Chapter 5

Advanced Accounting
Concepts

Puja Patil, Assistant Professor, IIBM

Introduction
Advanced

accounting concepts

includes:

Merger & amalgamation

Acquisition or takeover
Holding company
Economic value added (EVA)
Equity analysis
Stock split
Buy back of shares
Puja Patil, Assistant Professor, IIBM

Merger or Amalgamation
Combination

of two or more
companies into one company
One or more companies merged
with existing company or
formation of a new company
Income tax act of India uses
amalgamation term for merger

Puja Patil, Assistant Professor, IIBM

Forms of Merger or
Amalgamation
Absorption

Combination of two or more companies

into an existing company
All companies except one go into
liquidation
One concern acquires business of
another concern without forming a new
company
Size of concerns differs in absorption
Puja Patil, Assistant Professor, IIBM

Forms of Merger or
Amalgamation
Absorption

For e.g., 2 companies A ltd. & B ltd.

Company B merged into company A
Leaving its assets & liabilities to
acquiring company A ltd.

For e.g., Reliance Polypropylene ltd.

By Reliance Industries Ltd.

Puja Patil, Assistant Professor, IIBM

Forms of Merger or
Amalgamation
Consolidation

Combination of two or more companies

into new company
All existing companies go into liquidation
& form a new company with different
entity
Assets & liabilities of consolidating
company are taken over by new
company
Assets of old concerns are sold to new
concern
Puja Patil, Assistant Professor, IIBM
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Forms of Merger or
Amalgamation
Consolidation

New concern is formed by union of

two or more concerns
For e.g., company A ltd. & Company
B Ltd. Merged to form a new entity
AB ltd.

Puja Patil, Assistant Professor, IIBM

Types of Merger
Horizontal

merger

Two or more concern dealing in same

product or service join together
Idea avoid competition between
units
For e.g., two or more companies
dealing in: Manufacturing of cloth
Book seller
Transport companies operating on same
route
Puja Patil, Assistant Professor, IIBM

Types of Merger
Horizontal

merger

Advantages :

Avoiding competition
Economics of scale
Marketing economies
Elimination of duplication of facilities

For e.g., Tata Industrial Finance ltd

with Tata Finance ltd.

Puja Patil, Assistant Professor, IIBM

Types of Merger
Vertical

merger

Merger of firms engaged at different

stages of production
Companies dealing in same product
but at different stages of production
join to carry out whole process
Idea take up two different stages of
work to ensure speedy production or
quick service

Puja Patil, Assistant Professor, IIBM

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Types of Merger
Vertical

merger

For e.g.,
Petroleum company may set up petrol
pump for its selling
Railway company join with coal mining
company for carrying coal
Textile company merge with transport
company for carrying its products to
different places

Puja Patil, Assistant Professor, IIBM

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Types of Merger
Conglomerate

merger

Two concerns dealing in totally different

activities join hands
Merging concerns are neither
horizontally nor vertically related
Some common features in merging
company
Distribution channel
Technology

Merger undertaken to diversify activities

Puja Patil, Assistant Professor, IIBM

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Types of Merger
Concenetric

merger

Two merging firms are in the same

general industry
But no mutual buyer or supplier
relationship
For e.g., merger between bank and
leasing company
Prudentials acquisition of Bache &
company

Puja Patil, Assistant Professor, IIBM

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Types of Merger
Reverse

merger

A way of going public without the

expenses & time required by IPO
Healthy company merges into
financially weak company
Take advantage of provisions of
income tax act
Permits company to carry forward its
losses to set off against its future profits

Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Expansion

& Growth

Less time consuming & cost effective

Satisfactory & balanced growth of
company
Cheaper & less risky
Desired level of growth maintained
by acquiring another company

Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Diversification

Two or more companies operating in

different lines diversify through
amalgamation
Less risk in diversification different
companies dealing in their
respective lines
Bring together experience of
different persons in varied activities

Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Economics

of scale

Increase in scale of operation

More intensive utilization of
Production facilities
Distribution network
R&D facilities

Optimal point economies will occur

only up to certain point of operation
Point at which average cost is minimum
Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Synergy

Refers to greater combined value of

merged firms than sum of the values of
individual units
Results from benefits other than those
related to economies of scale
Synergy benefits:
Operating synergy
Strong R&D facilities of one with organized
production facilities with another
Enhanced managerial capabilities
Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Market

penetration

Introduction of product to all

segments easier
Market

leadership

Avoid unhealthy competition

Combined additional market share
Increase access to market
Play market strategies successfully

Puja Patil, Assistant Professor, IIBM

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Reasons/Motives/Advantages
behind Merger
Utilization

of surplus funds
Risk reduction
New product entry
New market entry
Deployment of surplus funds
Operating economies

