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22320 Accounting For Business Combinations

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22320 Accounting For Business Combinations

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Course Code: 22320
University: University Of Technology Sydney

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Country: Australia

Question:

The aim of the group assignment is for you to apply the skills and knowledge learnt in this subject to evaluate whether the takeover was value enhancing for shareholders. You will be allocated a company in class.
This assessment relates to the following subject and program objectives:

SLO 3. Critically evaluate the conceptual basis of accounting standards and extend accounting and reporting techniques to non-routine circumstances
SLO 4. Identify the appropriate account treatment applicable in various circumstances firms face in practice and analyze the impact of this choice on reported accounting numbers
CILO 3.1. Use effective written communication skills appropriate for working at senior level in the accounting sector in both local and international settings
PLO 5.2: Execute a substantial research-based or professionally focused project

Your discussion should cover at least the following points:
1.Detailed evaluation of the acquisition analysis: The offer price, method of payment, FVINA allocation and goodwill.
2.Explain how and why the share market reacted to the takeover around the announcement date?
3.Analysis of post-acquisition accounting performance up to 3 years post acquisition.
4.Using the analysis above, evaluate whether the takeover was value enhancing to shareholders.

Answer:

Introduction
This report is prepared with the aim of developing practical understanding about takeover strategy and its role in enhancing value of shareholders. For practical relevance of this report, the case of acquisition between Adelaide Bank and Bendigo Bank will be taken into account. The report will facilitate detailed analysis of the chosen case of merger/ acquisition strategy in terms of goodwill, FVINA allocation, method of payment and the offer price. In addition to this, the report will provide knowledge about reasons, due to which the share market have reacted as a result of major information and announcements of this acquisition. Apart from this, the report will focus on analysis of financial performance of company after the acquisition for a time period up to 3 years. Final section of this report will evaluate and summarize, whether the chosen acquisition between two companies was a value enhancing incident or not.
Background of the Case:
In this report, the case of acquisition between Adelaide Bank and Bendigo Bank has been selected for study. This acquisition has planned and taken place in 2007. Through this acquisition, the boards of companies have the intention of creation of unique partner and customer focused financial services organization. The name of newly acquired/ merged company was planned as Bendigo and Adelaide Bank Limited. In this merger, the investor is Bendigo Bank Ltd. At the same time, investee is this case of acquisition is Adelaide Bank Limited. Apart from this the merger will also result in integration of the specialist skills of the two organizations in retail and the wholesale banking. The merger group will be beneficial for growth of both the existing brands. It was also anticipated from the success of this merger, that customers will be able to enjoy greater range of banking products and services, greater number of bank branches and the greater number of ATMs.
Detailed Evaluation of the Acquisition Analysis:
The public review of this merger was commenced on 20th August 2007. At the same time, the number of days of total reviews was 16 working days. This merger review was completed by ACCA as on 10th September 2007. In this merger the acquirer bank was Bendigo Bank Limited (ACCA, 2018). At the same time, the target bank to be acquired in this case was Adelaide Bank Limited. In order to accomplish this review process, ACCA has performed the analysis of different aspects of the companies. Apart from this, the ACCA has also performed the feasibility analysis of this merger through technique of competition analysis. From this analysis, ACCA has observed that the large competitors in different markets will remain in the markets, as there will not be any major impact of this merger on their business. It was also observed by the ACCA that as a result of success of the planned acquisition, there will be only slight increase in the market share of companies (ACCA, 2018). Before the commencement of acquisition, the market of both the companies is comparatively low as compared to other market players in all the markets of Australia. Due to these factors or market situations, the other market players have not raised any concern with this proposed merger. Finally, ACCA concluded that the proposed event of acquisition will not have any negative impact on the existing level of competition in different markets. In the merged company, the share of Bendigo was planned as 55%. At the same time, rest of share was belonging to Adelaide Bank (Adelaide Bank and Bendigo Bank, 2018).
