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Solution
C will be consolidated on the basis of actual dominant influence and control exercised by the group because of the control contract.
IDENTIFYING AN ACQUIRER
Occasionally it may be difficult to identify an acquirer, but normally there will be indications that one exists; for example, when entities combine, the fair value of
one of the entities is likely to be significantly greater than that of the other entity, or one entity may provide the bulk of the management expertise. In this case, the
entity with the greater fair value and that provides the management expertise is probably the acquirer. Similarly, if the combination results in the management of one of
the entities being able to dominate the composition of the management team of the combined entity, then the entity whose management is dominating the composition
of the management team is likely to be the acquirer.
Facts
CASE STUDY 2
X, a public limited company, is to merge its operations with Z, a public limited company. The terms of the merger will be that Z will offer two of its shares
for every one share of X. There will be no cash consideration. Z’s market capitalization is $500 million and X’s is $250 million. After the issue of shares,
the board of directors will be comprised of only directors from Z. The group is to be named Z Group. Three months after the acquisition, 20% of X is sold.
Required
Is it possible to identify an acquirer?
Solution
It seems obvious that Z is the acquirer of X and not vice versa. Z is a much larger company and will dominate the business combination because of its
control of the board of directors. Also the group is to be named the Z Group, which really confirms that Z is the acquirer. Additionally, part of X is sold
after the acquisition, which again seems to indicate that Z acquired X.
Generally speaking, the entity that issues the equity shares in exchange for the net assets of the other entity normally can be designated the acquirer. However, in
some business combinations that are referred to as reverse acquisitions, the acquirer could be the entity whose equity interests are acquired and the issuing entity is the
acquiree. This can be the case where a private entity decides to have itself “acquired” by a smaller public entity in order to obtain a stock exchange listing. The entity
issuing the shares will be regarded as the parent, and the private entity will be regarded as the subsidiary. The legal subsidiary will be deemed to be the acquirer if it
has the power to govern the financial and operating policies of the legal parent.
PRACTICAL INSIGHT
Alliance Pharma, plc, a UK company, was “acquired” by Peerless Technology. Peerless became the legal parent of Alliance but due to the relative values
of the companies, the former shareholders of Alliance became the majority shareholder with 67% of the combined company. The management of the new
group was that of Alliance, and Peerless changed its name to Alliance Pharma. This was a reverse acquisition.
As a result of this reverse acquisition, the financial statements would comprise those of Alliance plus those of Peerless from the date of acquisition, and the
comparative results of Alliance.
COST OF ACQUISITION
The cost of the acquisition has to be measured. It is the sum of the fair values of the assets given or liabilities incurred at the date of the acquisition plus the equity
shares issued by the acquirer in exchange for control of the acquiree plus any costs that are directly related to the business combination. Equity shares issued as
consideration for the acquisition of the other entity will be valued at their market price. If a market price is not in existence or cannot be reliably determined, then other
valuation methods can be used.