Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

old stock of the constituent companies. The merger of a number of corporations is generally held to be a method of consolidating. The difference is that a consolidation is a fusion while a merger is rather an absorption. The constituent companies are merged into an existing one and no new corporation is formed. The rights, franchises, and interest are deemed to be transferred to, and vested in, the corporation into which the various companies have been merged without any deed or transfer, and the liabilities follow the rights. Formation of Consolidation and Merger In the formation of a consolidation or a merger the services of a promoter may be necessary. This is especially true if the various companies are direct competitors and deep-rooted jealousies exist. Under the circumstances an outsider has the best chance of effecting an agreement between the parties. The difficulty encountered in all consolidations and mergers is the exaggerated idea of officials regarding the importance and value of their own plant and organization as related to the rest. This difficulty is accentuated in effecting a merger because of the irrevocable nature of the compact and the almost complete disappearance of lines of demarcation as to the tangible and intangible assets of the various units. These difficulties are overcome in many instances by the promoter’s keeping the terms arrived at with each company a secret. Direct dealing is possible in the case of a merger when the various companies are supplementary to each other, such as would be the case where a selling organization is merged into a manufacturing corporation the product of which it distributes. Principles of Valuation of the Constituent Companies In all the foregoing cases the question at once arises as to the principles which should govern in arriving at a valuation. Should the value of the net assets comprising plant, equipment, etc., or the earnings for a number of years serve as a basis in arriving at the ratio of exchange in cash or stock? What relative weight should be given to the various items? A concern with large assets when not running its plant to full capacity would be averse to having the apportionments based on earnings. The corporation with relatively small assets but with large earnings on the capital invested would not want the value computed on net assets. If the net assets are an important factor of valuation, an appraisal should be made either through a committee or by independent appraisers. If such an appraisal cannot be made, the books should be examined to see that the valuation of each plant and equipment is correct. Great care should be exercised to see that capital additions represent actual additions to the plant or serve to increase its capacity or lower its cost of production. The method of handling improvement expenditures should be uniform. It is necessary to determine that proper entries have been made in respect of property abandoned or equipment removed from service. Another point requiring careful investigation is the provision of ample reserves for depreciation, and the same method of calculation and consideration of the different elements of depreciation and the conditions under which they are operative must be taken into account in all the companies. The main problem in using earnings as the basis for valuation is the determination of the number of years’ profits to be averaged. Care must be exercised to handle uniformly the earnings and expenses of the various companies. Fundamental Principle of Equalization of Conditions Before an intelligent estimate or computation can be made of the relative value of each unit in the proposed consolidation or merger, the various items that make up the assets and earnings of each company should be examined from the same point of view. Accounting systems and methods are so varied that a common basis of computation must be constructed or agreed upon before a comparison can be made. In general, the following points should be considered: