Mergers and acquisitions - Coursework Example

?Mergers and acquisitions Mergers and acquisitions occur in business companies all over the world. In mergers, two different companies come together to form a single company known as a parent company. In acquisitions, one big company acquires a smaller company so that the two companies transact business under a single owned company. This paper seeks to examine examples of companies in the USA that were involved in a merger. Mergers often look forward to ensuring profits rather than losses in the business combination. The selected company that involved itself in a merger is the Continental Airlines Company. The company was involved in the merger with another airline company. The two companies were the entities in the merger. An entity in business or in mergers and acquisitions (M & A) describes the organization, company or corporation that is acquired by another organization, company or corporation or that merges with the other in order to ensure a successful business in terms of profits, quality of products and competition and its continuous and long term survival in the world's competitive markets (Harwood, 2005). In the year 2010, an airline company in the U.S, Continental Airlines, merged or was rather acquired by another company, United Airlines (UAL) Corporation, also an airline holding company in the U.S which had its headquarters in Chicago in the state of Illinois. The two airline companies merged to form the United Continental Holdings in October 2010. The merger took place to ensure that the new company founded posed stiff competition to other airline companies around the world. The merge was also to ensure better services than the services provided before by the individual airline companies. After merging, the founded airline, United Continental Holdings became the largest airline company in the world as was confirmed by revenue passenger miles (New York Times, 2010). Mergers and acquisitions are often accompanied by transaction prices and payment terms. At the time of the merger between Continental Airlines and UAL Corporation, there were several factors that were involved in determining the transaction price and the payment terms for each of the individual companies after the merger. The first factor that determined the payment terms was the presence of other potential bidders who would provide better payment terms. United Airlines initially held merger talks with the US Airways. It is said that a deal was close between the two companies (New York Times, 2010). Unfortunately the merger talks broke off paving way for talks between the United Airlines Corporation and other airlines. On the other hand, the Continental Airlines also held merger talks with the Star Alliance and even merged. However the two airlines later on separated. This paved way for merger talks between the Continental Airlines and the United Airlines Corporation. Better payment terms were put in place bearing in mind that there were other potential bidders in case of a break off of the merger talks. The second factor that determined the transaction price and the payment terms between the two companies was the share deal that was signed by both entities. When the United Airlines and the Continental Airlines announced their merger in 2010, they struck so many deals. One was of a new name of the company to be formed which was named the United Continental Holdings. Secondly, the two companies struck deals to share the losses and profits. This share deal was the key factor which was strongly involved in determining the transaction price and payment terms during their merger. The third factor that determined the transaction price and the payment terms was the taxes to be imposed on the newly formed company by the US government. Taxes imposed on a certain company greatly influences the payment terms. In case of friendlier taxation, the two entities could enjoy sharing in large amounts of the profits incurred. However, in case of harsh taxation by the US government, the sharing of the profits incurred would be different. Various governments, taxation is done depending on the profits or total income that a particular company gets from its business. The United Continental Holdings which were a result of the merger became the largest airlines company worldwide. This means that the tax rate was high and this greatly influenced the payment terms agreed upon by the United Airlines Corporation and the Continental Airlines. In addition, the merger between the Continental Airlines and the United Airlines Corporation was strongly accounted for. Accounting for any business combination is very important because of the resulting financial statement purpose in any type of business (Thomas, 2007). At the time of the merger between the Continental Airlines and the United Airlines, the method used to account for the business combination was the purchase method. In 2010, the merging companies (UAL and Continental Airlines), before going into merger talks presented all their assets and liabilities where the main aim was to know the market values of the assets at the time of the merger. The assets of the airline companies which included aircrafts had their values at that time examined. The two companies had experienced big losses and only merging was the best way forward (BBC News May, 2010). The losses that the two companies incurred during their duration of existence were also examined by their various executive officers. The losses were the liabilities presented at the time of the merger. The United Airlines' parent company UAL during its time of existence reported a loss of $82m for the first three months of the year it was in existence, after reporting a $1.1bn loss for 2009. On the other hand, the Continental reported