Report On Two Companies Joining Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

In the past few years news of companies taking over other companies or two companies joining to form a new company was not very frequent, but now-a-days if you read the newspaper or watch news on a regular basis, you will find that there are bailout and takeovers happening almost every week. One of the major reasons for this is the financial and economic conditions today. These bailouts and takeovers are called mergers and acquisitions (M&A).

A merger or acquisition is a combination of two companies. Even though these two terms are uttered in the same breath, the term merger and acquisition mean slightly different things. In other terms merger is when two companies with almost equal worth join to form one big company and acquisition is when a large company takes over a smaller company (taking account the size of the assets and liabilities in the company). In a merger both the companies stocks are surrendered and new company stocks are issued in their place. Mergers are different from consolidation where in both the companies lose their individual identities to form a new company. An acquisition may involve the purchase of another firm's assets or stock, with the acquired firm continuing to exist as a legally owned subsidiary.[1] Acquisitions can be agreed or hostile depending on the target company if it wants to be taken over willingly or not. Mergers and Acquisition transactions are prolonged and complicated; they can take months or even more than that to seal the deal.

EFFECTS OF M&A ON THE BOOKS

Mergers and Acquisitions as mentioned before are not same terms, they have a slight difference. In a merger if two companies are joining to become a single company then they have to surrender their individual company stocks and issue new stocks of the newly formed company. In that case the effect will show on the balance sheet of the new company. The issuance of new stocks will show on the balance sheet. Sometimes if two totally different companies are merging then they may have to maintain different books.

When acquisition is to take place then the acquiring company takes over the target company which means that the target company has to sell its assets and pay all the remaining creditors and dissolve itself. After the target company dissolves the acquiring company takes over all its remaining assets and liabilities. Usually the acquiring company buys the assets of the target company. This effect of acquisition is seen on the balance sheet of the acquiring company. The assets and liabilities are added to its existing assets and liabilities and the total are shown in the balance sheet of that year.

In mergers the management of the two companies will not change unless it is decided to do so by the two companies. In acquisition as the target company dissolves the management also changes, but it may clearly depend on the acquiring company if it wants to fire the employees or not.

PROCESS AND STAGES IN M&A

RESEARCH AND VALUATION:-

When a company is considering merging with or acquiring another company, the first step it does is that it determines whether the company is worth taking over or not. This is to be taken under consideration because most of the failures happen because of lack of inadequate valuation or taking risk in acquiring a failed business.

There are different methods in which a company can be valued. The most common method is to comparing companies in an industry, but only comparing companies with each other is not the only thing deal makers take into consideration while valuing a target company.

Following are a few various methods to value a company:-

  1. Comparative ratios - Companies use certain ratios to find the value of target companies. Price-Earnings Ratio (P/E Ratio) and Enterprise-Value-to-Sales Ratio (EV/Sales) are two examples of such kinds of ratios.
  2. - The P/E ratio is calculated by dividing Market value per share by Earning per Share. It means that a company's current share price is compared to its per-share earnings. A high P/Esuggests that investors are expectinghigher earningsgrowthin the future compared to companies with alower P/E, which suggests that the target company with a high P/E ratio will be worth acquiring. [2]

    - The EV/Sales ratio is calculated by dividing Market Capitalization, Debt, Preferred Shares and deducting Cash & Cash Equivalents by the Annual Sales. This ratio compares the enterprise value of a companytothe company'ssales. EV/sales give investors an idea of how much it costs to buythe company's sales. Lower EV/sales can signal that the future sales prospects are not very attractive. But generally the lower the EV/sales the more attractive or undervalued the company is believed to be. Whit this in mind the acquiring company will find it easier to buy the target company as it will be cheaper to buy it. [3]

