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22754 Corporate Accounting 2023 SPR – Group assignment instructions

Assignment Question


On 12 July 2021, Wesfarmers Limited (ASX:WES) proposed to acquire 100 percent of the outstanding shares of Australian Pharmaceutical Industries Limited (ASX:API). After several rounds of competitive bidding by Sigma Healthcare Limited (ASX:SIG) and Woolworths Group Limited (ASX:WOW), Wesfarmers Limited emerged as the winner and completed the acquisition on 31 March 2022. Critically analyse the acquisition of Australian Pharmaceutical Industries Limited by Wesfarmers Limited.

Corporate Accounting Group Assignment

Introduction

Corporate Accounting is repleted with the stories of acquisitions and mergers, every facet laden with its unique strategies and plans with impactful financial intentions and implications. The report will study one such notable acquisition of the Australian Pharmaceutical Industrial Limited (API) acquired by Wesfarmers Limited, which was unrevealed on July 12, 2021. This acquisition was sent through the corporate landscape, raising pertinent questions about the economic growth and rationale, the impact it can have on the shareholder’s sentiments, and the strategies Wesfarmers integrated to get the deal. The report will delve more deeply into the understanding of the multifaceted approach of acquisition, aiming to reach comprehensive growth with economic rationales behind the strategic moves. Wesfarmers acquired the conglomerate giant API by venturing its position into unchartered territory. Before getting into this acquisition, Wesfarmers had no activity in the pharmaceutical industry, which made the company make strategic decisions more integrating and intriguing. The study will focus on the study economic rationales, for Wesfarmers’ acquisition of API, and then the report focus on the shareholder’s reaction to getting with Wesfarmers from the API shareholders, the choices of acquisition that API had, calculation of goodwill to pay the consideration for acquisition the revaluation made for the PPE by the companies to get acquisition process completed, and the integration of the ESG strategies with the acquisition plan of Wesfarmers by API.

Question1: Economic rationales

  1. Diversification- The primary rationale that Wesfarmers was to plan the acquisition of API was diversification. This is a strategic approach that involves expanding the company business portfolio to newer industries and untapped markets to expand the market and have a decreased resilience on prevailing streams of income. The case here is marked as the company Wesfarmers has the aim to diversify its business by getting its position in the pharmaceutical industry. This strategy of diversification is necessary for mitigating the risk linked by relying upon one industry (Wesfarmers, 2020). This has allowed the company Wesfarmers to spread the work to mitigate the risks and its reliance on only one industry. This is allowing Wesfarmers to spread its investment across diverse segments, thereby safeguarding its financial position and stability.

With this plan, the business is planning on its diversification strategies with which it is working to explore the other fields in business to grow and embrace its business and to grow from multiple industries and embrace its revenue.

  • Increased revenues
  • Diversifies businesses
  • Get in untapped markets
  • Wesfarmers to increase its position in the untapped markets
  • Market expansion- the other rationale behind the acquisition was to get in with market expansion with the recognition and get with the Wesfarmers to have the growth chances and tap with the market with increased demands for better products and services. These strategies move to align with the objectives of the company, pursue revenue, and expand its market presence and growth (Wesfarmers, 2022). These strategies made the company grow.

The market is expanding on its position and showing the acquisition of the APIs.

  • Acquisition of new market
  • Chances to grow
  • Align with the new market stream
  • Synergies- These are the critical drivers for the blend of merger and acquisition. The company Wesfarmers may be identified for the synergies between the company’s operations and the API business. These are manifesting in the forms and the supply chain optimization, plan with cost savings and with the economies of scale, leverage on the API network (Wesfarmers, 2020). The company has the aim to embrace the overall work efficiency and increased profitability of the combined business.

They get in with the market to get with the market expansion and strategies of growth.

  • Cost savings
  • Revenue optimization
  • Economies of scale
  • Leverage with the network

Question 2: Shareholder Reactions

Shareholders play a vital role in framing the destiny of any business, specifically while getting into mergers and acquisitions. The reactions to acquisition proposals and subsequent matters can significantly influence the outcomes and lead to the success of such endeavours. In this case, the company, Wesfarmers Limited, has acquired API by accessing the reactions of its shareholders, which is crucial for gauging the reception and the impact of getting the strategic move (Wesfarmers, 2022).  

Initial proposal made- In the beginning, when Wesfarmers Limited made the acquisition proposal to API, the stakeholders of API had a positive reaction. The barometer of investors, the share market, depicted a positive sentiment of investors by responding favourably to the news of the acquisition. A substantial upward trajectory was marked for the shares of API, indicating that the investors and the shareholders perceived the value of the planned acquisition (API, 2020). The positive response was attributed to Wesfarmers in the market being a reputable and financially robust company. The offer of Wesfarmers instilled confidence amongst the API shareholders, as it will lead them to stability and growth under new ownership.