net losses of $282m. The examination of the value of assets and liabilities at the time of the merger helped to determine the payment terms later on in case of depreciation or appreciation of the assets of each of the individual companies. However, with the purchase method, in any case of liabilities which in this case losses existed, the total liabilities [losses] of the newly formed company which was the United Continental Holdings had to be equal to the sum of the liabilities (losses) of both the Continental Airlines and the United Airlines before their merger. As had earlier mentioned, both companies were in merger talks with other companies which later on breaking off paving way for their merger. The merger resulted into a massive success of the newly founded airline company meaning that the value of assets that had been examined underwent appreciation. The appreciation enhanced the development and successful expansion of the newly formed United Continental Holdings Company. Although the merger between the two companies was approved by the government, both companies had to critically examine the value of their assets at the time of the merger. During mergers and acquisitions, asset valuation is very important for all the entities present. Asset valuation is the proper or correct estimation of the value or cost of a certain good or asset (Swanson, 2008). During the merger of the Continental Airline and the United Airline back in 2010, proper valuation of all the assets, which were mostly in this case aircrafts and the liabilities which were the losses incurred by the individual companies, was done. The valuation of assets acquired after the business combination was essential for both the individual companies. First, the new airline that was founded to take on the United Airlines name and the Continental's logo. The new airline under the United Continental Holding was run by the Chief Executive Officer of the previous Continental Airline, Jeffrey Smisek along with United Airline's Chief Executive Officer, Gunn Tilton. In addition, there was the delivery of new aircrafts which included the Boeing 787 Dream liner aircraft. The merger also led to increase in value of assets as they began to offer non-stop flights after the merger between the two companies was approved. The new company after the business combination also started to offer WI-Fi services on the aircrafts. The new company also attained a single operating certificate from the government which enabled operation of both the companies under one leadership. The business combination also resulted to the new headquarters of the United Continental Holdings being relocated to the Chicago Loop in Chicago. The new company also invested in $ 12 billion for the purchase of the present 270 fuel- efficient aircraft and related equipment that makes up part of the airlines fleet. This resulted or has greatly helped in the reduction of greenhouse gas and noise emissions and decreased fuel consumption. Other asset valuation ways of the new company’s assets include deploying of business first seats, introduction of meal and drink services and in-flight entertainment in a very back seat which included audio-video and personal television. The merger between the two companies also involved calculation of investments. Calculation of investments is an important aspect of any particular company. This is because it helps to know whether a particular company, corporation or organization experiences losses or gains profits from its investments. In the case of the merger between the Continental Airlines and the United Airlines, the parent company is the company that resulted from the merger which was known as the United Continental Holdings. The subsidiary companies were the companies that merged to form the single owned company. Thus, the subsidiary companies were the United Airlines and the Continental Airlines. Calculation of investments looks at the profits in relation to the capital invested in a particular company. It also involves the return on investment which is obtained by subtracting the total cost of investment from the total cost of gains got from the investment of a particular company (Farris, 2010). Therefore, in this case, the parent company's books (United Continental Holdings) at the date of acquisition reflected that the gains from the investments in the subsidiary companies were less than the cost of investment in the various subsidiary companies. That is to say that was the cause of the losses that the subsidiary companies went through forcing them to merge in order to make profits rather than losses and also to pose stiff competition to other airline companies worldwide. The companies were already facing competition from European airlines. The two companies formed a merger and formed one of the largest airlines worldwide (New York Times, 2010). Companies often present books of their assets and liabilities before a merger. This enables the resulting parent company to have records in its books of the losses or gains that each of its subsidiary companies went through during their time of existence. In addition to the calculation of investments, another important aspect involved in mergers and acquisitions is the consolidated financial statement. Consolidated financial statements show how a particular company, in this case the parent company is doing financially as a group. The group in this case entails the parent company and its subsidiaries. They also reflect the conditions in which the parent company is operating. There are several methods used to account for investments in a consolidated financial statement. To begin with, there is the equity method. Equity method is concerned with the treatment of equity investments in companies that are associates. For example, it