Purchase, Expansion or Sale of Business

Question 1

To change operating asset mix:

Answer 1

1) acquire new assets or business
2) enter into strategic alliance or joint venture
3) divest business units or assets
- consider synergies

Question 2

Business strategy changes

Answer 2

• vertical/horizontal integration
• expanding current business
• focusing on core business

Question 3

Synergies

Answer 3

when 2 or more businesses are worth more operating together than separately

Question 4

Issues in changing operating asset mix

Answer 4

• specific assets to buy/sell
• liabilities to be transferred/assumed
• synergies gained or lost
• form of transaction

Question 5

To acquire new assets

Answer 5

• purchase assets
• purchase group of assets
• purchase net assets of existing corporation
• purchase shares of a corporation
• enter into strategic alliance
• joint arrangement

Question 6

Acquiring assets vs shares: advantages

Answer 6

• acquirer can pick and choose which assets to purchase
• contingent liabilities are not unknowingly assumed
• tax basis = acquisition price

Question 7

Acquiring assets vs shares: disadvantages

Answer 7

• selling company may not want to sell certain assets
• higher price may be paid when limited liabilities assumed

Question 8

Initial measurement of purchase of assets

Answer 8

• when single asset; record at acquisition cost
• when group of assets; record cost on a pro-rata basis to each asset

Question 9

Control on investment/purchase

Answer 9

• if control achieved: consolidate FS (ASPE choice not to)
• if control not achieved: record as significant influence investment

Question 10

Purchase of shares: advantages

Answer 10

• control can be held for cheaper (only have to purchase 51%)
• easier to sell shares later
• acquirer can use tax loss Carryforward

Question 11

Purchase of shares: Disadvantages

Answer 11

• non-controlling shareholders still involved
• must purchase all assets and assume all liabilities (not wanted)

Question 12

Hostile takeover

Answer 12

when the target company does not want the company to be purchased and fights against it

Question 13

When consideration is other than cash

Answer 13

• when giving up shares consider future cash flows that may not want to be received by the payee or not wanted to be given up by the payor
• when giving up shares consider the tax and accounting difference between the shares and the tax implication of the CG or deemed dividend
• consider CG on selling shares or assets
• consider risk associated with any consideration other than cash due to fluctuation of value

Question 14

Control - de jure and de facto

Answer 14

• De jure: control more than 50% and has ability to appoint directors
• de facto: control without ownership greater than 50%