Experiences in Financial Matters in M&A

Experiences in financial matters in the M&A in some countries in the world

Some financial matters in the M&A in England:

Defining the enterprise’s value: the enterprises have also examined the increased value due to the merger. The merger is only chosen when the benefits coming from the merger are bigger than that of the service fees for the merger. The service fees contain the fees for consultsncy, costs for finance, proper fees for accounting, costs for exchanging the stocks, the public relation costs, etc. For example Enterprise A and Enterprise B, the present value (PV) in turn, is 25 million pounds and 15 million pounds; the service fees is 2 million pound, and the total value after the merger is 50 million pounds (including the deduction of the service fees). The increased valu after the deduction of the service fees is 10 million pounds:

£50 M = £25 M + £15 M + the increased value

            If Enterprise A is the buyer, it has to pay for £15 M. It is common that Enterprise A has to pay more than £15 M to get the right of “management”, also called “admission costs”. However, Enterprise A considers the value of buying prise based on the gained benefits. For example Enterprise A pays Enterprise B with the value of £20 M, the A’s shareholders will get £5 M in the increased value, and it is the same with A”s.

Ways of payment: It depends on the situation the buying enterprise use the stocks or cash in payment. At the earlier years of 1970 when there was the tendency of the increase of the stocks (1970-1972), the stocks was preferred in payment. However, along with the collapse of the stock market in the period of 1973-1974, the cash was preferred. In the first half of 1980s, when there was the explosion of mergers, the stocks was preferred, but after October 1987 when the stock market inclined, people used the cash for payment. At the last years of 1990s, people used stocks for payment. It is describe in the following table:

The mergers in England in the period of 1970-2000

Year	Numbers of mergers	Cost for merging (million pound)	Ways of payment
			Cash (%)	Regular stock (%)	Preferential stock (%)
1970	793	1,122	22	53	25
1971	884	911	31	48	21
1972	1,210	2,532	19	58	23
1973	1,205	1,304	53	36	11
1974	504	508	68	22	9
1975	315	291	59	32	9
1976	353	448	72	27	2
1977	481	824	62	37	1
1978	567	1,140	57	41	2
1979	534	1,656	56	31	13
1980	469	1,475	52	45	3
1981	452	1,144	68	30	3
1982	463	2,206	58	32	10
1983	447	2,343	44	54	2
1984	568	5,474	54	33	13
1985	474	7,090	40	52	8
1986	842	15,370	26	57	17
1987	1,528	16,539	35	60	5
1988	1,499	22,839	70	22	8
1989	1,337	27,250	82	13	5
1990	779	8,329	77	18	5
1991	506	10,434	70	29	1
1992	432	5,939	63	36	1
1993	526	7,063	81	16	3
1994	674	8,269	64	34	2
1995	505	32,600	78	20	2
1996	584	30,457	63	36	1
1997	506	26,829	41	58	1
1998	635	29,525	53	45	2
1999	493	26,166	62	37	1
2000	587	106,916	38	61	1

                 Source: Pike and Neal (2003)

Accounting methods for merging: The acounting standard of FRS6  in the M&A differentiates between the “adding-up method” and “buying method” in accounting. There are some characteristics of the “adding-up method” in accounting as follows:

The assets and capitals of the two parties are gathered and reported in the merged enterprise’s statements.

The reservoirs of both parties are not capitalized and they were distributed.

The stocks issued for the merger are written with nominal value not in the share premium.

At the end of the fiscal year, the statements of the merging operations include the loss and profit of both enterprises.

The goal of the adding-up method in accounting is to show out the accounts of the merged enterprises with the merging capital and are in operations as a separated entity.

The main enterprise and its subsidiaries hold at least 90% of the stocks of the merged one.

The bought stocks are the results of the agreements on the stocks of the main enterprises and its subsidiaries.

The fair value of the uneven amounts is considered the non- owners’ equity done by the main enterprise is not over 10% compared with the issued stocks.

In the adding-up method neither enterprise is considered as the buying party nor the selling party.

All parties take part in the setting up the structure of management for the merged enterprise in the tasks of choosing the managers, such decisions are base on the consensous nature.

The relative scale of the merged enterprise is not so different that one party can overwhelm and control the merged enterprise due to its scale.

The uneven items which are examined are belonged almost to the merged enterprise’s owners’ equity.

None of the shareholders of the merged enterprise must have any concerns in material side in one of its parties.     

