How does an acquisition impact BFIs concerned and their shareholders?

ShareSansar, June 2:

After the central bank introduced the acquisition bylaws on April 21, Citizens Bank International Limited is acquiring Nepal Housing and Merchant Finance Limited (NHMFL), which is first of its kind in the country’s banking sector.

Before we delve into the implications of acquisition on the shareholders of both these BFIs, we need to understand the concept itself.  

Acquisition generally means buying out the target company’s majority stake.

Acquisition affects only the balance sheet initially. Now to understand the impact of the acquisition in the balance sheet, let’s assume that Citizen Bank buys out NHMFL for Rs XYZ. If Citizen Bank pays cash, then the cash asset account on the balance sheet is reduced by Rs XYZ. But if the company borrowed the money, then it has Rs XYZ as liability on the balance sheet.

The assets and liabilities of NHMFL are added to the existing assets and liabilities of Citizen Bank’s balance sheet. Any difference between the net value of those assets and liabilities and the price paid by Citizen Bank also goes on the balance sheet as an intangible asset called goodwill. At this point, the income statement is not affected.

The purchasing company can acquire the target company by using all-stock, all-cash, or a combination of both. When a larger company purchases a smaller company with all cash, there is no change to the equity portion of the parent company's balance sheet.

The parent company has simply purchased a majority of the common shares outstanding. When the majority stake is less than 100 percent, the minority interest is identified in the liabilities section of the parent company's balance sheet.

On the other hand, when a company acquires another company in an all-stock deal, equity is affected. When this occurs, the parent company agrees to provide the shareholders of the target company a certain number of shares in the parent company for every share owned in the target company.

In other words, if you owned 1,000 shares in the target company and the terms were for a 1:1 all-stock deal, you would receive 1,000 shares in the parent company. The equity of the parent company would change by the value of the shares provided to the shareholders of the target company.

Jeevan Basnet, one of the prominent market experts, gave us an insight on the impacts of acquisition on the shareholders. According to him, the acquisition will not have much impact on market dynamics. But it will impact the companies concerned.

The shareholders of lesser company, which is to be acquired, will benefit. But it will not make much difference to those who have stake in the acquiring company.

He says, “For instance, the scrip of Citizen Bank, which is acquiring Nepal Housing, hovers around Rs 470. But the share of Nepal Housing stands at 200-something. After the DDA, if Citizens agrees to give half its shares to Nepal Housing shareholders, then the Housing’s shareholders stand to benefit more.”
(With inputs from investopedia.com)