AMALGAMATION OF AMALGAMATION OF COMPANIESCOMPANIES

ACCOUNTING PERSPECTIVEACCOUNTING PERSPECTIVE

ContentsContents

Business scenarioBusiness scenario Inorganic expansionInorganic expansion Intent and structure of acquisitionsIntent and structure of acquisitions Amalgamation - attributesAmalgamation - attributes Types of merger and steps involvedTypes of merger and steps involved Accounting for mergers Accounting for mergers Two types of methods of accountingTwo types of methods of accounting Inter-company holdings and transactionsInter-company holdings and transactions Innovative accountingInnovative accounting

Business ScenarioBusiness Scenario

In globalised scenario, businesses increasingly In globalised scenario, businesses increasingly need to reinvent themselves in order to grow, need to reinvent themselves in order to grow, remain relevant and profitable. remain relevant and profitable.

Constant need for: Constant need for: ExpansionExpansion DiversificationDiversification ConsolidationConsolidation Backward/forward integration Backward/forward integration Reducing competition or even monopolisationReducing competition or even monopolisation

Strategies:Strategies: organic organic inorganicinorganic

Inorganic ExpansionInorganic Expansion

Different strategies for acquisition of business:Different strategies for acquisition of business:

Acquisition of a running business on `going Acquisition of a running business on `going concern basis`concern basis`

Acquisition of assetsAcquisition of assets

Acquisition of business through management Acquisition of business through management controlcontrol

Intent of AcquisitionIntent of AcquisitionAcquisitionAcquisition IntentIntent

Smithlkine Beechem (now Smithlkine Beechem (now Glaxo)’s acquisition of `Crocin` Glaxo)’s acquisition of `Crocin`

Smithkline intended to acquire Smithkline intended to acquire only the brand and related only the brand and related assets as it had manufacturing assets as it had manufacturing facilities of its ownfacilities of its own

Tata Steel’s acquisition of CorusTata Steel’s acquisition of Corus Tatas wanted a pie of the Tatas wanted a pie of the lucrative European market for lucrative European market for which it was imperative to have which it was imperative to have manufacturing facility within manufacturing facility within Europe Europe

ICICI Bank’s acquisition of Sangli ICICI Bank’s acquisition of Sangli BankBank

Sangli Bank had a large branch Sangli Bank had a large branch network in Maharashtra which network in Maharashtra which ICICI in its rapid expansion was ICICI in its rapid expansion was eyeing eyeing

Intent drives the Structure of Intent drives the Structure of AcquisitionAcquisition

AcquisitionAcquisition IntentIntent StructureStructureSmithlkine Beechem (now Smithlkine Beechem (now Glaxo) acquisition of Glaxo) acquisition of `Crocin` brand and related `Crocin` brand and related businessbusiness

Buyer only wanted the brand Buyer only wanted the brand and assets. and assets.

The seller wanted out of The seller wanted out of crocin businesscrocin business

Outright PurchaseOutright Purchase

Smithkline bought the assets Smithkline bought the assets and the seller got money.and the seller got money.

Consideration went to the Consideration went to the seller company and not to its seller company and not to its shareholders.shareholders.

Tata Steel’s acquisition of Tata Steel’s acquisition of CorusCorus

Largest shareholder in Corus Largest shareholder in Corus intended to sell the shares. intended to sell the shares.

Tatas intended to acquire Tatas intended to acquire the shares and take control the shares and take control of Corus.of Corus.

Purchase of SharesPurchase of Shares

Tata Steel paid cash to Tata Steel paid cash to shareholders of Corus and shareholders of Corus and took management control of took management control of Corus.Corus.

Shareholders of Corus got Shareholders of Corus got money.money.

ICICI Bank’s acquisition of ICICI Bank’s acquisition of Sangli Bank Sangli Bank

The shareholders of Sangli The shareholders of Sangli Bank intended to continue in Bank intended to continue in the business of banking.the business of banking.

ICICI was interested in rapid ICICI was interested in rapid branch expansion under its branch expansion under its own brand. own brand.

Amalgamation/MergerAmalgamation/Merger

Sangli Bank merged itself Sangli Bank merged itself into ICICI Bank. into ICICI Bank. Shareholders of Sangli Bank Shareholders of Sangli Bank got shares of ICICI Bank.got shares of ICICI Bank.

