation Case

 On July 2, 1 8 NOVA Corporation merged with TRANSCANADA PIPELINES  The shareholders of NOVA and TransCanada use the Canadian income tax consequences of the transactions, described in the Plan of Agreement on July 2, 1 8

 Based on a valuation approach derived from the use of ten day weighted average prices, the fair market values were: NOVA Common Share (pre-merger) $16. 0 TransCanada Common Share $32.50 NOVA Common Share (post-merger) (referred to in the Joint Information Circular as a NOVA Chemicals Common Share) $27.85

 Using this valuation approach,

1. The proceeds of disposition of a NOVA Common Share were $16. 0; 2. The cost of a TransCanada Common Share received by a NOVA Common Shareholder was initially $32.50; 3. For purposes of calculating the cost of a TransCanada common share immediately after the Plan is effective, $5.57 (being .2 of $27.85 to reflect the 1 for 5 share consolidation) must be deducted from the adjusted cost base otherwise determined of each TransCanada Common Share; 4. The cost of a NOVA common share (post-merger) (referred to in the Joint Information Circular as a NOVA Chemicals Common Share) was $27.85.