  3. Replacement Costs - Sometimes acquisitions are based on the cost of replacing the target company. This means, that the acquiring company pays a price to replace an existing asset of the target company with similar assets of its own.
  4. Discounted Cash Flows (DCF) - The purpose of DCF analysis is just to estimate the money you'd receive from an investment and to adjust for the time value of money.DCF analysisuses futurefreecash flow projections and discounts them (most often usingthe weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived atthrough DCF analysisis higher than the current cost of the investment, the opportunity may be a good one for the acquiring company to take over. [4]
  5. Synergy - The idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Merging to create synergy is probably the most frequent justification for an acquirer to pay a premium for a target firm. Synergy is the concept whereby the merger of two firms increases overall value, because usually, the existing firms are operating below optimum. Buyers need to pay a premium if they hope to acquire a company, despite their pre-merger valuation. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. For sellers, that same premium represents their company's future prospects. Generally, mergers will benefit shareholders when a company's post-merger share price increases by the value of the potential synergy. [5]

Writedown

A writedown is an accounting term that recognizes the reduced value of anasset whose market value falls below its carrying amount and is not expected to recover (i.e) An Impaired Asset.[6] The value of an asset may change due to fundamental changes in technology or markets. For example when a company purchases another firm and pays more than the netbook valueof itstotal assetsand liabilities. The excess purchase price is recorded on the buying company's accounts asgoodwill.

Rupert MurdochNews CorpboughtWall Street Journalpublisher Dow Jones at a 60 percent premium in 2007, which News Corp later had to write down by $2.8 billion because of declining ad revenues ["Marketplace Whiteboard: Write-downs".Marketplace. Retrieved 2009-03-19]

A writedown is sometimes considered the same as a "write-off".The difference between the two is that while a "write-off" is completely removed from thebalance sheet, a "writedown" leaves the asset with a lower value.

Restatements

A restatement is the term given to the revision of a company's financial statements. The need arises for restating the company's records due to fraud, misrepresentation, or maybe a general human error.

Goodwill

Goodwill in an accounting sense is used to showcase the portion of a book value of a company not directly attributed with its assets and liabilities. It is generally seen at a time of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets[7]. Good will is an intangible asset.

Goodwill can be explained by these simple formulas:

Goodwill = Purchase Price - Fair Market Value of Net Assets

Fair Market Value of Net Assets = Net Tangible Assets + Write-up of Net Assets

Net Tangible Assets = Assets - Target's Existing Goodwill - Liabilities

DRAFTING LETTER OF INTENT:-

After valuing the target company, the acquiring company has to also take into consideration weather it wants to spend more time and money in analyzing the current target company or it would want to select a new one. If the current target company is thoroughly analyzed and would be acquired then the acquiring company drafts and signs the letter of intent. The letter of intent outlines a firm'splanto buy/take over the target company and will disclose the specific terms of the transaction. A letter of intent is not a contract and cannot be enforced; it is just a document stating serious intent to carry out certain business activities or in this case a merger or an acquisition deal.

DUE DILIGENCE:-

After the letter of intent has been signed, accounting and law firms which are hired by the acquiring company conduct due diligence. Due diligence is a process of collecting information about the target company, its financial statements, tax arrangements, contracts, staff, fixed assets, and success of products. [8]

CONCLUDING TRANSACTIONS AND SEALING THE DEAL:-

Before signing any agreement the companies have to be sure of clarifying all important details of the transactions. Both the parties have to agree upon certain transactions mentioned in the agreement. The acquiring company will then pay for the target company's shares with either cash or stocks or both, depending on what they have agreed upon. When a cash-for-stock transaction (cash transaction) is agreed upon, the target company shareholders receive a cash payment for each share purchased. This transaction is treated as a taxable sale of the shares of the target company. If a company is purchased with stock, new shares from the acquiring company's stock are issued directly to the target company's shareholders. The shareholders of the target company are only taxed when they sell their new shares. When the deal is closed, the acquiring company receives new stocks.

It is not necessary if a merger or acquisition is done fallowing the above steps then there is a guarantee that the deal will be a success. Many mergers fail even when caution is taken before sealing the deal. Trends show that roughly two thirds of big mergers will lose value on the stock market. This mostly happens when there is lack of through investigation, communication, analysis between the two parties and when an acquiring company knowingly takes over a company which may not have the potential to accelerate in the future.

