ACT-8 PDF

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Definition 1. Acquisition Method To acquire something means that you gain possession of it; money or any similar exchange need not be involved. The current accounting method used for business combination is acquisition method, whereas control is one of the essential elements, that can be obtain even without transferring consideration to the acquiree. Based on IFRS 3 B.5” business combination can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or not issuing consideration at all (i.e. by contract alone)” Under this method, assets and liabilities are recorded at fair value and any excess is considered as goodwill. Aside from that non-controlling interest (NCI) and bargain purchase must also be reported by the buyer on its consolidated statement of financial position. A bargain price is when the acquiring company pays less than the fair value of the company being acquired. Hence, these are the following must be present under acquisition method: identification of acquirer, the date of acquisition, recognition and measurement of goodwill: consideration transferred, NCI in the acquiree, previously held equity interest in the acquiree and measurement of identifiable assets acquired and liabilities assumed on the business combination. 2. Purchase Method To purchase something means that you obtain it by buying it with money or offering some equivalent. Purchase method in the context of business combination is a way of recording a merger or acquisition in which the acquiring company treats the target company simply like an asset such as equipment or stock. The acquiring company simply adds the fair value of the target company's asset to its balance sheet. If the acquisition cost more than the fair value, the excess is recorded as a goodwill. The said goodwill must be amortized at a certain period. 3. Pooling of Interest Method The accounting method that is used when two or more companies decided to merge or be combined. It allows the transfer of assets and liabilities from the acquiree to the acquirer company. The assets and liabilities transferred are measured at book value and the operating results were stated as if the companies had always been together. Unlike the methods mentioned before, fair values don’t have a role under pooling of interest, as well as goodwill.

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Major differences between acquisition method, purchase method and pooling of interest method.

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Both acquisition and purchase method are built upon fair value concept while in pooling of interest method, amounts are recorded at historical cost. The acquisition method requires accountants to disclose contingencies -potential assets or liabilities that the company may or may not recognize in the future. On the other hand, the purchase method did not require these to be disclosed at the time of the acquisition. Some contingencies, like lawsuits, product warranties, or off-balance sheet financial obligations, can have a material impact on the future of the company. Under pooling of interest, the statements of financial position for the two companies were simply summed together, item by item. Any cost that was paid above the true market price of the assets was not recorded in the business combination and, therefore, did not need to be paid off or expensed. On the other hand, both acquisition method and purchase method recognize any premium paid above the standard price must be accounted for in the acquirer’s statement of financial position as goodwill. The only difference is, in acquisition method, goodwill is tested for impairment.

Understanding the cause of the shift: In 2001, the Financial Accounting Standards Board issued the ending of usage of pooling of interest method. It is replaced by a new designated accounting method called purchase accounting method. Came by 2007, FASB decided to issue a new and improved accounting method by issuing Statement No. 141, the said issuance gave life to the required and innovated accounting method for business combinations-- acquisition method. In pooling of interest method, transfers of assets and liabilities are only recorded at their book value. The non-recognition of goodwill caused the shift to purchase method which gives truer representation of the exchange in value. The FASB believed that the creation of a goodwill account provided a better understanding of tangible assets versus intangible assets and how they each contributed to a company's profitability and cash flows. However, the shift to purchase method led to negative impact on earnings. The goodwill amortization issue was solved by incorporating an impairment test that exists under acquisition method. The impairment test would determine if the goodwill was higher than its fair value, and only then it would have to be amortized and expensed.

MERGING COMPANIES Merging Companies – merging companies were two companies that united to form a one new company. Usually done to expand a company’s reach, expand into new segments, or gain market share. All of these are to increase shareholder value.

