Question

In: Accounting

1.What are the steps that the company has to do in time of merger transaction? And...

1.What are the steps that the company has to do in time of merger transaction? And What are the obstacle that may lead to merger failure?

2.What are the Exceptions to not to consolidate the financial statement and what are the benefits of consolidating the financial statements

Solutions

Expert Solution

1

Mergers are part of strategic management of any business. It involves consolidation of two businesses with an aim to increase market share, profits and influence in the industry.

Mergers and Acquisitions are complex processes which require preparing, analysis and deliberation. There are a lot of parties who might be affected by a merger or an acquisition, like government agencies, workers and managers. Before a deal is finalized all party needs to be taken into consideration, and their concerns should be addressed, so that any possible hurdles can be avoided.

Steps in a Merger

There are three major steps in a merger transaction: planning, resolution, and implementation.

1. Planning, which is the most complex part of the merger process, entails the analysis, the action plan, and the negotiations between the parties involved. The planning stage may last any length of time, but once it is complete, the merger process is well on the way.

More in detail, the planning stage also includes:

  • signing of the letter of intent which starts off the negotiations;
  • the appointing of advisors who play the role of consultants, examining the strengths, weaknesses, opportunities, and threats of the merger;
  • detailing the timetable (deadline), conditions (share exchange ratio), and type of transaction (merger by integration or through the formation of a new company);
  • Expert report on the consistency of the share exchange ratio, for all of the companies involved.

2. The resolution is simply management's approval first, then by the shareholders involved in the merger plan.

The resolution stage also includes:

  • the Board of Directors calling an extraordinary shareholders’ meeting whose item on the agenda is the merger proposal;
  • the extraordinary shareholders’ meeting being called to pass a resolution on the item on the agenda;
  • any opposition to the merger by creditors and bondholders within 60 days of the resolution;
  • Green light from the government that evaluates the impact of the merger and imposes any obligations as a prerequisite for approving the merger.

3. Implementation is the final stage of the merger process, including enrolment of the merger deed in the Company Register.

Normally medium-sized/big mergers require one year from the start-up of negotiations to the closing of the transaction. This is because, in addition to the time needed technically, there are problems relating to the share exchange ratio between the merging companies which is rarely accepted by the parties without drawn-out negotiations.

During the merger process, share prices will adjust to the share exchange ratio. On the effective date of the merger, financial intermediaries will enter the new shares with the new quantities in the dossiers. The shareholders may trade without constraint the new shares and benefit from all rights (dividends, voting rights).

Possible reasons for merger failure:

1.Differences

One of the primary reasons that mergers sometimes fall apart before they can ever be completed is due to the differences between those attempting the merger in the first place. Differences in opinion or management style may cause potential partners to fail to see eye-to-eye, causing the merger negotiations to break down. This can happen for other reasons as well. Differences in personality may cause two potential partners to part ways even though it may be mutually beneficial to combine their efforts.

2.Legal Issues

Legal issues present another major snafu the companies may run into during the merger process. Since the passage of the Sherman Anti-trust Act of 1890, companies in the United States have been forbidden to form any type of business entity that might result in the restriction of fair trade. This applies to mergers at the corporate level as well. The act indicates that any "combinations" in restraint of trade are also illegal. It has taken well over a century for U.S. policymakers to fully spell out what this means, but it is an important consideration that companies must make when moving forward in the merger process.

3.Culture

Differences in corporate culture from one organization to the next also can pose problems for businesses looking to combine efforts and resources. This is closely related to the differences seen between partners but applies to the entire organization as a whole rather than the differences between those at the top of the corporate food chain. The ability to combine two organizations with cultures that are seeming polar opposites of one another requires both planning and a certain level of artistry. Cultural differences can threaten the outcome of a merger.

4.Integration

One of the most significant problems that occurs in relation to a corporate merger is the post-merger integration that must take place. Companies that combine their efforts and resources must learn to do so by bringing all of the constituent elements of their organizations together. This is easier said than done. The amount of planning and negotiating required to bring this about is fairly significant and usually takes place during the merger process. This integration planning is closely related to cultural issues because it requires those involved in the planning process to determine what corporate culture will look like after the merger.

2.

As per IFRS 10, a parent need not present consolidated financial statements if it meets all of the following conditions:

  • it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements
  • its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets)
  • it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market, and
  • its ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.

Consolidated financial statements present the financial position and results of operations for parent and one or more subsidiaries as if the individual entities are a single company.

  • These are prepared primarily for the benefit of the shareholders, creditors and the other resource providers of the parent.
  • Significantly, consolidated financial statements often represent the only mans of obtaining a clear picture of the total resources of the combined entity that are under the control of parent entity.

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