I.

Definition
1. Acquisition Method
To acquire something means that you gain possession of it; money or any similar
exchange need not be involved. The current accounting method used for business
combination is acquisition method, whereas control is one of the essential elements,
that can be obtain even without transferring consideration to the acquiree. Based on
IFRS 3 B.5” business combination can occur in various ways, such as by transferring
cash, incurring liabilities, issuing equity instruments (or any combination thereof), or
not issuing consideration at all (i.e. by contract alone)”
Under this method, assets and liabilities are recorded at fair value and any excess
is considered as goodwill. Aside from that non-controlling interest (NCI) and bargain
purchase must also be reported by the buyer on its consolidated statement of
financial position. A bargain price is when the acquiring company pays less than the
fair value of the company being acquired.
Hence, these are the following must be present under acquisition method:
identification of acquirer, the date of acquisition, recognition and measurement of
goodwill: consideration transferred, NCI in the acquiree, previously held equity
interest in the acquiree and measurement of identifiable assets acquired and liabilities
assumed on the business combination.
2. Purchase Method
To purchase something means that you obtain it by buying it with money or
offering some equivalent. Purchase method in the context of business combination is
a way of recording a merger or acquisition in which the acquiring company treats the
target company simply like an asset such as equipment or stock. The acquiring
company simply adds the fair value of the target company's asset to its balance sheet.
If the acquisition cost more than the fair value, the excess is recorded as a goodwill.
The said goodwill must be amortized at a certain period.
3. Pooling of Interest Method
The accounting method that is used when two or more companies decided to
merge or be combined. It allows the transfer of assets and liabilities from the acquiree
to the acquirer company. The assets and liabilities transferred are measured at book
value and the operating results were stated as if the companies had always been
together. Unlike the methods mentioned before, fair values don’t have a role under
pooling of interest, as well as goodwill.
II. Major differences between acquisition method, purchase method and pooling of
interest method.
  Both acquisition and purchase method are built upon fair value concept while
in pooling of interest method, amounts are recorded at historical cost.
 The acquisition method requires accountants to disclose contingencies --
potential assets or liabilities that the company may or may not recognize in the
future. On the other hand, the purchase method did not require these to be
disclosed at the time of the acquisition. Some contingencies, like lawsuits,
product warranties, or off-balance sheet financial obligations, can have a
material impact on the future of the company.
 Under pooling of interest, the statements of financial position for the two
companies were simply summed together, item by item. Any cost that was
paid above the true market price of the assets was not recorded in the business
combination and, therefore, did not need to be paid off or expensed. On the
other hand, both acquisition method and purchase method recognize any
premium paid above the standard price must be accounted for in the acquirer’s
statement of financial position as goodwill. The only difference is, in
acquisition method, goodwill is tested for impairment.

III. Understanding the cause of the shift:

In 2001, the Financial Accounting Standards Board issued the ending of usage of
pooling of interest method. It is replaced by a new designated accounting method called
purchase accounting method. Came by 2007, FASB decided to issue a new and improved
accounting method by issuing Statement No. 141, the said issuance gave life to the
required and innovated accounting method for business combinations-- acquisition
method.
In pooling of interest method, transfers of assets and liabilities are only recorded
at their book value. The non-recognition of goodwill caused the shift to purchase method
which gives truer representation of the exchange in value. The FASB believed that
the creation of a goodwill account provided a better understanding of tangible assets
versus intangible assets and how they each contributed to a company's profitability and
cash flows. However, the shift to purchase method led to negative impact on earnings.
The goodwill amortization issue was solved by incorporating an impairment test that
exists under acquisition method. The impairment test would determine if the goodwill
was higher than its fair value, and only then it would have to be amortized and expensed.

MERGING COMPANIES
KAY BRY TO
FRIENDLY TAKE OVER
 In a friendly takeover, the management and board of directors approve of the takeover
and advises shareholders to vote in favor of the deal. The acquirer company, in a friendly
takeover, can employ strategies such as:
 
1. Offering their own shares or cash
The acquirer company can offer a share conversion (x shares of the acquirer company for each
share of the target company) or make a cash offer ($x per share of the target company). A
combination of acquirer company shares + cash can also be used.
 
2. Offering a share price premium
The acquirer company can offer a percentage premium to the most recent closing share price of
the target company (x% premium to the closing share price).
EXAMPLE: Facebook & WhatsApp Deal
Facebook takeover to WhatsApp is another big example of a friendly takeover where
Facebook bought WhatsApp in $19 Billion.

