Purchase v. Pooling of Interests: Case B
The Intec Corporation management initiated a friendly acquisition of Comtel Corporation on 12/9/84. The action was reportedly taken by Intec in an effort to improve its efficiency by gaining access to business overseas.
The Intec Corporation is a large, engine re-manufacturing operation
based in Blytheville, Arkansas, and founded in 1975. The company has been
able to steadily increase the size of its operations as it obtained contracts
with auto-parts stores in several southeastern states.
Intec's past dividend policy has been to pay 45% of net earnings out
to shareholders each year. As of 3/27/86, the number of shares of Intec
common stock outstanding stood at 1,425,000 (see Exhibit 3 for Intec Financial
Statements).
The Comtel Corporation, located in Tokyo, Japan, is currently the third largest engine re-manufacturing firm in Japan. Through a number of process innovations this small company has been highly profitable and has grown rapidly, plowing most of its earnings back into the company.
The Comtel company holds, for investment purposes, a number of stocks
(see Exhibit 4 for specific holdings). The company's dividend policy for
the last 5 years has been to pay out 5% of net earnings each year.
The Comtel Corporation was created as a result of the breakup of Mak
Motor & Machine (MM&M) on 2/2/82. On 3/27/86, 2,800,000 shares
of Comtel stock were outstanding (see Exhibit 4 for Comtel Financial Statements).
After a four month delay, cause by an anti-trust investigation into
the pending merger by the FTC, the combination of the Intec and Comtel
corporations was consummated with the exchange of common stock on 3/27/86.
This involved the exchange of 2,655,000 shares of Comtel stock for 885,000
shares of Intec's stock.
No special allowances or incentives were given to any subset of the
stockholders of the new company. In addition, no plans have been made to
dispose of significant assets of either firm.
The Intec management announced that there are no plans to acquire any
Intec stock in the future and that all new stock issued to former Comtel
stockholders would be distributed based upon the ratio of their ownership
in Comtel, would be immediately exercisable, and would carry all of the
rights of existing Intec stock.
Exhibit 3
QUESTIONS
(1) Should the business combination be accounted for as a purchase or a pooling of interests?
(2) Explain the basis for your decision as stated above (be sure to cover all criteria considered in your decision).
Consider each of the following scenarios independent of the other.
(3) A misprint has been discovered in the case described above. The MM&M breakup date, 2/2/82 is an error and should have been 2/2/83. You still need to analyze criteria #1, #2, #9, and #11, but all other criteria qualify for the pooling of interests method. Determine if this new information would affect any of the remaining criteria and what effects, if any, it would have.
(4) An accounting error occurred in the determination of the Comtel Corporation's stake in Intec. Comtel actually owns an additional 24,000 shares of Intec. You still need to analyze criteria #2, #4, #5, and #7, but all other criteria qualify for the pooling of interests method. Determine if this new information would make any difference in the remaining criteria and what effects, if any, it would have.