Subsequent offers and share price fluctuation- The dynamics given for the acquisition landscape shifted when the subsequent offers were made by other reputable businesses, Sigma and Woolworths. These multiple offers triggered the bidding war, with multiple offers and counteroffers. With this, the share prices of API started to fluctuate, showing the uncertainties and the volatilities inherent in these bidding wars (API, 2020).

In this work phase, the shareholders were closely analysing and monitoring the development and deciding whether to accept or reject the offers by analysing their financial implications. These fluctuations in API shares show the tug-of-war mirroring between the bidders, vying to secure the acquisition. This was elevated, and all the focus was on the decision of API (API, 2020). Wesfarmers emerged victorious in the acquisition on March 31, 2022, and ascertained its position as the new API owner.

Question 3: Acquisition Choices

The acquisition of Wesfarmers of API was not solely reliant on the strategic intent but also hinged on the critical options made by the company throughout the process. The acquisition of Australian Pharmaceutical Industries Limited (API) by Wesfarmers Limited was an essential move that earned massive consideration in the Australian business landscape. The fundamental examination of this obtaining includes assessing the decisions made by Wesfarmers to get the arrangement, including the securing technique, offer cost, instalment strategies, and takeover premium (API Acquisition, 2020).

Method of Acquisition- Wesfarmers opted to pay with cash to acquire API. This decision was underpinned by offering the shareholders of API immediate liquidity. The given cash offer, Wesfarmers settled on a well-disposed procurement approach instead of an unfriendly takeover. This implies that API’s directorate and investors were, by and large, responsive to Wesfarmers’ proposition, encouraging a smoother exchange process (API Acquisition, 2020). This approach probably added to limiting expected opposition and lawful difficulties, making it a judicious decision to get the arrangement.

Offer Prices- Financially viable price determined to ensure the value of API and feasibility of Wesfarmers.   The deal cost is a critical part of any procurement. Wesfarmers proposed a price tag of AUD 1.38 per share for API. The proposition cost was alluring, addressing a premium to API’s cost before the procurement declaration. This superiority tempted Programming interface investors to honestly think about the deal (API Acquisition, 2020). Wesfarmers’ choice to offer a top-notch notch exhibited their obligation to secure API and their comprehension of the organization’s market worth.

Methods of payment- Cash and shares- a mixed payment combination was opted to balance returns and future gains. Wesfarmers used a blend of money and offer to back the securing. This approach allows API investors to pick their favoured strategy for remuneration, offering adaptability and attractiveness to a more extensive scope of financial backers. Those searching for guaranteed liquidity could settle on cash, while those keen on partaking later in the progress of the combined element could pick shares (Wesfarmers, 2020). This adaptability in instalment techniques expanded the proposal’s appeal to Programming interface investors.

Premium paid to takeover- Wesfarmers gave a competitive premium offer to incentivize API shareholders to take the offer.   The takeover premium is the extra sum addressed over the market cost of the objective organization’s portions to convince investors to sell. Wesfarmers offered a critical premium over API’s pre-procurement market cost, which showed their reality and assurance to get the arrangement. This superior mirrored the apparent collaborations and expected worth of the obtaining (API, 2020). Nonetheless, it is fundamental to consider the genuine post-securing execution of API and whether the premium paid was legitimate by the ensuing development and combination benefits.

Wesfarmers’ obtaining of Australian Pharmaceutical Industries Limited has been arranged and executed. The decision of a well-disposed procurement technique, an appealing proposition cost with a premium, and adaptable instalment strategies were vital choices that probably added to the effective securing (Reuters, 2022). The genuine assessment of this obtaining’s prosperity will rely upon the post-securing joining, cooperative energy acknowledgement, and long-haul monetary execution of API under Wesfarmers’ proprietorship. Looking back, it will be essential to evaluate whether the premium paid was legitimate by the worth made through the securing (Wesfarmers, 2020).

Question 4: Goodwill Calculations

Calculation of Fair Value of Identifiable Net Assets

FVINA of the company is the sum for the fair value of all the identifiable assets, less the fair value of all of the business’s liabilities. FVINA of Wesfarmers with Wesfarmers’ acquisition of the Australian Pharmaceutical Industry (API).

The calculations are made as given:

  1. Identification of the API assets and liabilities
  2. Determining the fair value of each of the assets and liabilities
  3. Fair value is the sum of all assets and subtracting the fair value taken for all the liabilities.