PS: YUNG PICTURE PO NA NAKAHIGHLIGHT DI PO KASAMA SA ILALAGAY

SA VIDEO. SALAMAT
UNFRIENDLY TAKEOVER
The acquisition of a firm despite resistance by the target firm's management and board of 
directors. 
Also called hostile takeover.
Example:
Kraft Foods Inc. and Cadbury PLC
In September 2009, Irene Rosenfeld, CEO of Kraft Foods Inc. (KHC), publicly announced her
intentions to acquire Britain's top confectionery company, Cadbury PLC. Kraft offered $16.3
billion for the maker of Dairy Milk chocolate, a deal rejected by Sir Roger Carr, Cadbury's
chairman.1 Carr immediately put together a hostile takeover defense team, which labeled Kraft's
offer unattractive, unwanted, and undervalued.2 The government even stepped into the fray. The
United Kingdom's business secretary, Lord Mandelson, said the government would oppose any
offer that did not grant the famed British confectioner the respect it was due.3
Kraft was undeterred and increased its offer in 2010 to about $19.6 billion. Eventually, Cadbury
relented and in March 2010 the two companies finalized the takeover.4 However, the contentious
battle inspired an overhaul in the rules governing how foreign companies acquire UK companies.
Of major concern was the lack of transparency in Kraft's offer and what its intentions were for
Cadbury post-purchase.

What is the Greenmail defense tactic?

The Greenmail is the anti-takeover tactic undertaken when the target firm buys back its own
shares at an inflated price from the unfriendly firm which possesses a large stock of the target
company and is threatening a hostile takeover. The term “greenmail” is derived from
“greenbacks” (dollars) and “blackmail”. It is a buyout by the target of its own shares from the
hostile acquirer with a premium over the market price. The potential acquirer accepts the
greenmail profit it makes from selling the target company’s shares back to the target at a
premium, in lieu of pursuing the takeover any further. Although this strategy is legal, the
acquirer is, effectively, sort of blackmailing the target company, in that the target must pay the
acquirer a premium – through the share buybacks – in order to persuade it to cease its takeover
attempt.
Key Points
Purchase – A corporate raider or an investor gets hold of a large stake in the target company by
purchasing its shares from the open market.
Struggle – Threaten the target company over a hostile takeover but they offer to sell the acquired
shares to the target company at a premium price which is much above the market value. The
raider also makes a promise of not harassing the target company on repurchasing the shares by
the target company.
Sale – The corporate raider sells its share at a higher price. The target company utilizes the
shareholder money to pay the premium price for buyback
The target company is left with a considerable amount of debt and its value is reduced whereas
the raider makes a handsome profit.
Illustration:
ABC Corp. acquired 53% of voting shares in XYZ Inc. The former has now control in XYZ Inc
as it can now appoint the majority directors of the board, and expressed its interest in taking over
the company. Thus, XYZ Inc. agreed to repurchase the shares at a premium to avoid the possible
takeover. ABC Corp. acquired the shares for an average price of P35.50 per share, a total of
P109 million. It sold its stake at P52 per share, netting a profit of P51 million.

Purchase - ABC Corp purchase 53% of voting shares from XYZ Inc.
Struggle - ABC Corp expressed interest to take over XYZ Inc. But XYZ Inc offers ABC to
reacquire its own share at a premium price.
Sale - XYZ acquires its own share at a premium of P16.5 per share or a total of P51 million to
avoid the possible takeover of ABC Corp.

What is White knight/White squire?

A white squire is an individual or company that buys a large enough stake in the target company
to prevent that company from being taken over by a black knight. In other words, a white squire
purchases enough shares in a target company to prevent a hostile takeover. A white knight is an
investor who is considered friendly for the company as that person acquires the company with
the help of the company’s board of directors or top-level management at a fair consideration so
that the company can be protected from the hostile takeover attempt by the other potential buyer
or from bankruptcy.
White knights are preferred by the board of directors and/or management as in most cases as they
do not replace the current board or management with a new board, whereas, in most cases, a
black knight will seek to replace the current board of directors and/or management with its new
board reflective of its net interest in the corporation's equity. The intent of the acquisition is to
circumvent the takeover of the object of interest by a third, unfriendly entity, which is perceived
to be less favorable. The target company must incentivize the white squire to stand on its side of
the target and not end up selling its shares to the black knight (thus aiding the hostile takeover
attempt).

