Running head: BUSINESS COMBINATION     1
Mergersand acquisitions are the modern day business strategies employed byvarious firms in improving the efficiency and overall competitivecapability. In this case mergers results in broadened product lines,refocused and strengthened management and personnel systems betweenthe two companies and shifting levels of profits and growth rates. Insome cases one firm may lose certain substancial amount of money andthere are costs to incur in terms of evaluation exercise, completionand in the implementation of the merger. In other cases, if theleadership is not accepted by the other firm, this may impede chancesof success. In some cases, mergers fail because the required amountto merge with another company is too high.
However,in order to determine the efficacy of a merger with a potential firm,a strategic fundamental financial analysis is imperative in order tounderstand the financial dynamics surrounding the companies. Thereare various methods used in mergers and acquisition(Giddy, 2006).These include leveraged buyouts, diversities, holding company,consolidation, mergers and acquisition. In order to form a businesscombination between Whole Food Inc. (WFI) and McDonalds, a mergermethod is used in this case McDonalds acquire Whole Food Inc.leaving all operations, assets, and liabilities under McDonalds.
Synergiesthat could occur as a result of the proposed acquisition
Asa result of this merger between McDonald and Whole Food Inc. possiblesynergies of the acquisition include replacing inefficiency inmanagement, increasing growth, gaining market power, improvingeconomies of scale and overall increased revenue. These synergieswill improve and maximize the value of shareholders (Giddy,2006).
Increased revenue and market share in this way McDonald will increase its power through market share.
Economies of scale the merged companies will reduce duplication of departmental operations thereby lowering costs and increasing profits.
Improved cross selling McDonald will sell complimentaryproducts after merging with Whole Food Inc.
Geographical diversifications this will enhance more earning to the firm thereby improving the stock prices and confidence among investors
Diversification this is an important strategy in ensuring stability of McDonald portfolio
Resource transfer the merger will enhance and create more value through streamlining market information asymmetry and merging scarce resources.
Taxes write off the merger will enhance limiting of tax by MacDonald after merging with Whole Food Inc.
Accountingrequirements for the business Mergers
Acquisitionsare important investment decisions and should be consistent with theobjectives of shareholders aim to maximize wealth. A sound foolprooffinancial analysis of the firms merging forms an important aspect ofthe merging firms. Most merger failures are as a result of failing toassess critically the financial aspects of the firm to be mergedthis starts with assessing the company’s financial statements. Thenext step is analyzing the investors and lenders required returns aswell as the corporate analysis. Mergers should be seen in the aspectof making strategic decisions and the acquired firm should fit in theoverall plan (Giddy,2006).
Reasonsand motives for mergers need to be reassessed marketingcompetitiveness, reduction in production costs, improved management,prevent merging with other competitors or improving market share. Assuch it is important to determine who consolidates what in themerger. In mergers and acquisitions if the parties do not agree ontotal purchases, an additional payment is made such payments arecalled earn outs. All assets should be acquired at their marketvalue. There are two methods of accounting for merging purchasemethod and pooling of interest method (Thornton,2012). In this case a purchase method was used to acquire Whole FoodIncorporation by MacDonald’s and a new ownership was assumed. Theassets of the acquired firm were appraised at market values and thebalance sheets were leveled to new levels. A good will of $15 millionwas also paid to Whole Food Inc.
Consolidatedfinancial statements for the date of acquisition
WhenWhole Food Inc. merged with MacDonald as of 1 January 2014, at 31December 2013, their individual financial extracts were as follows
McDonalds Whole Food Inc. (WFI)
Receivables $5,050 $1,980
Payables $3,170 $1,088
Theconsolidated figures after merger will be:
Receivables $5,050+$1,980 =$ 7,030 (in millions)
Payables$3,170+$1,088= $ 4,258 (in millions)
Goodwill impairment means that it’s carrying value surpasses therecoverable amount that is the value in use is same as in the futurecash flow (Price water coopers, 2012). It is an estimate amount acompany feels that it will get from the acquired assets throughselling or using. After the merger or acquisition, good will issubject to annual impairment review. Goodwill impairment comes as aresult of physical damage or obsoleteness of assets, worseningeconomic situations, market value declines, and increase in marketstock rates and negative changes in technology(Thornton, 2012). In the case of MacDonald merger with Whole Food Inc. good will isimpaired after two years due to declining market value of assets.Therefore, the impairment loss will be adjusted as follows
Accountingentries to recognize goodwill impairment
Goodwillwas $ 15, 000000 when Whole Food Inc. merges with MacDonald’s
Totalassets for Whole Food Inc. before merger (net assets book value) = $5,538
Assumeafter a period of two years the Recoverable amount of the subsidiaryassets is $ 5050 (in millions) due to market decline.
TheImpairment review will be adjusted as follows
Thisimpairment loss will be recognized in the overall group statement towrite the new good will as
Goodwill$ 15(millions) – Impairment loss $3 (millions)
GiddyIan, 2006. Mergers & Acquisitions: An Introduction. NewYork University. Retrieved on. July 22, 2014. Fromhttp://pages.stern.nyu.edu/~igiddy/articles/mergers_intro.htm
GrantThornton, 2012. ExampleConsolidated Financial Statements: International Financial ReportingStandards (IFRS).Retrieved on July 22, 2014. Fromhttp://www.grantthornton.ca/resources/insights/adviser_alerts/Example%20Consolidated%20Financial%20Statements%202012_en.pdf
Pricewater coopers, PWC. 2012. Tax accounting services, Goodwillimpairment testing. PWC LLP. Retrieved on July 22, 2014. Fromhttp://www.pwc.com/en_US/us/tax-accounting-services/newsletters/tax-accounting/assets/pwc-goodwill-impairment-testing.pdf