Horizontal and Vertical Mergers Horizontal Mergers came from and compete in the same industry and Vertical Mergers are involved in different stages of the supply chain of a product or services. Example: Horizontal A potential merger between Pepsi and Coca-Cola would be one of the mergers of the century. Both companies compete in the same industry, and the combination would create a new, larger company with a higher market share. Vertical Ebay, a prominent online auction and shopping website, acquired PayPal, a company that supports online payments and money transfers. Merging companies practices no-shop clause No-Shop Clause - an agreement between a seller and a potential buyer that bars the seller from soliciting a purchase proposal from any other party

FRIENDLY TAKE OVER In a friendly takeover, the management and board of directors approve of the takeover and advises shareholders to vote in favor of the deal. The acquirer company, in a friendly takeover, can employ strategies such as:

1. Offering their own shares or cash The acquirer company can offer a share conversion (x shares of the acquirer company for each share of the target company) or make a cash offer ($x per share of the target company). A combination of acquirer company shares + cash can also be used.

2. Offering a share price premium The acquirer company can offer a percentage premium to the most recent closing share price of the target company (x% premium to the closing share price). EXAMPLE: Facebook & WhatsApp Deal

Facebook takeover to WhatsApp is another big example of a friendly takeover where Facebook bought WhatsApp in $19 Billion.

PS: YUNG PICTURE PO NA NAKAHIGHLIGHT DI PO KASAMA SA ILALAGAY SA VIDEO. SALAMAT UNFRIENDLY TAKEOVER The acquisition of a firm despite resistance by the target firm's management and board of directors. Also called hostile takeover. Example: Kraft Foods Inc. and Cadbury PLC In September 2009, Irene Rosenfeld, CEO of Kraft Foods Inc. (KHC), publicly announced her intentions to acquire Britain's top confectionery company, Cadbury PLC. Kraft offered $16.3 billion for the maker of Dairy Milk chocolate, a deal rejected by Sir Roger Carr, Cadbury's chairman.1 Carr immediately put together a hostile takeover defense team, which labeled Kraft's offer unattractive, unwanted, and undervalued.2 The government even stepped into the fray. The United Kingdom's business secretary, Lord Mandelson, said the government would oppose any offer that did not grant the famed British confectioner the respect it was due.3 Kraft was undeterred and increased its offer in 2010 to about $19.6 billion. Eventually, Cadbury relented and in March 2010 the two companies finalized the takeover.4 However, the contentious battle inspired an overhaul in the rules governing how foreign companies acquire UK companies. Of major concern was the lack of transparency in Kraft's offer and what its intentions were for Cadbury post-purchase.

What is the Greenmail defense tactic? The Greenmail is the anti-takeover tactic undertaken when the target firm buys back its own shares at an inflated price from the unfriendly firm which possesses a large stock of the target

company and is threatening a hostile takeover. The term “greenmail” is derived from “greenbacks” (dollars) and “blackmail”. It is a buyout by the target of its own shares from the hostile acquirer with a premium over the market price. The potential acquirer accepts the greenmail profit it makes from selling the target company’s shares back to the target at a premium, in lieu of pursuing the takeover any further. Although this strategy is legal, the acquirer is, effectively, sort of blackmailing the target company, in that the target must pay the acquirer a premium – through the share buybacks – in order to persuade it to cease its takeover attempt.

Key Points Purchase – A corporate raider or an investor gets hold of a large stake in the target company by purchasing its shares from the open market. Struggle – Threaten the target company over a hostile takeover but they offer to sell the acquired shares to the target company at a premium price which is much above the market value. The raider also makes a promise of not harassing the target company on repurchasing the shares by the target company. Sale – The corporate raider sells its share at a higher price. The target company utilizes the shareholder money to pay the premium price for buyback The target company is left with a considerable amount of debt and its value is reduced whereas the raider makes a handsome profit. Illustration: ABC Corp. acquired 53% of voting shares in XYZ Inc. The former has now control in XYZ Inc as it can now appoint the majority directors of the board, and expressed its interest in taking over the company. Thus, XYZ Inc. agreed to repurchase the shares at a premium to avoid the possible

takeover. ABC Corp. acquired the shares for an average price of P35.50 per share, a total of P109 million. It sold its stake at P52 per share, netting a profit of P51 million.