Amalgamation - AttributesAmalgamation - Attributes Amalgamation is also referred to as `merger`.Amalgamation is also referred to as `merger`. Fusion of two or more existing companies. Fusion of two or more existing companies. The company getting merged is called the The company getting merged is called the

`Transferor Company` `Transferor Company` Company in which it merges is called the Company in which it merges is called the

`Transferee Company` `Transferee Company` All assets and liabilities of the transferor company All assets and liabilities of the transferor company

gets transferred to the transferee companygets transferred to the transferee company The transferee company pays consideration by The transferee company pays consideration by

issue of its equity shares/debentures and/or issue of its equity shares/debentures and/or payment in cash payment in cash

The transferor company gets extinguished The transferor company gets extinguished The shareholders of the transferor company The shareholders of the transferor company

become shareholders of the transferee company become shareholders of the transferee company

Example of a MergerExample of a MergerSay, A Ltd. acquires B Ltd. and they opt for a merger; then:Say, A Ltd. acquires B Ltd. and they opt for a merger; then:

B Ltd.: Transferor Company – will extinguish on mergerB Ltd.: Transferor Company – will extinguish on merger A Ltd.: Transferee Company – it will survive A Ltd.: Transferee Company – it will survive All the assets and liabilities of `B` will become assets and All the assets and liabilities of `B` will become assets and

liabilities of `A` liabilities of `A` `A` being the buyer needs to pay compensation for the merger`A` being the buyer needs to pay compensation for the merger Shareholders of `B` are the sellers and therefore need to be Shareholders of `B` are the sellers and therefore need to be

compensatedcompensated `A` will therefore pay compensation to shareholders of `B` by way `A` will therefore pay compensation to shareholders of `B` by way

of :of : issue of equity shares of `A` issue of equity shares of `A` debentures of `A` debentures of `A` and/or cash payment and/or cash payment

Merger – Two TypesMerger – Two Types Forward MergerForward Merger – normal merger – a bigger – normal merger – a bigger

company acquires a smaller company and merges the company acquires a smaller company and merges the smaller company into itself smaller company into itself

Reverse MergerReverse Merger – though a bigger company acquires – though a bigger company acquires a smaller company; the structure given to the a smaller company; the structure given to the transaction is that the bigger company merges into transaction is that the bigger company merges into the smaller company. the smaller company.

Generally, `forward merger` is followed except in Generally, `forward merger` is followed except in exceptional cases where `reverse merger` is exceptional cases where `reverse merger` is beneficial to achieve a specific motive like tax beneficial to achieve a specific motive like tax exemption or listing. exemption or listing.

Example of a reverse merger - merger of Spicejet into Example of a reverse merger - merger of Spicejet into Modiluft; later Modiluft’s name was changed to Modiluft; later Modiluft’s name was changed to Spicejet. Spicejet.

Steps in a MergerSteps in a Merger Board of directors of both companies – transferor and Board of directors of both companies – transferor and

transferee – decide to merge transferee – decide to merge Companies appoint valuers to ascertain fair value of shares Companies appoint valuers to ascertain fair value of shares

of both the companies of both the companies A A scheme of mergerscheme of merger is framed which among other things, is framed which among other things,

will provide for :will provide for : The basis of payment of consideration by the transferee company – i.e. The basis of payment of consideration by the transferee company – i.e.

shares, debentures, cash shares, debentures, cash Share exchange ratio - on the basis of share valuationShare exchange ratio - on the basis of share valuation

A petition is made to the High Court seeking permission to A petition is made to the High Court seeking permission to merge as per the schememerge as per the scheme

The Court directs the companies to hold meetings of The Court directs the companies to hold meetings of shareholders and creditors to approve the mergershareholders and creditors to approve the merger

After approval by shareholders and creditors, the Court After approval by shareholders and creditors, the Court passes an order of merger as per the scheme passes an order of merger as per the scheme

Companies pass necessary entries in their books of account Companies pass necessary entries in their books of account recording the mergerrecording the merger

Accounting for MergersAccounting for Mergers In order to ensure uniformity in accounting (recording of In order to ensure uniformity in accounting (recording of

transactions), the Institute of Chartered Accountants of transactions), the Institute of Chartered Accountants of India (ICAI) has prescribed Accounting Standards laying India (ICAI) has prescribed Accounting Standards laying down standard accounting practices for different kinds of down standard accounting practices for different kinds of transactions. transactions.

AS-14 deals with accounting of mergers. AS-14 deals with accounting of mergers.

The AS-14 is mandatory for companies to follow.The AS-14 is mandatory for companies to follow.

