Importance of Acquisition
Australian Super and IFM investors acquired interest in Ausgrid which is a state owned energy distributor. The purchase consideration was 16.4 billion Australian dollars which was to be in form of equity. The deal is essentially a 99 year lease over the company’s assets.
What happens when a company buys another. When a major acquisition occurs, you are expected to get a company that makes more profits (DEPAMPHILIS, 2017). But it is not a simple calculation, there are several factors to take into account, when assessing if it is a good purchase:
What synergies are expected to be obtained (ie how the resulting company improves to the simple sum of the two that compose it).
How the acquisition will be paid and, if applicable, how it is financed.Other aspects that may affect the operation, such as antitrust laws, reputation of participating entities, and so on.What is the valuation that is made of the company bought: in relation to the market price, its book value, its expectations, and so on (Fraser and Ormiston, 2016).
Depending on how these factors value the markets, it is estimated that the transaction is good for the acquiring company (in which case its shares would rise), or that it presents certain complications and uncertainties and / or is not an adequate acquisition or price, Which causes the shares of the acquiring company to decrease.
How shareholder value is generated
In principle, shareholders expect that, with the merger, the resulting company will realize greater profits and its value will grow, or that it will deliver greater dividends (GAUGHAN, 2017).However, all the factors discussed above can influence the progress of the new company, so that the resulting company is not always better investment than each of its components separately.
Here’s how these factors affect you in more detail:
When such an acquisition occurs, a number of synergies are sought. By joining two similar or complementary companies, various benefits can be obtained, in the form of:
Economies of scale (being the largest resulting company, is cheaper for each unit produced / sold).
Savings in logistics (you can share transport networks).
Lower staffing costs (mergers usually involve the closing of offices and even entire business units which, while increasing the cost in the short term, reduce it to medium and long).
Financial improvements derived from its size, allowing it to be better financed.
Improvements obtained through the knowledge they can share (Hove, 2006).
How Shareholder Value is Generated
In addition, if companies are rivals, competition is reduced, which can contribute to gain greater margin, improving the profitability of the business. If they are complementary, they can unite “the best of both worlds”.
How the acquisition is paid
When a large business purchase occurs, the financing of the same is usually a relevant aspect. It is not usual for the operation to be carried out entirely with the company’s own treasury (although it may be used in a partial way), and it is usually financed through several means:Bank financing, sometimes through a syndicated loan, in which several entities participate, due to the large volume involved.Investment funds that enter to form part of the capital of the company.
Capital increases, to proceed with an exchange of shares with the shareholders of the purchased company (which would lead to a dilution of the current shareholders).
How the shareholder perceives the purchase of another company
There are aspects related to the purchase that can be very important. If the sum of the two companies implies a very important participation in some sector, there may be problems related to the competition laws that try to avoid monopolies to defend the consumers.If this is the case, the resulting company may not be able to carry out this activity without further ado, but rather be obliged to carry out some kind of action to “qualify” this dominance of the market (Nussbaum, n.d.).
This would mean that the possible synergies that occur in the merger could be significantly diluted, in which case the transaction would not be so interesting (which would cause the acquirer’s stock market crash).
In other cases, the acquired company has a reputation problem, either due to management errors in the past, or because it is in a sector that is not well-regarded by a more or less large part of the population (or investors).
If the shareholders of the acquiring company do not see the theoretical synergies to be obtained or believe that they are going to pay too high a price, they may prefer to sell before the merger takes place, contributing to the downturn.
For its part, the shareholders of the acquired company may not see the acquisition, or not the price initially offered, favorably.
Advantages and disadvantages of consolidating the financial statements of business groups
We want to emphasize the importance of having the consolidated financial statements of a business group, whether or not such group is bound to consolidate.
Advantages and Disadvantages of Consolidating Financial Statements of Business Groups
The legal obligation to consolidate is determined by the direct participation between the dominant and dependent companies and by the overcoming for two consecutive years of two of the following three limits:
Assets exceeding EUR 11.4 million
Billing of the group of 22.8 million euros
Average number of workers more than 250
For groups that are not obliged to consolidate, either because they do not exceed the limits set forth above or because there is no participation between the different companies (so-called groups per unit of decision or horizontal consolidation shared by shareholders), Allows the realization of the importance of having consolidated financial statements for decision making, for the design of business strategies and in general for undertaking actions at the group level (Nussbaum, n.d.).
The provision of these consolidated financial statements would allow, among others, the following:
1. To be able to carry out a financial and profitability analysis of the group of companies at the individual and consolidated level, in order to be able to consider mergers, takeovers or other mercantile operations, that provide some benefit and that allow to reduce costs, to take advantage of the group structure and to improve the Profitability and reduce bureaucracy (Nussbaum, n.d.).
2. To be able to make decisions on the taxation of each of the companies on the basis of the joint analysis of the group, so as to make better use of the results of each of the member companies, so that the joint tax effect can be calculated on the group.
3. To dispose of the consolidated accounts of the group, in order to be able to negotiate with financial institutions, or to important clients, so that the solvency of the group and the corporate image can be strengthened.
4. To be able to analyze the member companies of the group from a global point of view, which allows us to see the real profitability of each of the companies, and what the group contributes to each one of them, since some companies of Business groups alone could not survive.
For these and other reasons it is interesting to have the consolidated annual accounts of the business group and to begin to consider consolidation as a tool of the scorecard that will allow us to make adequate decisions for all the companies of the group and as an investment for the analysis and The reduction of business costs.