Some financial matters in the M&A in the United States:

Defining the enterprise’s value: One of the outstanding characteristics of the M&A in the USA is that they pay attention to the enlarging the values coming from the M&A. Both parties usually examine the resonant values coming from the 5 following factors: saving costs, turnover improvement, operational procedure enhancement, benefits on finance and taxation.

Accounting methods for merging: it depends on the “health situation” period of the economy, in each period would choose the way of payment, either with the cash or with stocks. In the period of 1990-1992, the period of economic recession, so the value of the stocks, the preferred way of payment is in cash. In the term of 1998-2000, there was the continuous economic and stock market growth, the choice was in stocks.

 Ways of payment in the M&A in the USA

	1990 – 1992	1998 – 2000
The transactions with the value over $100 M
Payment in cash	691	2,558
Payment in stocks	196	1,343
Total	887	3,901
Percentage of the transactions paid in cash	78%	66%
Percentage of the transactions paid in stocks	22%	34%

      Source: Bruner (2004)

Accounting methods in the M&A: Before 2001 there were 2 accounting methods – the adding-up, and buying methods. If a transaction of M&A can satisfy the 12 criteria (Please see the above section).

In 2001, the Finance-Accounting Standardization Bureau (FASB) issued the regulations on financial statements 141, and 142 which went into effect after June 30, 2001. There were some changes as follows:

All the merged or united enterprises apply the “buying method” in accounting, the buying price of the sold enterprise is recorded in the buying enterprise’s records as follows:

            Ú The buying enterprise records 100% of the sold enterprise’s assets in the real market value. One account of “minor stock” is set up in the sources of capital to show the percentage which cites out the percentage of stocks that the buying enterprise does not hold.

            Ú Any of the uneven rates between the buying price and the value in materials is not distributed into any accounts, but the goodwill.

            Ú 100% of the turnerover of the sold enterprise is recorded in the buying enterprise’s report of sales, after it is deducted with stocks of the minor shareholders’ loss and profits of the sold enterprise.

The intangible asset is the good will of the enterprise should be examined annually to consider the increase or decrease.

Beside the intangible asset, other intangible assets should be recognized if they can satisfy the legal criteria in contracts and other relevant criteria.

The intangible assets, the life-cycle of which cannot be defined are not calculated in depreciation, but they are calculated if their life-cycle can be defined.

Some financial matters in the M&A in China:

The M&A in China exploded in the recent years. It is not only calculated with the quantity of transactions of the M&A, but also in the scales, complecations, and in the quantity of the taken-part branches. in 2006, there were 573 transactions of M&A with the total value as of 25.8 billion dollars, increased 40% compared with that in 2005, among them, there were 297 cases of multinational enterprises with the total value as of 15.4 billion dollars, increased 16% compared with that in 2005.

Evaluating the buying price, this is a puzzel to the foreign enterprises those which want to carry out the M&A with Chinese enterprises. Both buying and selling enterprises approach the M&A with different perceived buying price. The reasons why there were differences are the different ways of evaluating price, and there is lack of information and data for reference. For example, after the first meeting, one enterprise of material production comes to the negotiation meeting for the buying price. The selling party showed out a balance sheet and gave out the price which based on the net assets which are two folded compared with the perceived price of the buying price. After that both parties examined the criteria of profits before tax, EBIDA (Ebit Data) – interest for debts and depreciation. The selling party gave out the value which was 12 times of EBITDA. After the reference, the buying party recognized that it was only 4-5 times of EBIDA. That transaction failed.

The preferred way of payment is the stocks because the stock market in Chinese is on the way of development, and the Chinese economy has also been on the increase which can bring about more benefit to the investors.

Accounting methods in the M&A: The popular method of payment is the “buying method” in accounting.

Lessons coming from experience of the financial matters in the M&A

The information of some financial matters in the M&A in the world like above are not in full scale, but it can be derived some for Vietnamese enterprises as follows:

Firstly, evaluating the enterprise’s value is not only to define the real value for each enterprise, but also the resonant value coming from the merger. 

Secondly, the way of payment influence both in the two parties, and also in the market.  

Thirdly, the M&A is one of the most important economic event which has to record in the financial statement. The recent studies in the United States show that the chosen way of accounting does not influence directly to the economic position of the merged enterprise , but it influences in the statements of turnover and other financial accounts.

At present, the operations of M&A are rather new though they have existed about a decade. To urge the operations, one of the necessary tasks should be prepared is to gain the knowledge of reasoning the financial theory in the M&A.