Report
Corporate takeover
In a corporate takeover, two methods are commonly used. There is the purchase method and secondly the pooling of interest method. The first is applied where the acquirer can be identified while the latter is used where the acquirer cannot be identified. In a corporate takeover, several aspects of valuation are necessary. They are as follows – share valuation, valuation of business, valuation of fixed assets and shareholder agreement (Solomon, 2011).
In the event of a corporate takeover, the financial statements are adjusted so as to remove items which are not reflective of the ongoing business on a continuous basis. To begin with, assets that are not a part of the business operations are removed from the balance sheet. This is done in order to provide an accurate reporting of the financial status of the new entity. Secondly, the excess cash is removed from the balance sheet (Murray, 2010). However, this occurs when the negotiations involved the cash.
Thirdly, there is an adjustment in the income statement. The aim in this case is to remove the non recurring income items and expenses. These include expenses on lawsuits or gain/losses on disposal of an asset. The other items are wages and salaries. These are adjusted to current levels. This goes to the owner salaries as they involve a lot of subjectivity and the new owner may not keep up the salaries.
Consider GTE Ltd, which took over, Bell Atlantic Limited in the year 2011. In this case, GTE Ltd was the acquirer. The various statements before the takeover are as follows.
Bell Atlantic Limited
Income Statement
For the Year Ended December 31st, 2011
Revenues $ $
Sales revenue 100000
Gain on disposal of machinery 5000
Total revenues 105000
Expenses
Rent expense 15000
Supplies expense 4500
Wages and salaries 2000
Loss on law suit 1000
Total expenses (22500)
Gross profit 82500
Less: income taxes (23500)
Net profit 59000
Bell Atlantic Ltd
Owner's Equity Statement
For the year ended December 31st, 2011
$
Capital on January 1 550,000
Add: net income 59000 609000
Less: drawings ( 9000)
Equity on December 31 600000
Bell Atlantic Ltd
Balance Sheet
As at ended December 31st, 2011
Assets $ $
Fixed assets
Property and equipment 1000000
Vehicles 200000
Current assets
Accounts receivable 400000
Cash and cash receivables 100000
Total assets 170000
Liabilities and Owner's Equity
Accounts payable 250000
Long term loan 850000
Owner’s equity 600000
Total liabilities and owner’s equity 1700000
The financial statements for Blue Shield are as follows.
GTE Ltd
Income Statement
For the Year Ended December 31st, 2011
Revenues $ $
Sales revenue 250000
Recovery of bad debts 10000
Total revenue 260000
Less: expenses
Rent expense 25000
Supplies expense 6000
Wages and salaries 5500 (36500)
Gross profit 223500
Less: income tax (44500)
Net profit 179000
GTE Ltd
Owner's Equity Statement
For the year ended December 31st, 2011
$
Capital on January 1 850,000
Add: net income 179000 1029000
Less: drawings ( 150000)
Equity on December 31 879000
GTE Ltd
Balance Sheet
As at ended December 31st, 2011
Assets $ $
Fixed assets
Property and equipment 1700000
Vehicles 350000
Current assets
Accounts receivable 650000
Cash and cash receivables 230000
Total assets 2930000
Liabilities and Owner's Equity
Accounts payable 980000
Long term loan 1071000
Owner’s equity 879000
Total liabilities and owner’s equity 2930000
After GTE Ltd took over Apex Ltd in 2011, various items in the financial statements changed in line with the takeover. After the takeover, GTE would retain its entity while Bell Atlantic would cease to exist. Assets that are not part of the business for GTE will be removed. In this case, suppose the vehicles were taxi cabs for Bell Atlantic. Since GTE is in Hotel business only, it would not use the cabs. Instead, it would continue with the hotel business operated by Bell Atlantic which was its main target.
GTE would record cash from its own accounts as opposed to the sum for both companies. The wages would reflect the actual wages paid by GTE. The nonrecurring items i.e. the loss on the law suit would not be recorded as it is nonrecurring. In addition, drawings would be those for GTE and not a sum for both companies. This is as required by International Accounting Standards. The consolidated financial statements would look as follows in 2011.
GTE Ltd
Income Statement
For the Year Ended December 31st, 2011
Revenues $ $
Sales revenue 250000
Recovery of bad debts 10000
Total revenue 260000
Less: expenses
Rent expense 25000
Supplies expense 6000
Wages and salaries 5500 (36500)
Gross profit 223500
Less: income tax (44500)
Net profit 179000
GTE Ltd
Owner's Equity Statement
For the year ended December 31st, 2011
$
Capital on January 1 850000
Add: equity for Bell Atlantic Ltd (December 31st) 600000
Add: net income 179000 1629000
Less: drawings ( 150000)
Equity on December 31 1479000
GTE Ltd
Balance Sheet
As at ended December 31st, 2011
Assets $ $
Fixed assets
Property and equipment 1700000
Add: PPE for Bell Atlantic Ltd 1000000
Vehicles 350000
Current assets
Accounts receivable 650000
Cash and cash receivables 230000
Total assets 3930000
Liabilities and Owner's Equity
Accounts payable 280000
Add: accounts payable from Bell 250000
Long term loan 1071000
Add: long term loan from Bell 850000
Owner’s equity 879000
Add: owner’s equity from Bell 600000
Total liabilities and owner’s equity 3930000
References
Drummond, T. (2009). Corporate Valuation for Takeovers. The Journal of Corporate Finance , 23.
Murray, J. (2010, August 14). How are Financial Statements Adjusted for a Business Valuation? . Retrieved May 12, 2013, from http://biztaxlaw.about.com/od/valuingabusiness/f/financialadjustvalue.htm: http://biztaxlaw.about.com
Solomon, F. (2011). Accounting for Business Combinations and Corporate Reorganizations. Jounal of Analysis of Finacial Statements , 6.