One of the main post merger failures is the differences in corporate cultures of the companies. After mergers and take over's the concentration on the market synergies and other decision overshadow the differences in the cultures of both the companies. Personnel relations are very important to handle when a merger takes place and working conditions should be talked about to fill the gap between the companies different cultures. For example, if in a target company the working environment was very casual, and the working environment in the acquiring company is very professional then there may be a possibility of differences and underperformances by few workers. [9]

The promises made by deal makers demand the careful analysis of investors. The success of mergers depends on how realistic the deal makers are and how well they can incorporate two companies while maintaining day-to-day operations.

TATA GROUP

Started in way back in 1868, Jamsetji Nusserwanji Tata established a small trading company in Mumbai which gradually over the years turned into a company which is known today as The Tata Group. One of the major pioneers of the company was JRD Tata, who made Indian history when the first commercial airlines took off in 1939 with Tata Aviation Services. After the demise of JRD Tata, Ratan Tata took over as chairman in 1993 who guided the Tata Group towards new horizons in the age of globalization. Today, Tata Group is one of the largest multinational conglomerates in India with its businesses expanded in steel, automobiles, information technology, tea, power, communication and hospitality. [10]

TATA GROUP'S M&A

As mentioned before Tata Group is a conglomerate. It has acquired many large companies in various fields. It all started in 2000 with the acquisition by Tata tea of Tetley. Tata Motors acquired the heavy vehicles unit of Daewoo Motors in South Korea. But the most looked forward to deal was when Tata Steel took over Corus, the Anglo-Dutch giants and the Jaguar and Land Rover deal with Tata Motors. Tata Group merged and acquired many companies in the present decade which lead it to be one of the most respected companies in the business world globally.

CORUS DEAL:-

Corus is Europe's second largest steel producer with annual revenues of Rs. 82,674 crores (£9.7 billion) and crude steel production of 18.3 million tons in 2006. Corus was formed on October 6, 1999 following the merger of Koninklijke Hoogovens and British Steel. Corus' shares were listed (de-listed post the acquisition) on the London, New York and Amsterdam Stock Exchanges until the acquisition of Corus Group plc by Tata Steel in April 2007. Tata Steel acquired Corus for $ 12 billion making it the fifth biggest steelmaker and will allow the company to cut costs by $ 350 million a year. Tata acquired Corus at 608 pence per share in cash, making the enterprise value of Corus at about $ 10 billion, whereas four year prior to the deal Corus's shares were trading at just 19 pence per share. [11] As per the agreement, 75 % of Corus shareholders had to tender their shares for the acquisition to be completed. According to B Muthuraman, managing director of Tata Steel, there was no change in the Corus management. It had not fired the existing management or the employees. This could be a very good reason why even after 2 years the merger is yet not a failure.

Corus's P/E ratio for the year 2006 was 17.16 (360.5p/21.01p) which is not very high. Which made is easier for Tata to buy the company whom it started bidding from 2005. And as seen in the Statement of Cash Flows for the year 2007-2008 of Tata Steel, the investment activities show an increase of Rs. 23889.08 Crores ($5128602.93). As the management of Corus was not changed the cost of liabilities was not very high as seen in the financial statements.

JAGUAR LAND ROVER MERGER:-

After a major acquisition with Corus, there were many other mergers that took place in various sectors of Tata Group. But the focus on its Jaguar Land Rover acquisition was the one that was awaited. Ford and Tata Motors announced their much awaited deal on June 2008 for Tata to pay $2.3 billion for the two brands that cost Ford $5.3 billion. Tata said the deal required Ford to pay about $600 million into the Jaguar-Land Rover pension fund on closing, so Ford will net only about $1.7 billion. Ford invested approximately $10 billion trying to revive the brand after spending $2.5 billion to buy it in a deal that closed in 1990.

Ford lost $2.7 billion in 2007 and posted a $12.7 billion loss for 2006. Looking at their performances through the last few years Ford had to find a buyer to give back these luxury brands their glory. While the merger was to take place Tata announced that they dint expect any significant changes for the workforce of about 16,000 that Ford employed for these two brands. [12] Tata also let the Jaguar staff run the company, which means they did not change the entire management of the target company. Tata said that Ford will continue to supply engines, transmissions and other components, as well as environmental and engineering support. This means, that they did not buy much of the assets of the company. This deal with Ford was a merger where in the Jaguar Land Rover did not have to be dissolve. It maintained its books separately.