AS-14 prescribes two types of methods for accounting for AS-14 prescribes two types of methods for accounting for mergers: mergers:

Pooling of InterestPooling of Interest PurchasePurchase

Pooling of Interest MethodPooling of Interest Method As the name suggests – merger is a genuine pooling of assets, As the name suggests – merger is a genuine pooling of assets,

liabilities, business and shareholders’ interest of both the companiesliabilities, business and shareholders’ interest of both the companies In objective terms, this method is to be followed where:In objective terms, this method is to be followed where:

All assets and liabilities of the transferor company become assets and liabilities All assets and liabilities of the transferor company become assets and liabilities of the transferee companyof the transferee company

The consideration for merger is discharged by the transferee company by issue The consideration for merger is discharged by the transferee company by issue of its shares onlyof its shares only

The business of the transferor company is intended to be carried on.The business of the transferor company is intended to be carried on. The value of assets and liabilities are taken over at their book values The value of assets and liabilities are taken over at their book values

It is like sum total of both the balance sheets:It is like sum total of both the balance sheets: line by line consolidation of values of assets, liabilities and reservesline by line consolidation of values of assets, liabilities and reserves reserves of the transferor company will retain their identity and will be treated reserves of the transferor company will retain their identity and will be treated

similarly in the transferee company’s accountssimilarly in the transferee company’s accounts Any excess or shortfall between the net book values of assets of the Any excess or shortfall between the net book values of assets of the

transferor company and the value of shares issued by transferee transferor company and the value of shares issued by transferee company is adjusted in the reserves of the transferee companycompany is adjusted in the reserves of the transferee company

Purchase MethodPurchase Method As the name suggests – merger reflects a purchase by As the name suggests – merger reflects a purchase by

the transferee company the transferee company The transferee company accounts for assets and The transferee company accounts for assets and

liabilities (of the transferor company) at their fair values liabilities (of the transferor company) at their fair values and not necessarily book values and not necessarily book values

It may also account for certain assets or liabilities which It may also account for certain assets or liabilities which are not recorded in the books of the transferor are not recorded in the books of the transferor company (e.g. trade mark, brand, copyright)company (e.g. trade mark, brand, copyright)

The consideration for the merger is discharged by the The consideration for the merger is discharged by the transferee company by issue of its shares or a mix of transferee company by issue of its shares or a mix of shares, debentures and cash shares, debentures and cash

Consideration paid in excess of fair values of net assets Consideration paid in excess of fair values of net assets is treated as goodwill is treated as goodwill

If the consideration paid is lower than the fair values of If the consideration paid is lower than the fair values of net assets, then, the difference is treated as a `Capital net assets, then, the difference is treated as a `Capital Reserve`. Reserve`.

Inter-company TransactionsInter-company Transactions

Inter-company HoldingsInter-company Holdings Where either of the company holds shares in the Where either of the company holds shares in the

other, then, to that extent share capital is cancelledother, then, to that extent share capital is cancelled• Example of merger of subsidiaries of Nicholas Piramal India LimitedExample of merger of subsidiaries of Nicholas Piramal India Limited• Example of RCVL’s merger with Reliance Capital Ltd. Example of RCVL’s merger with Reliance Capital Ltd.

Inter-company Balances and StocksInter-company Balances and Stocks While consolidating the accounts of the transferee company, While consolidating the accounts of the transferee company,

internal balances are squared-off and cancelledinternal balances are squared-off and cancelled Where either of the company holds stocks/inventory of goods Where either of the company holds stocks/inventory of goods

sold by the other, then the profit element therein is nullified and sold by the other, then the profit element therein is nullified and adjusted adjusted

Innovative Accounting – Innovative Accounting – Recent DevelopmentsRecent Developments

Instead of treating the excess consideration as goodwill, it is Instead of treating the excess consideration as goodwill, it is adjusted against other reserves of transferee companyadjusted against other reserves of transferee company

• Example of Sangli Bank’s merger with ICICI BankExample of Sangli Bank’s merger with ICICI Bank• Example of Go4i.com’s merger with Hindustan Times Example of Go4i.com’s merger with Hindustan Times

Instead of treating the short consideration as capital reserve, it is Instead of treating the short consideration as capital reserve, it is treated as general reserve or share premium reservetreated as general reserve or share premium reserve

• Example of IPCL’s merger with Reliance IndustriesExample of IPCL’s merger with Reliance Industries

In case of inter-company holdings, instead of canceling equity In case of inter-company holdings, instead of canceling equity shares, such shares are transferred in a trust as treasury stock shares, such shares are transferred in a trust as treasury stock

• Example of merger of M&M’s subsidiariesExample of merger of M&M’s subsidiaries

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