is used to treat investments in parent companies and its subsidiaries. As earlier discussed, the merger between Continental Airlines and the United Airlines resulted into a parent company known as the United Continental Holdings. Equity method of accounting for investment can be used in accounting for investment in United Continental Holdings and its subsidiaries. A company must have an investor or several investors. When an investor has a certain share of a company’s net income, it is evident that the investment will increase. On the other hand, when an investor has a certain share of a company's loss, it is evident that the investment will decrease. Thus, the consolidated statement of profit and loss has to reflect the share of contribution of the investor in that particular investment. The cost method is also used to account for an investment. It is mainly used to account for the stocks that a particular company sells and later on buys from the company it sold the stock too. In the cost method, the journal entries on the parent’s books are recorded by associating the stock and the actual cost of purchase. Thus, the treasury stock is recorded through the debiting of treasury stock account by the actual cost of purchase (Irfanullah Jan). The partial equity method can also be used to explain journal entries. In partial equity method, a parent company has ownership in its various subsidiaries hence this method uses this as the basis for calculation of profits (gains) or losses. In the parent company’s book, the profits or losses of the company are always evident. The gains and losses are often obtained by getting the difference between the total value of assets and liabilities of a company during the time of acquisition and the purchase price of the shares or assets. Thereafter, the gains or losses that are contained in the book value are added to the incomes of the company for that period. Normally in companies, the gains or losses in book value are often not very evident. This is due to their lack of actual cash impact unless a particular company decides to sell the available shares to other companies (Nicholas B. Sisson). Journal entries on the parent company’s books to account for an investment can also be explained using the complete equity method. The method involves itself with the calculation of the value of all the investments belonging to a particular company with another company through getting the difference between the dividends paid and the total sum of the investment which was initially placed in the company and the increase in the value of stocks. Even though not always evident, business combinations must always be accompanied by financial reporting objectives. Financial reporting objectives are the information provided that guides the success of intercompany sales. There are several financial objectives that guide intercompany sales of inventory. One of the financial reporting objectives is to provide specific and detailed information about the available economic resources and materials belonging to a company. This may help an investor or the companies doing transactions to the strengths of a particular company or the challenges that a company faces. It also helps to know how the company has been performing during its period of existence. Another financial reporting objective that guides intercompany sales of inventory is to provide information that evaluates how the companies doing transactions have been performing during the time of their existence. This often helps to know the past of that particular company and also have specific expectations of the company in the future, that is to say, what one will expect of the company in the future. These expectations can either be of big profits or big losses. The other financial reporting objective is the provision of information that clearly shows how a company has been managed during its period of existence. The information about management may help the owners of the company ensure that the economic resources of the company are safe and not misappropriated. This in turn ensures that the company incurs profits rather than losses. Another financial reporting objective is to provide relevant information that helps the investors of the company and other users of the company’s resources to understand the financial information contained in the company’s consolidated statements. This makes the other users of the company’s resources aware of the development of the company. Mergers and acquisitions as a form of business combination must also have an accounting theory. An accounting theory is a detailed explanation of the observable accounting practices in a particular company or organization. Accounting practices in a company must always be accompanied by auditing practices which helps to correct possible financial anomalies that may be experienced. In the US, accounting research has greatly developed over the years [Englewood]. Business combinations are also frequent in the US. The accounting theory that governs business combinations in the US GAAP and IFRS is the positive accounting theory. This has greatly enhanced business combination occurring in the US. It has helped to properly account for investment in a business combination in the US triggering large profits of the investment of the companies. Moreover, business combinations should have objectives. Business combination as earlier mentioned involves mergers and acquisitions. There are several objectives achieved as a result of business combinations. The first objective achieved is the minimization of the per unit cost. When two or more companies are involved in a merger they form one company, hence the cost of production comes under a single company unlike in several different companies before the merger. The