Corporate Defenses and Changes

1

Mergers-Notes – 2/19/03

Corporate defenses and changes

A.Greenmail

1.Repurchase of stock at ‘over the market price.’

2.Excess over market is an expense

Expense

Treasury stock

Cash

B.Restructuring

1.Decision to sell

a.At time of decision assets and liabilities become reported as net assets of discontinued operations

Net assets of discontinued operations

Liabilities of discontinued operaitons

Assets of discontinued operations

b.Discontinued operation must be clearly distinguishable physically and operationally

c.Operations are also separated and reported as net

d.Actual sale entry

New assets

Net assets of discontinued operations

Loss or Gain

2.Spinoffs

a.Full spinoff

i)Distribution of shares in a subsidiary to shareholders

ii)Company gets rid of assets & liabilities that may not fit

iii)Meet legal obligations

iv)Shareholders get stock in new company

v)Company can create a sub with assets & liabilities, then distribute securities

b.Partial spinoff

i)Issues shares to public for a price

ii)Distribute rest of shares to stockholders

c.Accounting

i)Property dividend

ii)Done at book value

iii)No gain or loss

Debt (assumed by spinoff reduces debt of parent)

APIC

Net Assets of discontinued operations

Introduction to consolidation

A.Examples – Cost of acquisition > book value

1.Consolidation a premium purchase: Cost of acquisition > book value

a.100% ownership example

b.Purchase by common stock and cash

Investment in S (including fees necessary to acquire the sub)

Cash

Common stock - P

Additional Paid-in Capital - P

c.Excess is the premium over book value

i)Premium is allocated to assets& liabilities of sub

ii)Brings them to fair value if possible

d.Any leftover premium is goodwill

e.Elimination entries

i)Removal of book value of investment

Common stock – S

APIC – S

Retained earnings – S

Investment in S (investment premium still remains)

ii)Removal of rest of investment

Purchase Premium - P

Investment in S (eliminates investment premium)

iii)Allocation of purchase premium

Adjust Assets (S) to Fair

Goodwill(leftover premium)

Adjust Liabilities to Fair (S)

Purchase Premium - P

f.Result

i)Old assets & liabilities of P at book

ii)Acquired assets and liabilities at fair value

iii)Excess accounted for as goodwill

2.Consolidation a premium purchase: Cost of acquisition > book value

a.n% ownership example

b.Purchase by common stock and cash

Investment in S (including fees necessary to acquire the sub)

Cash

Common stock - P

Additional Paid-in Capital - P

c.Excess is the premium over book value

i)Premium calculated as

Cost of acquisition – n%(book value of S’s net assets)

(1)Premium attaches only to acquired interest

(2)Leaves minority interest at old book value

(3)Minority interest is not revalued – not part of deal

ii)Premium is allocated to assets& liabilities of sub

iii)Brings them to fair value if possible

d.Any leftover premium is goodwill

e.Elimination entries

i)Removal of book value of investment

Common stock – S

APIC – S

Retained earnings – S

Investment in S (investment premium still remains)

Minority interest in S (at old book)

ii)Removal of rest of investment

Purchase Premium - P

Investment in S (eliminates investment premium)

iii)Allocation of purchase premium

Adjust Assets (S) toward Fair(adjustment is n% of fair adjustment)

Goodwill(leftover premium)

Adjust Liabilities (S) toward Fair (adjstmnt is n% of fair adjstmnt)

Purchase Premium – P

f.Result

i)Old assets & liabilities of P at book

ii)Acquired assets and liabilities adjusted toward fair

iii)Excess accounted for as goodwill

g.Minority ownership position is recognized

i)Not revalued to fair

ii)No need to pay minority off & buy out position

iii)Not a liability

iv)A second permanent source of equity

v)A permanent partner & drain on profits

B.Examples – Cost of acquisition < book value

1.Consolidation a discount purchase: Cost of acquisition < book value

a.100% ownership example

b.Purchase by common stock and cash

Investment in S (including fees necessary to acquire the sub)

Cash

Common stock - P

Additional Paid-in Capital - P

c.Discount is the cost less than book value

i)Goodwill is excess of fair value of accounts – book value of accounts

ii)Negative goodwill if fair value < book value

iii)Negative goodwill is allocated to assets& liabilities of sub

iv)Reduces their values

(1)Assign to noncurrent assets first

(2)Leave current assets and liabilities at fair value

d.The allocation

i)Get fair value of assets to be adjusted

ii)Determine amount of negative goodwill to be subtracted from fair value adjustment

iii)Allocate discount in accord with fair values

iv)Subtract allocation from fair values

e.First step of consolidation is addition – puts assets & liabilities of S into consolidation

f.Elimination entries

i)Removal of book value of investment

Common stock – S

APIC – S

Retained earnings – S

Investment in S (investment discount still remains)

ii)Removal of rest of investment

Investment in S (eliminates investment discount)

Purchase Discount – P

iii)Allocation of purchase discount

Adjust Current Assets (S) to Fair

Adjust LT Assets (S) toward Fair

Purchase Discount(leftover discount)

Adjust Liabilities to Fair (S)

Adjust Other LT Assets (S) toward Fair

g.Result

i)Old assets & liabilities of P at book

ii)Acquired current assets and liabilities at fair value

iii)Acquired LT assets toward fair value

2.Consolidation a discount purchase: Cost of acquisition < book value

a.n% ownership example

b.Purchase by common stock and cash

Investment in S (including fees necessary to acquire the sub)

Cash

Common stock - P

Additional Paid-in Capital - P

c.Discount is amount less than book value

i)Discount calculated as

Cost of acquisition – n%(book value of S’s net assets)

(1)Discount attaches only to acquired interest

(2)Leaves minority interest at old book value

(3)Minority interest is not revalued – not part of deal

ii)Discount is allocated to assets& liabilities of sub

iii)Brings them to fair value if possible

iv)Goodwill is excess of fair valu of accts – book valu of accts

v)Negative goodwill if fair value < book value

vi)Negative goodwill is allocated to assets& liabilities of sub

vii)Reduces their values

(1)Assign to noncurrent assets first

(2)Leave current assets and liabilities at fair value

d.The allocation

i)Get fair value of assets to be adjusted

ii)Adjust assets/liabilities toward fair value per ownership %

iii)Determine amount of negative goodwill to be subtracted from fair value adjustment

iv)Allocate discount in accord with fair values

v)Subtract allocation from adjustments toward fair values

e.Elimination entries

i)Removal of book value of investment

Common stock – S

APIC – S

Retained earnings – S

Investment in S (investment discount still remains)

ii)Removal of rest of investment

Investment in S (eliminates investment discount)

Purchase Discount - P

iii)Allocation of purchase discount

Adjust Current Assets (S) to Fair

Adjust LT Assets (S) toward Fair

Purchase Discount(leftover discount)

Adjust Liabilities to Fair (S)

Adjust Other LT Assets (S) toward Fair

f.Result

i)Old assets & liabilities of P at book

ii)Acquired assets and liabilities adjusted toward fair

iii)No goodwill

g.Minority ownership position is recognized

i)Not revalued to fair

ii)No need to pay minority off & buy out position

iii)Not a liability

iv)A second permanent source of equity

v)A permanent partner & drain on profits