Assets:

  1. Cash and cash equivalents
  2. Trade and other receivables
  3. Inventories
  4. Lease receivables
  5. NCA

Liabilities:

  1. Trade and other payables
  2. Loans and borrowings
  3. Lease liabilities
  4. Provisions
  5. Income Tax
  6. NCL

The calculation of New Assets/ FVINA is given in the following table:

Asset/LiabilityFair Value (AU$ millions)
  
Cash and cash equivalents60713
Trade and other receivables537899
Inventories368180
Lease Receivables6530
NCA569649
Total assets1542971
Trade and other payables741945
Loans and borrowings8260
Lease liabilities40404
Provisions34632
IT payable7441
NCL252543
Total Liabilities1085225
Net Assets457746

Calculating the goodwill based on FVINA

For calculating the goodwill:

Consideration Paid: AUD 687 million

FVINA: AUD 457,746

Goodwill= Consideration paid – FVINA

Goodwill:

687,000,000- 457,746,000

= AUD 229,254,000

Goodwill
Consideration Paid68,70,00,000
FVINA45,77,46,000
Goodwill22,92,54,000

Thus, the goodwill for the acquisition of API by Wesfarmers is AUD 229.254 million.

Goodwill is an intangible asset represented on the company valuations, the brand value of it, and other intangible assets (API, 2020). This is calculated by subtracting the fair value of the identifiable net assets of the company from the purchase price that the company Wesfarmers had paid.

The fair value of net assets recognized

The identification and appraisal of all the transferable assets and liabilities of the acquired business are necessary for the complex process of calculating goodwill based on FVINA. It is a crucial phase in accounting procedures for business combinations since it enables the acquirer to report the fair value of the purchased organization’s remaining assets and goodwill (API, 2020).

Consolidated Sheet
Half-year ended Consolidate statement($m) 2022
Revenue2,778
EBITDA66
Depreciation and amortization36
Interest on lease liabilities3
EBIT margin (%)1
Market-based emission7

Question 5: Revaluation for PPE

Wesfarmers Limited’s bookkeeping treatment for revalued Property, Plant, and Equipment (PPE) obtained from Australian Pharmaceutical Industries Limited (API) will rely upon the bookkeeping guidelines applied, which ought to be as per Australian Bookkeeping Norms. In particular, the treatment of revalued PPE is tended to under AASB 116 – Property, Plant and Gear.

  1. Financial year in which PPE was depreciated and scrapped-

In the monetary year when the revalued PPE is completely devalued and rejected (for this situation, following three years), the bookkeeping treatment would be as follows:

  1. Depreciation: Wesfarmers would keep perceiving devaluation costs on the revalued PPE over its leftover helpful existence of three years. Considering that the fair worth of the PPE was $850 million at the date of procurement, the yearly deterioration cost would be determined as follows:

 Yearly Devaluation Cost = (Fair Worth – Assessed Lingering Worth)/ Staying Helpful Life

 Yearly Devaluation Cost = ($850m – $0)/3 years

 Yearly Devaluation Cost = $283.33 million every year

The devaluation cost would continue until the PPE’s conveying measure arrives at its lingering worth of $0 (Wesfarmers, 2020).

  • Conveying Amount: As the PPE is completely devalued and no longer has a conveying sum, it would be eliminated from the monetary record. This includes crediting the PPE resource account and charging the collected devaluation account until both have a zero equilibrium.
  • Scrapped: When the PPE is rejected, Wesfarmers would perceive any subsequent additions or misfortunes in the pay proclamation. On the off chance that the piece esteem is unique about the conveying sum (which is currently $0), the distinction would be recorded as an increase or misfortune (Parker et al., 2019).

B.    Subsequent year entries and accounting treatment and taxation analysis.

In the resulting year, after the PPE had deteriorated entirely and been rejected, Wesfarmers wouldn’t have any PPE connected with the Programming interface procurement, staying on its monetary record. The budget summaries would exclude any PPE resources or devaluation costs related to this obtaining (Reuters, 2022). Wesfarmers would have to consider whether to put resources into new PPE or different resources to proceed with its activities and development in the ensuing years. Any new resources procured would be represented per AASB 116 and dependent upon deterioration, revaluation, and debilitation contemplations as material.

In synopsis, the bookkeeping treatment for revaluing PPE procured from API includes perceiving devaluation costs until the PPE is wholly deteriorated and rejected. In the monetary year of rejection, any additions or misfortunes from rejection are perceived. In the ensuing year, there would be no PPE connected with this securing on Wesfarmers’ accounting report. It’s fundamental for Wesfarmers to make arrangements for the substitution or securing of new resources to support its tasks past the helpful existence of the rejected PPE (Parker et al., 2019).

Question 6: ESG strategies with acquisition

Sustainability initiatives- Highlighting the sustainability goals of the whole acquisition and the embrace CSR. 