business combination thus helps to minimize the per unit cost. Another objective achieved is the elimination of competition. In case of mergers, the parent companies formed often thrive in the worldwide market thereby reducing stiff competition in the market. Improving of production methods is another objective achieved as a result of business combinations. When two or more companies combine or merge, the capital invested is usually more as compared to the invested capital by a single company. The big invested capital often improves the production methods. Another objective achieved by a merger is the earning of maximum profits. For example, as earlier mentioned, the merger between the Continental Airlines and the United Airlines ensured maximum profits because the founded parent company became one of the largest airlines worldwide making big profits. Consequently, another important aspect in business combinations is due diligence. Due diligence in mergers and acquisitions is always a critical process which often has a particular purpose. The first purpose of due diligence is to prove assumptions. In mergers and acquisition of companies, assumptions are the orders of the day. Thus, due diligence often exists to ensure the various assumptions are proved. Another purpose of due diligence is to confirm the information received or perceived. In mergers and acquisitions of companies, several people are often involved in the various activities happening in the companies. This due diligence is important in the reception and perception of information. Due diligence is also important in the gathering of information in companies where there are several people of different kinds (Jack Lyons). As a result of the several consolidated statements of merging companies, there is always a need for public accountants. A public accountant is an individual with financial knowledge and has the ability to solve financial problems and prepare financial statements for a company, organization or even a corporation. A public accountant has several roles that he or she does in or during business combinations. First, a public account has the ability to identify, research, consult and make our draft proposals on significant or rather proposed transactions. Secondly, a public accountant has the duty of working together with financial controllers. They may create or rather update any financial policies during business combination. Another role of the public accountant is to organize teams of individuals who should develop policy and implement any available accounting pronouncements during the business combination. A public accountant should also assist with the merger and acquisition implementation and also activities that are somehow related to accounting including the assessment of values of various assets. A public accountant also updates financial policies that may arise or develop during business combinations. A public accountant also has a role of conducting due diligence for proposed transactions during business combinations. Lastly, a public accountant may play a role of developing and presentation of merger and acquisition due diligence communication during business combinations. The existence of public accountants in companies is an important aspect. However, several auditing techniques also exist. One of them is the computer assisted auditing techniques. Computer assisted auditing techniques (CAATS) involves the usage of computers in the auditing processes in companies, schools, organizations or bigger corporations. It is just the mere use of basic office software majorly the spreadsheets and word processors to solve statistical analysis of data. Most people who use the CAAT are the public accountants. However, they must have knowledge in finance and software. The public accountants mainly use CAAT to analyze large volumes of data while looking for problems that may occur. CAAT is mainly used by experienced staff to analyze a sample of statistical data but complete review of all transactions involved in a company, school or organization. In business combinations, there exist several ways of conducting audit financial statements in companies. Some of the ways in the US include GAAS, GAAP, PCAOB and COSO. They all have requirements that must be fulfilled when auditing consolidated statement of publicly traded companies. One of the necessary requirements is the availability of sufficient audit evidence. This results to better audit with fewer frauds. Another requirement is the professionalism of the person doing the auditing. Presence of receivable accounts of the incomes of a company is also a necessity when doing the auditing. It helps the expatriate doing the evidence has tangible evidence in case of frauds. To recap it all, mergers and acquisitions have several considerations that must be put in place at the time of merging and at the time of acquisition. To name a few of the considerations, there should be identification of the entities that will be involved in the business combination. Factors that will determine the transaction price and the payment terms should also be considered. The companies engaging in the business combination should put in place proper methods of accounting for their investments. The companies involved in the business combination should also assess the values of their assets and liabilities. References “United and Continental Airlines to merge” BBC News, May 2010. Douma and Schreuder, 2013. “Economic Approaches to Organizations” Straub, Thomas (2007) “Reasons for frequent failure in Mergers and Acquisitions”. Joseph Swanson and Peter Marshall, Houliham Lokey and Lyndon Norley, Kirkland and Ellis International LLP (2008) Harwood, I. A (2005). “Confidentiality constraints within mergers and acquisitions” Read More