Consolidated statements require a parent company and its subsidiary (s), since the financial statements of each one are taken into account, since these are the ones that form the consolidated state (Nussbaum, n.d.). Understand by matrix that company that is participating in another and has 50% or more of the capital of the company involved, the latter is known as a subsidiary.
The consolidated financial statements are all those mentioned in the FRS:
- Statement of Financial Position or Balance Sheet.
- Statement of Results.
- Cash flow statement.
- State of Variation in Capital.
These statements are subject to Mexican FRS and International Accounting Standards.
We will begin by explaining how the consolidation of the financial statements was created.
The consolidation of financial statements arose as a result of the economic development that motivated the combinations of companies, which, being governed by the same control, represented an economic entity with characteristics and needs similar to those of an independent legal entity (Park and Banyai, 2007).
The need to know the development of the groups of companies, seen as a whole, resulted in the evolution of information methods, which gradually improved until arriving at what are now known as consolidated financial statements. These states had their origin in the United States of North America due to its great development in the industries.
The consolidated financial statements are those that present the financial condition and results of operations of an entity integrated by the holding company and its subsidiaries (regardless of their legal personalities).
And they are formulated by substituting the investment in shares of subsidiary companies of the holding company of assets and liabilities and eliminating the balances and operations carried out between the different companies, as well as the profits not realized by the entity.
The foregoing refers to the union of the financial statements of the parent company and its subsidiaries, which will be added to the account (Park and Banyai, 2007). The elimination of the balances referred to in the previous paragraph is the adjustment and occurs in those accounts in which there is an interrelation of the companies, such adjustments will have to appear at the foot of the consolidated financial statement since it has to comply with the norm Of sufficient revelation.
To present financial information of the group as if it were a single company, in order to reflect the operations of the group and the operations carried out with third parties external to the group, in such a way as to present the profits obtained as a single entity and not individually, So that the consolidated financial statements provide appropriate information together.
- Consolidated financial statements may be consolidated on different dates, provided that the difference in the dates does not exceed 3 months and must be prepared based on the same financial reporting standards.
- Names of the main subsidiaries and the proportion of the parent company in said subsidiaries.
- Principal activity of the parent and its subsidiary.
- The relationship between these when the matrix is ??not proprietary.
- Reasons why direct or indirect participation is not control.
- Dates of the financial statements of the subsidiary used in the consolidated financial statements.
- The subsidiary must have its net assets and depreciations in its financial statements.
- To add the accounts of the financial statements of the subsidiaries and the parent company.
- Eliminate intercompany transactions.
- Eliminate the amount of the investment in the subsidiary recognized by the parent company.
- Separate stockholders’ equity(Tan, n.d.).
- Determine the variations by comparing consolidated stockholders ‘equity with the sum of the stockholders’ equity of the parent company and the comprehensive income or loss of its subsidiaries.
Advantages and disadvantages of the Consolidated financial statements.
- Present the financial situation, results of operations and Changes in the financial position of a parent and its subsidiaries in a Single document as if it were a single.
They represent a document that serves as a better guarantee for credits that Be requested from third parties for the cumulative value of the companies (Vachon, 2008).
- They are useful for investors as they serve as the basis for theTaking Investment decisions and better management.
Consolidated financial statements are prepared for a controlling company and its subsidiary, therefore the legal aspects of independent entities are ignored and the matrix is ??emphasized · The usefulness of consolidated financial statements for minority shareholders, creditors Of subsidiaries and government agencies is limited since the aforementioned financial statements do not include any details of the subsidiaries.
Exceptions of the obligation to consolidate financial statements. The matrices or Controlling financial statements are not required to prepare consolidated general purpose financial statements when they are operated by a competent authority and such measure results in a loss of control or is in a liquidated state (Viebig, Poddig and Varmaz, 2008). The following is an example of a consolidated balance sheet. To point out that the only thing that appears in the balance sheets is the total sum of the accounts. In this balance there is no adjustment, since the related companies do not have transactions between them, since before we saw that the accounts are eliminated that are interrelated and does not exist here .
Minority interest must be presented as the last line of stockholders ‘equity, the majority shareholders’ participation must be highlighted by a subtotal before incorporation of minority interest (White, 2003). Consolidated income statement must arrive at consolidated net income and at the bottom of said statement will show its distribution between the parent company and the minority shareholders (Mu?ller-Stewens, Kunisch and Binder, n.d.). When the amount of the profits available in subsidiaries differs significantly from the profit figures used for consolidation because different practices have been applied to generally accepted accounting principles, such amount should be disclosed in a note to the statements Financial resources. When different accounting principles are applied because the conditions of consolidated companies are not similar.
References
Depamphilis, D. (2017). Mergers, Acquisitions, And Other Restructuring Activities. [s.l.]: Elsevier Academic Press.
Fraser, L. and Ormiston, A. (2016). Understanding financial statements. Boston: Pearson.
Gaughan, P. (2017). Mergers, Acquisitions, And Corporate Restructurings. [s.l.]: John Wiley.
Hove, M. (2006). Consolidated financial statements. Cape Town, South Africa: Juta Academic.
Mu?ller-Stewens, G., Kunisch, S. and Binder, A. (n.d.). Mergers & Acquisitions.
Nussbaum, A. (n.d.). Mergers & acquisitions.
Park, L. and Banyai, I. (2007). Tap dancing on the roof. New York: Clarion Books.
Tan, L. (n.d.). Consolidated financial statements.
Vachon, D. (2008). Mergers & acquisitions. New York: Riverhead Books.
Viebig, J., Poddig, T. and Varmaz, A. (2008). Equity valuation. Chichester: J. Wiley & Sons.
White, K. (2003). Acquisitions. Columbus, MS: Genesis Press.
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