Looking at the Balance sheet of Tata Motors for the year ended March 31, 2008 and 2009, you can see that the shares issued in 2009 are more than the share of 2008 which are the shares issued due to the merger with Jaguar Land Rover. As the Jaguar Land Rover unit of Ford was going into a loss, it was easy for Tata Motors to acquire it in such a low price. But the risk that Tata has taken to "get back their glory" may not cost them a huge price like Ford. Further while there was no change in the employees and the management of Jaguar Land Rover, there can be a possibility that the unit may not do as good as Tata claims.

ARE MERGERS & ACQUISITIONS REALLY THIS SIMPLE?

Mergers and acquisitions may be doing well to Tata Group but it is not necessary that they work for all. Both the Corus and the Jaguar Land Rover deals are much resent and it will be unfair to say that they are successful. It is only a matter of time that will reveal if these subsidiaries will succeed or not. Mergers and Acquisitions are very stressful and be hard to handle for companies but only profit should be a reason to acquire another company, this reason is better than risking a major unit of a company and investing huge sum of shares and cash into it.

Looking at Tata Group and all its past and present M&A, we cannot say that M&A are simple. They are complicated and messy when companies are involved in joining two very similar but yet different industries. Through analysis and investigation should be done before acquiring another company.

Citations

  1. Mergers, Acquisitions and Other Restructuring Activities by Donald M. DePamphilis Retrieved November 15th, 2009, from Google Knol's website: http://knol.google.com/k/donald-depamphilis/understanding-mergers-acquisitions/2y7l67l8la2ns/1#
  2. Investopedia. Price-Earnings Ratio - P/E Ratio. Invertopedia website: http://www.investopedia.com/terms/p/price-earningsratio.asp
  3. Investopedia. Enterprise-Value-To-Sales - EV/Sales. Invertopedia website: http://www.investopedia.com/terms/e/enterprisevaluesales.asp
  4. Investopedia. Discount Cash Flows - DCF. Invertopedia website: http://www.investopedia.com/terms/d/dcf.asp
  5. Ron Harper. Sample 35. from Papers4you website: http://74.125.95.132/search?q=cache:8CxEvgXphCYJ:www.coursework4you.co.uk/essays-and-dissertations/sample35.php+synergy+the+premium+for+potential+success&cd=7&hl=en&ct=clnk&gl=us&client=firefox-a
  6. KMPG Baltics AS. Stages of Acquisition and Merger Transactions. from KMPG website: http://www.kpmg.ee/detail.thtml/en/services/Advisory_/FAS/MergersAcquisitions/FourStages/index.html
  7. Marv Dumon. The Buy-Side of the M&A Process., from Investopedia website: http://www.investopedia.com/articles/stocks/07/buyside_m_and_a.asp?viewed=1
  8. Write Downs http://marketplace.publicradio.org/display/web/2009/02/10/whiteboard_writedowns/
  9. Goodwill http://en.wikipedia.org/wiki/Goodwill_(accounting)
  10. Tata Group. Our Heritage, from Tata Group website: http://www.tata.com/htm/heritage/HeritageOption1.html
  11. Mark Kleinman. "India's Tata wins Corus in takeover battle" (Jan 31st 2007), from Telegraph.co.uk website: http://www.telegraph.co.uk/finance/2803543/Indias-Tata-wins-Corus-in-takeover-battle.html
  12. Sharon Silke Carty. "Tata Motors to buy Jaguar, Land Rover for $2.3B" (March 26th 2008). from USA Today website: http://www.usatoday.com/money/autos/2008-03-25-ford-sells-jaguar-land-rover-tata_N.htm
  13. Tata Group website: http://www.tata.com/
  14. Corus Group website: http://www.corusgroup.com/en/
  15. Jaguar Land Rover Website: http://www.jaguarlandrover.com/index.html Balance sheet references from: http://www.mergentonline.com.cwplib.proxy.liu.edu/compsearch.asp
  16. http://www.tatasteel.com/investorrelations/tatasteelAR2006-07/pdfs/0707_cashflow.pdf
  17. http://www.tatasteel.com/annualreport-2007-08/pdfs/0807_cashflow.pdf

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.