Key points:
Target company - the entity that’s being threatened to be taken over.
White Knight/Squire - the acquirer entity that is usually preferred by the management instead of
being taken over by black knight.
* However, the differentiating point is that a white knight purchases a majority interest
while a white squire purchases only a partial interest in the target company.
Black knight - individual or a company that takes over the target company by force.
Illustration:

ABC Corp is in the brink of bankruptcy. At that time DEF Corp offers to purchase 90% of its
controlling interest and be taken over by said corporation. Despite the rejection of their offer,
DEF Corp proceeds with a tender offer of purchasing voting shares at 40% premium, to acquire a
controlling interest in ABC Corp. An investor friendly to ABC Corp namely G Inc, sees the
hostile takeover attempt by DEF Coop and decides to step in and help the ABC Corp. The
friendly investor purchases shares of ABC Corp to prevent the shares from being acquired by
DEF Corp. In return, ABC Corp promised G Inc to declared generous dividend and a reasonable
purchase price of the stocks.

Target Company:
ABC Corp facing bankruptcy offered to be taken over by DEF in exchange of 40% premium for
90% of its voting shares.
Black knight:
DEF Corp who’s expressed its interest to take over the company.
White Knight:
G Inc, a friendly investor who purchase the share of ABC Corp to avoid the hostile take over by
DEF Corp.

PAC-MAN DEFENSE
It is a defensive tactic used by a hostile takeover situation wherein the target firm tries to acquire
the company that has made a hostile takeover attempt. It is like” reversing the coin” or “turning
tables.” target firm fights back by seeking to acquire the public shares or buying back its shares
of the other company so they reverse and its like trying to eat the hostile corporation rather than
the hostile corporation eating the target corporation which has similar concept with the video
game Pac-man.
It is one of the few options available with a hostile takeover attempt. The target company have to
be aggressive and ready to fight back, if not, the company would not have a chance to survive. It
is an expensive strategy and may increase debts for the target company which may cause losses
or lower dividends in future.
Example: The Pac-man battle of Martin Marietta and Bendix (1982), Volkswagen and Porsche
2008-2012)
SALE OF CROWN JEWELS
This defense strategy is applied to avoid a future hostile takeover by another company by selling
its crown jewel or it most important assets to decrease or lose its attractiveness. Since the most
valuable assets are sold off to a friendly third party (white knight) the target company becomes
less attractive to the unfriendly bidder.
A company’s crown jewels vary from other companies as it depends on the industry and nature
of the business (such as trade secrets, proprietary information, intellectual property, etc which
costs a lot of money)
It is basically the last-resort strategy to be applied to stop the takeover because the sale of crown
jewels will generally leave the remnants of a company in less attractive which will make slower-
growing markets. There may be a decrease in brand equity value of the company, and diminished
sales and earnings growth prospects resulting from the loss of talented management, product
innovation, manufacturing efficiency or geographic markets. Shareholders who invested because
of the crown jewels would flee if they are sold.
This strategy can also be used in a better manner where the target company sells off the valuable
assets to a friendly third party and later repurchases those assets once the hostile bidder retracts
its bidding.
Example: Sun Pharma vs Taro (2007)
SCORCHED EARTH
What is Scorched Earth?
A scorched earth is a technique that can be used by a business to prevent a hostile takeover.
Essentially what happens is that a company targeted for takeover does everything it can possibly
do to make it unattractive, aiming to prevent the potential acquirer from pursuing the attempt at
acquisition.
Origin of the Scorched Earth
The word "scorched earth" began as a military phrase. During times of war, to make them
unusable by enemy forces, troops would destroy valuable goods (crops, houses, roads in and out
of towns).
The downside of the scorched strategy is that the destructed objects and facilities could also no
longer be used by the troops that destroyed them.
In order to make it less attractive, a targeted company may do a number of things.
1. Winding up or terminating valuable assets and shares.
2. Make debt repayment arrangements as soon as the hostile takeover is over. The acquiring
company would then be forced to pay off the outstanding debt, thereby eroding its profits.
3. Trying to "scorch" the acquirer even by using a "poison pill" technique such as the flip-over
strategy.

HOSTILE TAKEOVER
What is Hostile Takeover?
A hostile takeover is the acquisition by another company (referred to as the acquirer) of a target
company by going directly to the shareholders of the target company. A hostile takeover happens
when the management or board of directors of the targeted company does not approve of the
deal. With a lack of approval and cooperation from these decision-makers, the acquirer goes
straight to the shareholders of the target company to validate the acquisition.
2 Main Strategies Buyer can use to approach Hostile Takeover
Tender Offer – A tender offer occurs when the buyer offers to purchase shares at premium value.
Proxy Fight – Also known as a proxy vote or proxy contest, this strategy involves persuading
shareholders to support the sale. By doing so, the prospective buyer can then convince those
individuals to vote for board and executive member replacements who are more likely to
approve of the acquisition.

