Business Combinations

When you have completed this chapter you will understand:

the nature and structure of business combinations (groups);

IFRS accounting principles and rules for accounting for business combinations, especially IFRS 3 and 10;

political aspects of the standard setting process for business combinations;

how to account for investments in “associate companies”;

how to account for “joint ventures”;

why related-party transactions must be disclosed.

“Final” Astra Bid Leaves Doubt Swirling; Ashley Armstrong Explains What LED To Pfizer's new Offer Amid Confusion on Whether a Deal is Still Possible

It may have been the hottest weekend of the year but AstraZeneca’s and Pfizer’s army of advisers was trapped indoors, sweating over what promised to be the UK’s biggest ever company takeover. Finally, on Sunday night, after hours of conference calls and email exchanges, AstraZeneca’s deal team called a halt to their labours – believing their work was done, at least until the morning. Some even had the sense that it was all over and there was no more to be done to secure a deal.

But, no sooner had the advisers arrived home than their phones buzzed back into life. Pfizer had decided not to down tools for the night and had suddenly gone public with a £55-per-share “final” offer – better, but not good enough, as it would turn out. “When there’s a big deal on, weekends are cancelled,” one weary adviser said, reflecting on the takeover drama that had sparked into life again last Friday night.

After markets closed, Pfizer lived up to its aggressive reputation and went low-ball at £53.50 in a letter to AstraZeneca’s chairman. Analysts had reckoned a proposal between £53 and £55 would have been sufficient to bring AstraZeneca to the table …

On Saturday, AstraZeneca’s board met to discuss the offer and emphatically decided it undervalued the company, still lacking certain “key aspects” that it required. These included more comfort on the combined group’s operating structure, details of planned cost cutting, and reassurance around pipeline and deal execution risks, mainly concerns surrounding Pfizer’s own tax inversion plans.

“Unfortunately, we could not really engage Pfizer on those very important dimensions,” said Pascal Soriot, Ast ra-Zeneca’s chief executive. “We could not really get to any sort of meaningful discussion that would be reassuring for us. So a combination of a low price and risks without any protection led the board to reject it.”

It is understood that AstraZeneca remained focused on the value and certainty surrounding the potential bid, rather than being swayed by any political ramifications.

Pfizer boss Ian Read – who had returned to the United States – was said to be extremely frustrated with the lack of engagement from AstraZeneca’s board and asked for a “principals’ call” to take place between himself, Pfizer chief finance officer Frank D’Amelio, Astra-Zeneca’s chairman Leif Johansson, Mr Soriot and finance boss Marc Dunoyer. After a “polite and professional” phone call that lasted over an hour, Pfizer intimated it might be willing to make a “minor” increase to the price of its proposal. But AstraZeneca, unusually for a target, put a price on its independence. Ast raZeneca said that it would only be prepared to do a deal if the offer were 10pc higher, meaning roughly £59 per share, or a £70bn overall bid.

While Mr Soriot’s on-going rejection of Pfizer had so far been lauded by UK and Swedish politicians, he had been increasingly under fire from shareholders for not fully engaging in talks and dismissing the interest out of hand. The new tactic of naming a price was meant to illustrate that AstraZeneca wasn’t burying its head in the sand. Pfizer is understood to have ended the conversation on Sunday night. For the first time, it knew the price at which it could get a deal done. But it had no intention of going that high.

The Pfizer decision on late Sunday night, however, to propose £55 had baffled some of Astra-Zeneca’s team, seeing it as Pfizer directly ignoring its attempt to be clear about the recommended deal level. But, while the swift rejection yesterday morning by AstraZeneca stunned the market, it didn’t necessarily surprise Pfizer. The US drug maker had imposed various restrictions that meant it couldn’t go hostile or raise its price – its proposal was “final”.

Yesterday as news of AstraZeneca’s rejection broke, there remained widespread confusion about whether the deal was definitively over. Even AstraZeneca’s Mr Johansson admitted he had “no idea” when the saga will end. The uncertainty was primarily caused by the three caveats Pfizer included in its £55 proposal that meant it could raise its offer if: Pfizer’s share price fell considerably; it achieved a recommendation from AstraZeneca’s board; or a rival bidder appeared with a lower offer.

However, sources close to the Takeover Panel have confirmed that “final” means final – even in the case of a proposal, rather than a formal offer. Pfizer is restricted to making a firm bid at £55 a share with AstraZeneca’s board backing, which requires Mr Soriot and Mr Johansson to suddenly change their minds about the adequacy of the offer.

The clock is ticking ever louder on next Monday’s deadline which requires Pfizer to make a firm bid or walk away under panel rules. Pfizer is hoping that AstraZeneca’s shareholders put enough pressure on Mr Soriot and Mr Johansson to force them back to the negotiating table.

This could still be enough, with sources close to the process pointing out that there remains a week still to play. AstraZeneca may even be looking to accept the £55 bid only to then negotiate a higher price while the deal progresses through a regulatory process that could last up to a year. “At the moment AstraZeneca has rejected a proposal, it hasn’t rejected a bid,” one source said.

(Daily Telegraph, 20 May 2014)