Purchase - ABC Corp purchase 53% of voting shares from XYZ Inc. Struggle - ABC Corp expressed interest to take over XYZ Inc. But XYZ Inc offers ABC to reacquire its own share at a premium price. Sale - XYZ acquires its own share at a premium of P16.5 per share or a total of P51 million to avoid the possible takeover of ABC Corp.

What is White knight/White squire?

A white squire is an individual or company that buys a large enough stake in the target company to prevent that company from being taken over by a black knight. In other words, a white squire purchases enough shares in a target company to prevent a hostile takeover. A white knight is an investor who is considered friendly for the company as that person acquires the company with the help of the company’s board of directors or top-level management at a fair consideration so that the company can be protected from the hostile takeover attempt by the other potential buyer or from bankruptcy.

White knights are preferred by the board of directors and/or management as in most cases as they do not replace the current board or management with a new board, whereas, in most cases, a black knight will seek to replace the current board of directors and/or management with its new board reflective of its net interest in the corporation's equity. The intent of the acquisition is to circumvent the takeover of the object of interest by a third, unfriendly entity, which is perceived to be less favorable. The target company must incentivize the white squire to stand on its side of the target and not end up selling its shares to the black knight (thus aiding the hostile takeover attempt).

Key points: Target company - the entity that’s being threatened to be taken over. White Knight/Squire - the acquirer entity that is usually preferred by the management instead of being taken over by black knight. * However, the differentiating point is that a white knight purchases a majority interest while a white squire purchases only a partial interest in the target company.

Black knight - individual or a company that takes over the target company by force. Illustration:

ABC Corp is in the brink of bankruptcy. At that time DEF Corp offers to purchase 90% of its controlling interest and be taken over by said corporation. Despite the rejection of their offer, DEF Corp proceeds with a tender offer of purchasing voting shares at 40% premium, to acquire a controlling interest in ABC Corp. An investor friendly to ABC Corp namely G Inc, sees the hostile takeover attempt by DEF Coop and decides to step in and help the ABC Corp. The friendly investor purchases shares of ABC Corp to prevent the shares from being acquired by DEF Corp. In return, ABC Corp promised G Inc to declared generous dividend and a reasonable purchase price of the stocks.

Target Company: ABC Corp facing bankruptcy offered to be taken over by DEF in exchange of 40% premium for 90% of its voting shares. Black knight: DEF Corp who’s expressed its interest to take over the company. White Knight: G Inc, a friendly investor who purchase the share of ABC Corp to avoid the hostile take over by DEF Corp.

PAC-MAN DEFENSE It is a defensive tactic used by a hostile takeover situation wherein the target firm tries to acquire the company that has made a hostile takeover attempt. It is like” reversing the coin” or “turning tables.” target firm fights back by seeking to acquire the public shares or buying back its shares of the other company so they reverse and its like trying to eat the hostile corporation rather than the hostile corporation eating the target corporation which has similar concept with the video game Pac-man. It is one of the few options available with a hostile takeover attempt. The target company have to be aggressive and ready to fight back, if not, the company would not have a chance to survive. It is an expensive strategy and may increase debts for the target company which may cause losses or lower dividends in future. Example: The Pac-man battle of Martin Marietta and Bendix (1982), Volkswagen and Porsche 2008-2012)

