Page 8 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 1: Acquisition of Business

notes

Did u know? Net assets are calculated by taking the difference of assets taken over and
liabilities taken over.

self assessment

Fill in the blanks:
1. Purchase price of a business is called ……………..

2. Purchasing company is ……… with purchase consideration in the books of vendor.
3. Purchase consideration is determined on the basis of ……………..
4. Total of Real Assets – External liability = …………………..
5. All the assets are transferred to………….. by the vendor company.



Caselet Hindalco’s acquisition of novelis

he case discusses the acquisition of US-Canadian aluminium company Novelis
by India-based Hindalco Industries Limited (Hindalco), a part of Aditya Vikram
TBirla Group of Companies, in May 2007. The case explains the acquisition deal in
detail and highlights the benefits of the deal for both the companies. It also examines the
valuation of the acquisition deal and how the deal was financed. The case concludes by
describing the challenges that Hindalco would face in integrating the operations of Novelis
and analysing if the deal was overvalued as opined by some industry experts.

the Deal
Hindalco acquired Novelis through its wholly owned subsidiary AV Metals on February
10, 2007. AV Metals purchased 100 percent of the issued and outstanding common shares
of Novelis at US$ 44.93 per share, amounting to US$ 3.6 billion. Hindalco paid a premium
of 16.6 percent on the closing price of Novelis’ stock. Apart from equity purchase, Hindalco
also acquired Novelis’ debts to the tune of US$ 2.4 billion.
After the deal was signed for the acquisition of Novelis, Hindalco’s management issued
press releases claiming that the acquisition would further internationalise its operations
and increase the company’s global presence. By acquiring Novelis, Hindalco aimed to
achieve its long-held ambition of becoming the world’s leading producer of aluminium flat
rolled products. Hindalco had developed long-term strategies for expanding its operations
globally and this acquisition was a part of it. Novelis was the leader in producing rolled
products in the Asia-Pacific, Europe, and South America and was the second largest
company in North America in aluminium recycling, metal solidification and in rolling
technologies worldwide.
the pitfalls
Though the Hindalco-Novelis merger had many synergies, some analysts raised the issue
of valuation of the deal as Novelis was not a profit-making company and had a debt of
US$ 2.4 billion. They opined that the acquisition deal was over-valued as the valuation was
done on Novelis’ financials for the year 2005 and not on the financials of 2006 in which the
company had reported losses (Refer to Exhibit IX for Novelis P&L statements and balance
sheets). They said that Hindalco might have to collect a huge amount of resources to revive
and restructure Novelis.
Source: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR265.htm

lovely professional university 3