Defensive Strategies
1. Differential voting rights
This preemptive defense strategy involves establishing stocks with differential voting rights,
meaning shareholders have fewer voting rights than management. If shareholders must own
more shares to cast votes, a takeover becomes a more costly endeavor.

2. Employee Stock Ownership Program

Another preemptive defense strategy is to create a tax-qualified plan that grants employees more
substantial interest in the company. The idea is that employees are more likely to vote for
management rather than support a hostile buyer.

Poison Pill
(also known as shareholders' protection rights plans.)
 It refers to a defense strategy used by a target firm to prevent or discourage a
potential hostile takeover by an acquiring company. Potential targets use this tactic in
order to make them look less attractive to the potential acquirer. Although they're not
always the first—and best—way to defend a company, poison pills are generally very
effective.
 It allow existing shareholders the right to purchase additional shares at a discount,
effectively diluting the ownership interest of a new, hostile party. 
 Poison pills often come in two forms—the flip-in and flip-over strategies.
"FLIP-OVER" RIGHTS PLAN
The most commonly used strategy is called the "flip over" or the shareholder rights plan. Under
this strategy, the holders of common stock of a company receive one right for each share held,
which allows them an option to buy more shares in the company.
"FLIP-IN" RIGHTS PLAN.
A variation of the flip over is the "flip-in" plan. The plan allows the rights holder to purchase
shares in the target company at a discount upon the mere accumulation of a specified percentage
of stock by a potential acquirer.
Shark Repellant
 It refers to measures employed by a company to lock out hostile takeover attempts. The
measures may be periodic or continuous efforts exerted by management to make special
amendments to its bylaws. The bylaws become active when a takeover attempt is made
public to the company’s management and shareholders. It fends off unwanted takeover
attempts by making the target less attractive to the shareholders of the acquiring firm,
hence preventing them from proceeding with the hostile takeover.
  A shark repellent is a strategy taken by public companies to ward off unwanted
takeovers. It is a generic term for periodic or continuous measures taken by the
management of a firm to discourage unwanted or hostile takeovers. These measures
benefit the firm’s management more than the stockholders, as they damage the firm's
financial position.
Practical Example of Shark Repellent
Brown Forman Corporation initiated a takeover of Lenox Corporation
In 1983, wines and spirits maker Brown Forman Corporation initiated a takeover of Lenox
Corporation, a leading producer of bone china ceramics and collectibles, by offering to buy the
latter’s shares at $87 each. At the time, Lenox’s shares were trading at $60 on the New York
Stock Exchange. In a bid to protect itself from the takeover threat, Lenox offered its shareholders
a special cumulative dividend in the form of preferred shares that were convertible to common
stock shares.
The proposal would’ve given shareholders the right to purchase additional shares at steep
discounts at Brown Forman Corporation if the takeover attempt was successful. The action made
the company less attractive to the acquirer since the shares would be diluted when the preferred
stocks were converted to shares of the acquirer. Brown Forman Corporation was later forced to
raise its offer and get into a negotiated agreement with the directors of Lennox Corporation.

Leveraged buyouts
arrangement to buy out the stockholders using the company’s assets to finance the deal.
A buyout (the purchase of a controlling share in a company) can be funded with a combination
of cash or debt. Buyouts that are disproportionately funded with debt are commonly referred to
as leveraged buyouts
As the cost of debt is finite and the company will not have any further obligations to the lender
once the loan is fully repaid, generally debt is cheaper than equity for companies that are
profitable and expected to perform well.
•Leveraged buyouts – arrangement to buy out the stockholders using the company’s assets to
finance the deal.
A leveraged buyout is one company's acquisition of another company using a significant amount
of borrowed money to meet the cost of acquisition. The assets of the company being acquired are
often used as collateral for the loans, along with the assets of the acquiring company
The Mudslinging defense
Mudslinging in definition is an attempt to discredit one's competitor, opponent, etc., by malicious
or scandalous attacks. it could also describe as dirty politics or dragging one’s name through the
mud.
•Mudslinging defense – When the acquiring company offers stock instead of cash, the prospective
acquiring company’s management may try to convince the stockholders that the stock would be a
bad investment.
When business competition gets tough, no tactic is more tempting than an attack on the other
guy’s good name. Surreptitious or overt, a well-aimed mudslinging campaign can blight a
competitor’s sales, unravel its important deals and alienate its bankers and business partners.
The Defensive acquisition tactic
Kay Bry to

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