SALE OF CROWN JEWELS This defense strategy is applied to avoid a future hostile takeover by another company by selling its crown jewel or it most important assets to decrease or lose its attractiveness. Since the most valuable assets are sold off to a friendly third party (white knight) the target company becomes less attractive to the unfriendly bidder. A company’s crown jewels vary from other companies as it depends on the industry and nature of the business (such as trade secrets, proprietary information, intellectual property, etc which costs a lot of money) It is basically the last-resort strategy to be applied to stop the takeover because the sale of crown jewels will generally leave the remnants of a company in less attractive which will make slowergrowing markets. There may be a decrease in brand equity value of the company, and diminished sales and earnings growth prospects resulting from the loss of talented management, product innovation, manufacturing efficiency or geographic markets. Shareholders who invested because of the crown jewels would flee if they are sold. This strategy can also be used in a better manner where the target company sells off the valuable assets to a friendly third party and later repurchases those assets once the hostile bidder retracts its bidding. Example: Sun Pharma vs Taro (2007) SCORCHED EARTH What is Scorched Earth? A scorched earth is a technique that can be used by a business to prevent a hostile takeover. Essentially what happens is that a company targeted for takeover does everything it can possibly do to make it unattractive, aiming to prevent the potential acquirer from pursuing the attempt at acquisition. Origin of the Scorched Earth The word "scorched earth" began as a military phrase. During times of war, to make them unusable by enemy forces, troops would destroy valuable goods (crops, houses, roads in and out of towns). The downside of the scorched strategy is that the destructed objects and facilities could also no longer be used by the troops that destroyed them. In order to make it less attractive, a targeted company may do a number of things. 1. Winding up or terminating valuable assets and shares. 2. Make debt repayment arrangements as soon as the hostile takeover is over. The acquiring company would then be forced to pay off the outstanding debt, thereby eroding its profits.

3. Trying to "scorch" the acquirer even by using a "poison pill" technique such as the flip-over strategy.

HOSTILE TAKEOVER What is Hostile Takeover? A hostile takeover is the acquisition by another company (referred to as the acquirer) of a target company by going directly to the shareholders of the target company. A hostile takeover happens when the management or board of directors of the targeted company does not approve of the deal. With a lack of approval and cooperation from these decision-makers, the acquirer goes straight to the shareholders of the target company to validate the acquisition. 2 Main Strategies Buyer can use to approach Hostile Takeover Tender Offer – A tender offer occurs when the buyer offers to purchase shares at premium value. Proxy Fight – Also known as a proxy vote or proxy contest, this strategy involves persuading shareholders to support the sale. By doing so, the prospective buyer can then convince those individuals to vote for board and executive member replacements who are more likely to approve

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Defensive Strategies 1. Differential voting rights This preemptive defense strategy involves establishing stocks with differential voting rights, meaning shareholders have fewer voting rights than management. If shareholders must own more shares to cast votes, a takeover becomes a more costly endeavor.

2. Employee Stock Ownership Program Another preemptive defense strategy is to create a tax-qualified plan that grants employees more substantial interest in the company. The idea is that employees are more likely to vote for management rather than support a hostile buyer.

Poison Pill (also known as shareholders' protection rights plans.) 

It refers to a defense strategy used by a target firm to prevent or discourage a potential hostile takeover by an acquiring company. Potential targets use this tactic in

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order to make them look less attractive to the potential acquirer. Although they're not always the first—and best—way to defend a company, poison pills are generally very effective. It allow existing shareholders the right to purchase additional shares at a discount, effectively diluting the ownership interest of a new, hostile party. Poison pills often come in two forms—the flip-in and flip-over strategies.

"FLIP-OVER" RIGHTS PLAN The most commonly used strategy is called the "flip over" or the shareholder rights plan. Under this strategy, the holders of common stock of a company receive one right for each share held, which allows them an option to buy more shares in the company. "FLIP-IN" RIGHTS PLAN. A variation of the flip over is the "flip-in" plan. The plan allows the rights holder to purchase shares in the target company at a discount upon the mere accumulation of a specified percentage of stock by a potential acquirer. Shark Repellant 

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It refers to measures employed by a company to lock out hostile takeover attempts. The measures may be periodic or continuous efforts exerted by management to make special amendments to its bylaws. The bylaws become active when a takeover attempt is made public to the company’s management and shareholders. It fends off unwanted takeover attempts by making the target less attractive to the shareholders of the acquiring fir...