The Offer Price:
The offer price can be defined as the total amount that is finalized between two companies that are participating in the acquisition activity. The offer price is paid by company that is going to acquire a company. At the same time, the amount is paid to owner of company, which is going to be acquired. In the acquisition/ merger between Adelaide Bank and Bendigo Bank, the shareholders of Adelaide Bank will receive 1.075 shares of Bendigo Bank for every share of Adelaide Bank (Roth, 2011). This merger has been planned to undertake under a scheme, the name of which is Scheme of Arrangement of Adelaide Bank. It was also anticipated that the shareholders of Adelaide Bank will receive the benefit of scrip-for-scrip capital gains tax (CGT) rollover relief.
Method of Payment:
No any cash payment has been planned to be made in this merger. The method of payment of this merger is the exchange of shares of Adelaide Bank by the shares of Bendigo Bank. It is so because in the given case of merger, the investor is Bendigo Bank. At the same time, investee is Adelaide Bank.
FVINA Allocation and Goodwill:
Formula of FVINA Allocation:
= BVNA + Net Assets Written-up
Where:
BVNA = Intangibles
The amortization of intangibles of Bendigo Bank has increased by 106% as a result of the merger. This amortization includes goodwill impairment loss to the company amounting to $4.0 million (Young and Cohen, 2014). It also increased the amortization of intangible software to the company.
Reaction of Share Market to the Announcement and Occurrence of Take-over:
The share market of country (i.e. Australia) has responded positively towards the announcement and occurrence of takeover between Adelaide Bank and Bendigo Bank. One of the reasons behind this response was that both the companies have shown profitability position at time of acquisition. It was also anticipated that the success of this merger incident will deliver high value addition and cash EPS accretion. It was also anticipated about this merger that this merger will lead to pre tax cost synergies amounting to $60 million – $65 million to the companies. This will ultimately increase the profitability as well as wealth of shareholders (Petty et al., 2015). At the same time, positive response was also provided by the share market due to increased scope of greater product offering by the merged to customers of both companies. Apart from these, the merged group or merged company will have a market capitalization value of $4 billion that provides a good position in the list of S&P/ASX100 index. At the same time, total number of shareholders of the merged company will be 80,000 retail shareholders that is a very high count. At the same time, the total customer base of this company will become more than 1.3 million customers.
The stock market of Australia has shown a positive response as a result of news that came in the market with regards to the merger between Adelaide Bank and Bendigo Bank. For example, the value of each share of Adelaide Bank has increased by a rate of 14.86% (by 1547 AEST). In other words, per share value of Adelaide Bank Ltd has increased by $2.14. This amount is a very big amount for the shareholders. In contrast to this, the share price of Bendigo Bank has also shown the negative movement over the stock market indices (John, 2018). For example, it has shown 18% decline, due to which the per share price of this bank reached to $16.32. On the other hand, positive movement was also visible in the share price of BoQ. For example, the stock price of BoQ increased by 7.84% that means $1.30 on each share. It reached to $17.88 each share.
In contrast to this, the financial analysts have depicted that merger between Adelaide Bank and Bendigo Bank is an inferior deal. The analysts and brokers have also indicated that this is an attempt by the Bendigo Bank Ltd to retain control of its business but it is not directly any effort to enhance shareholder value of its own. According to technical analysts that shareholders of Bendigo Bank should either sell their shared hold by them or they should avoid buying more shares currently of this Bank. Some of the technical analysts suggest that the deal of BoQ was better for the bank, if it could accept it (Petty et al., 2015). But it was a clear statement of chairmen of Bendigo Bank that there was a little chance of success with the offers of BoQ, due to which these offers were rejected. According to chairman of the bank, the positive response from this deal (deal of merger with Adelaide Bank Ltd) will reflect in the long run.
Analysis of Post-acquisition Performance (for up to 3 Years):
Following table is helpful to summarize the financial performance of merged group for up to 3 years (i.e. post acquisition performance):