Puja Patil, Assistant Professor, IIBM

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Benefits of Merger
Diversification

of product and
service offerings
Increase in plant capacity
Larger market share
Utilization of operational
expertise and research and
development (R&D)
Reduction of financial risk
Puja Patil, Assistant Professor, IIBM

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Cost of Merger
Direct

monetary costs

Legal cost
Consultant fees
Audit fees
Relocation expenses
Logo design & printing expenses
Webpage redesign cost

Puja Patil, Assistant Professor, IIBM

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Cost of Merger
Human

Resource cost

Committee meetings & meetings of

stakeholders, members & directors
Negotiating the relationship of postmerger organization
Securing required voting %

Puja Patil, Assistant Professor, IIBM

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Merger Process
Defining corporate strategy

Puja Patil, Assistant Professor, IIBM

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Merger Process
Defining

corporate strategy

What business the firm is currently in?

What business it intends to be in?
How does it wishes to grow and be known as?
Implementing

corporate strategy

Route or roadmap to implement its corporate

strategy
Mergers
Joint ventures
Internal development
Puja Patil, Assistant Professor, IIBM

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Merger Process
Target

identification

Target firm to merge / acquire

Parameters for identification

Financial consideration
Business strength
Weaknesses
Specific resource
Competencies & capabilities
Structure, strategies, culture & processes
Market power
Puja Patil, Assistant Professor, IIBM

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Merger Process
Valuation

of merger

Specific cost & premium

Firm will pay for acquiring share or
management control of target firm

Depend on
Projected synergies after merger

Puja Patil, Assistant Professor, IIBM

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Merger Process
Merger

implementation

Tax, regulatory & market issues

Local laws, conditions & shareholders
preferences
Merger happens through: Stock swap
Tender offer
Cash offer

Registration of merger, obtaining

shareholders approval, announcement to
public & notifying to stock exchange part
of this stage
Puja Patil, Assistant Professor, IIBM

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Merger Process
Post-merger

integration

Its a final stage

Includes:

Asset stripping
improving operating efficiency
Setting up managerial system
Streamlining operations of combined firm
Establishing corporate culture
Ensuring competitiveness of combined
firm
Puja Patil, Assistant Professor, IIBM

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Acquisition or Takeover
Buying

of one firm by another

When one company takes over
another and clearly established
itself as the new owner
The purchase is called an
acquisition.
Acquisition is generally
considered negative in nature
Acquisitions are often made as
part of a company's growth

Puja Patil, Assistant Professor, IIBM

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Acquisition or Takeover
More

beneficial to take over an existing

firm's operations and niche compared to
expanding on its own.
Acquisitions are often paid in cash, the
acquiring company's stock or a
combination of both.
Acquiring company often offers a
premium on the market price of the
target company's shares in order to
entice shareholders to sell.
Puja Patil, Assistant Professor, IIBM

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Types of Acquisition
Friendly

takeover

One business makes bid to buy other

business
Shareholders of acquired company
receive cash
Receive certain number of shares in
acquiring company
Target company's management and
board of directors agreetoa merger
or acquisitionby another company.
Puja Patil, Assistant Professor, IIBM

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Types of Acquisition
Hostile

takeover

One company moves to acquire

target company
Even if target company does not
want to be bought out
Acquiring company buys controlling
amount of shares in target company
A takeover attempt that is strongly
resisted by the target firm
Puja Patil, Assistant Professor, IIBM

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Types of Acquisition
Reverse

takeover

Smaller company to buy out bigger

company
Private company to buy public
company

Puja Patil, Assistant Professor, IIBM

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Principles of Acquisitions
Transparency

of process

Takeover affects interest of many parties

Conducted in open manner
Regarded as legitimate device in market
for corporate control by various parties
Interest

of small shareholder

Controlling block between 20% to 40%

acquired by single seller
At negotiated price higher than market
price
Puja Patil, Assistant Professor, IIBM

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Principles of Acquisitions
Realization

of economic gains

Improve operating efficiency

Promote optimum utilization of
resources
Through:

Restructuring operations
Widening of product range
Redeployment of recourses
Suitable fiscal incentives

Puja Patil, Assistant Professor, IIBM

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Principles of Acquisitions
No

undue concentration of market

power
Acquirer should not enjoy undue market
power
Which can be used to detriment of
customers & others

Financial

support

To enable competent person to

participate in takeover process
Access to funds provided by financial
institutions
Puja Patil, Assistant Professor, IIBM

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Reasons or Advantages of
Acquisitions
Increased

market power
Overcoming entry barriers
Cost of New product
development
Increased speed to market
Access to resourceful
management
Increased diversification
Learning & developing new
capabilities

Puja Patil, Assistant Professor, IIBM

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