At Wesfarmers, supportability and capable strategic policies have been the centre of our procedure for a long time. We comprehend the significance of ESG contemplations in the present business scene, and our obligation to these standards is apparent in our activities. The securing of the Programming interface is no particular case; it mirrors our devotion to maintainability and Corporate Social Responsibility (CSR) in more than one way:

  1. Medical Care Access: API is a huge player in the medical services area, and by obtaining it, we are building up our obligation to further develop medical services access for networks. This lines up with the “Social” part of ESG, showing our commitment to having a beneficial outcome for society.
  2. Drug Supply Chain: API’s activities are essential in the drug store network, adding to the conveyance of fundamental medical care items. The company possession permits them to impact and work on the supportability of this production network, from obtaining to dispersion, guaranteeing moral and ecologically mindful practices.
  3. Representative Welfare: Wesfarmers focus on worker prosperity and commitment. As a component of the obtaining, we plan to put resources into the Programming interface’s labour force, guaranteeing fair wages, safe working circumstances, and open doors for the proficient turn of events. This mirrors our obligation to the “Social” part of ESG.
  4. Ecological Responsibility: API’s resources, including property and offices, give an open door to us to carry out energy-effective and economical practices. We expect to decrease our natural impression through drives like energy-effective activities, squander decrease, and maintainable obtaining, lining up with the “Ecological” part of ESG (Reuters, 2022).
  5. Local area Engagement: Wesfarmers will draw in the networks where API works, figuring out their remarkable necessities and adding to their turn of events. Local area commitment is indispensable to our CSR approach.

Associated risks and potential risks- Potential risks with ESG and the regulatory risks also aligned with it.

While obtaining API lines up with our ESG procedure and manageability objectives, it is fundamental to recognize and address the potential dangers related to ESG factors. These dangers include:

  1. Administrative Risks: The medical services and drug industry is exceptionally directed. Changes in guidelines connected with item security, valuing, or ecological principles can affect our tasks. We should intently screen and adjust to developing administrative prerequisites.
  2. Store network Risks: Guaranteeing moral and manageable practices through API’s production network is significant. Any disturbance or embarrassment in the store network could prompt reputational harm and monetary misfortunes.
  3. Reputational Risks: As a capable corporate resident, any deviation from our ESG responsibilities can result in reputational harm. We should keep up with straightforwardness and consistency in our ESG endeavours.
  4. Ecological Liabilities: If there are undisclosed or ignored ecological liabilities related to the Programming interface’s tasks, they could have monetary and reputational outcomes (Parker et al., 2019). We should make a careful, reasonable effort to distinguish and alleviate such dangers.
  5. Worker Relations: Guaranteeing fair and impartial treatment of workers is fundamental. Any issues connected with work questions, segregation, or exploitative practices could hurt our standing and impede representative resolve.
  6. Wellbeing and Security Compliance: Given the idea of the drug business, adherence to severe well-being and security guidelines is critical. Rebelliousness can prompt mishaps, legitimate liabilities, and harm to our social standing.

Considering everything, securing Australian Drug Enterprises Restricted aligns with our ESG technique and supports our obligation to maintainability and CSR. We recognize the related dangers, including administrative, inventory network, reputational, ecological, representative-related, and well-being dangers (Reuters, 2022). As a mindful corporate element, we are devoted to moderating these dangers through the intensive expected level of investment, nonstop checking, and proactive measures.

Our obligation to ESG standards stays steadfast, and we trust that by tending to these dangers straightforwardly and mindfully, we will get the outcome of this obtaining and reinforce our situation as a capable and feasible indication in the business.

Conclusion

Strategic mergers and acquisitions are widespread in corporate Finance, and each has its own set of financial goals and ramifications. Wesfarmers Limited’s acquisition of Australian Pharmaceutical Industrial Limited (API), announced on July 12, 2021, has been a major acquisition that has been the subject of this study. As a result of this transaction, there have been significant repercussions in the business world, prompting necessary inquiries concerning the acquisition’s economic justification, effect on shareholder mood, and Wesfarmers’s strategic moves to close the deal. Thus, to conclude it can be mentioned that the company Wesfarmers has worked towards the acquisition of API when the company has offers from multiple other companies such as Woolworths but the acquisition was made by Wesfarmers. In summary, the accounting procedure for revaluing PPE obtained via API comprises recognizing devaluation expenses up until the PPE is completely damaged and discarded. Any gains or losses resulting from rejection are felt in the year financially. On Wesfarmers’ accounting report for the next year, there would be no PPE associated with this securing.  Wesfarmers must make provisions for the replacement or acquisition of new resources to support their operations beyond the useful life of the rejected PPE. Even with the integration of the process of acquisition, the company is focusing on working with the improved plans and showing the embraced position to grow the business in multiple niches and grow as the revenue streams from multiple industries.

References

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