Financial Performance of Bendigo and Adelaide Bank Limited

Particulars

2008

2009

2010

Net Profit after Tax ($121.8 million in 2007)

$170.5 million

$83.8 million

$242.6 million

Revenue from Operations ($562.2 million in 2007)

$815.0 million

$873.7 million

$1,135.0 million

Dividend per Security (34.0 cents in 2007)

37.0 cents

15.0 cents

30.0 cents

Interim dividend (24.0 cents in 2007)

28.0 cents

28.0 cents

28.0 cents

Cash earnings attributable to members ($118.5 million in 2007)

$201.9 million

$182.2 million

$291.0 million

Cash earnings per share (82.9 cents in 2007)

93.7 cents

62.9 cents

83.3 cents

Share Price

$11.47

$9.40

$9.15

(Source: Adelaide Bank and Bendigo Bank 2018; Bendigo Bank 2018)

Table showing Additional Data related to Price of Each Security

Years

2011

2012

2013

2014

2015

2016

2017

2018

Share Price

$8.49

$7.68

$10.02

$11.92

$9.91

$10.77

$11.61

$10.64

(Source: Yahoo Finance, 2018)
Analysis and Interpretation of Findings:
From the analysis of above tables, it can be observed that financial performance of newly merged bank (i.e. Bendigo and Adelaide Bank Limited) has shown improvement in terms of positive changes. For example, the revenue from operations of the merged group has shown increase from $815 million in 2008 to $1135 million in 2010. Similar to this, the value of net profit after tax of merged group has increased from $170.5 million in 2008 to $242.6 million in 2010. It means overall profitability of the merged group has improved in post acquisition period for up to 3 years (Adelaide Bank and Bendigo Bank 2018). At the same time, total cash earnings of this company have increased from $201.9 million in 2008 to $291.0 million in 2010. So, overall the financial performance of merged group has shown incremental trend that is good for attractiveness of company’s shares in the capital market.
Apart from these, the value of dividend per security offered by the company to its shareholders was 37.0 cents in 2008 that has decreased slightly to 30.0 cents in 2010. The company offered only 15.0 cents in 2009 due to financial constraints but it increased it to 30.0 cents in 2010. The value of interim dividend for each security is 28.0 cents in all the years (i.e. 2008, 2009 and 2010). But the share price of merged group has shown a decline from $11.47 per share in 2008 to $9.15 per share in 2010 (Yahoo Finance, 2018). So, on basis of this it can be depicted that in the period of 3 years after event of acquisition, the company has not contributed in the wealth of share holders.
Conclusion
On the basis of above analysis, it can be concluded that the strategies of merger and acquisition have a significant impact on the financial performance of organizations. For example, an organization that is going to merge with or acquire a loss making or less profit making organization, than a detrimental effect can be seen on its share price. In other words, the response of share market in terms of change in share price of the company is shown as positive if a small company is going to be merged by large size and profit making organization, than some positive change will be visible in its share price. At the same time, a detrimental effect or negative change will be visible in share price of the larger organization. This type of effect was visible in the share price of Bendigo Bank Ltd and share price of Adelaide Bank Limited. From the analysis of financial performance of merged group after acquisition for up to 3 years, it can be said that no any major positive contribution in visible in wealth creation of share holders. For example, the share price in this period has shown declining trend. At the same time, slight decline was also seen in dividend offered by organization. It is also possible that in longer time period, some positive results may be seen, as indicated by chairmen of the company.
References
ACCA (2018) Proposed merger between Bendigo Bank Limited and Adelaide Bank Limited. [Online]. Available at: https://registers.accc.gov.au/content/index.phtml/itemId/798060/fromItemId/751043 (Accessed: 14 September 2018).
Adelaide Bank and Bendigo Bank (2018) Adelaide Bank and Bendigo Bank announce intention to merge. [Online]. Available at: https://www.bendigobank.com.au/news-and-media/news/news-archive/adelaide-bank-and-bendigo-bank-announce-intention-to-merge (Accessed: 14 September 2018).
Adelaide Bank and Bendigo Bank (2018) Annual Report 2008: Financial Statements. [Online]. Available at: https://www.bendigoadelaide.com.au/public/shareholders/pdf/financial_reports/2008_financial_report_2007_08_appendix_4E.pdf (Accessed: 14 September 2018).
Adelaide Bank and Bendigo Bank (2018) Annual Report 2009: Financial Statements. [Online]. Available at: https://www.bendigoadelaide.com.au/public/shareholders/pdf/financial_reports/2009_financial_report_2008_09_appendix_4E.pdf (Accessed: 14 September 2018).
Adelaide Bank and Bendigo Bank (2018) Annual Report 2010: Financial Statements. [Online]. Available at: https://www.bendigoadelaide.com.au/public/shareholders/pdf/financial_reports/20010_financial_report_2009_10_appendix_4E.pdf (Accessed: 14 September 2018).
Bendigo Bank (2018) Annual Report 2007: Financial Statements. [Online]. Available at: https://www.bendigoadelaide.com.au/public/shareholders/pdf/financial_reports/2007_financial_report_2006_07_appendix_4E.pdf (Accessed: 14 September 2018).
John, D. (2018) Can do better: analysts reject $4b Bendigo Bank merger. [Online]. Available at: https://www.smh.com.au/business/can-do-better-analysts-reject-4b-bendigo-bank-merger-20070811-gdqtzp.html (Accessed: 14 September 2018).
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M. (2015) Financial Management: Principles and Applications. Australia: Pearson Higher Education AU.
Roth, M. (2011) Top Stocks 2008: A Sharebuyer’s Guide to Leading Australian Companies. USA: John Wiley & Sons.
Yahoo Finance (2018) Bendigo and Adelaide Bank Limited (BEN.AX). [Online]. Available at: https://au.finance.yahoo.com/quote/BEN.AX/history?period1=1200335400&period2=1536949800&interval=1mo&filter=history&frequency=1mo (Accessed: 15 September 2018).
Young, D. and Cohen, J. (2014) Corporate Financial Reporting and Analysis. USA: Wiley.

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