In a consolidation or a merger the usual practice is to pay the various interests in the companies which are amalgamated with bonds, preferred and common stock, and in some instances with cash. The proportion and kind of payment will depend upon the conditions surrounding each case. The prevalent custom is to pay for the net assets in preferred stock and to issue common stock for good-will. Often, however, bonds are used to pay for the tangible assets; preferred stock is issued for the intangible assets; and common stock represents the additional profits that are expected to accrue to the corporation through the consolidation or merger. The issue of bonds to cover all the tangible assets is generally a dangerous procedure because of the high fixed charges resulting therefrom—though advantageous when the difference between the fixed charges and the net earnings is large. Bonds generally carry relatively small interest because of their safety, whereas the use of preferred stock entails a smaller equity for the common. The bondholder is not concerned with the capitalization or nature of the issues over which he takes precedence. For the same reason it is not usual for the preferred stockholder to complain about overcapitalization through the use of common stock. The business risk involved depends upon the nature of the business and the ability of the management. No financial arrangements should be made that do not take into consideration the fluctuations that are inherent in the business and their effect upon net income.
Another apportionment sometimes made is to issue bonds for the fixed assets; preferred stock for the working capital; and common stock in proportion to the prospective earnings of the consolidation or merger. New bonds are exchanged for the old bonds or preferred stock of the constituent companies, while the common is exchanged for the corresponding issues in the merged corporations. The balance is used for the purpose of paying organization expenses and the fees of the promoters, and to provide working capital for the consolidation. The ratio and the medium will depend to a great extent upon the nature of the business, the attitude of those who are interested in the merger corporations, and the optimism or hopes of the promoters.
Closing the Books of the Merged Concerns
Closing the books of the merged concerns presents the problems of accounting for the sale of the subsidiary companies. This may be effected in two ways. Where the sale is made at the book values as carried on the records of the subsidiary, no adjustments whatever become necessary. Where, however, the price received is less or greater than the book value of the concern, it becomes necessary to show the difference between book and sale valuation. In taking account of these differences two methods are employed. Under the one an adjustment is made of all the detailed valuations of the items of property as taken over. It becomes necessary, therefore, to adjust each property account through its depreciation reserve or through surplus, in order to bring it to the value at which it is taken over. This may, and frequently does, necessitate setting up a good-will account on the books of the vendor company. After the books are thus brought into accord with the sale agreement, the closing of the accounts follows the procedure laid down in [Chapter XXVIII] for the liquidation of a company.
Under the second and more common method, no attempt is made to adjust the individual items of properties sold in accordance with the appraisal committee’s report, but all differences are cleared in a lump sum through the surplus or deficit accounts. If the sale is made for cash, the amount received is then disbursed as a liquidating dividend to the shareholders. If the property is sold for stock and bonds in the merged company, either this stock is handed over en bloc, in which case it is likewise distributed as a liquidating dividend, or the merger company may issue the stock and bonds as a liquidating dividend for the vendor company on the basis of the report of the shares belonging to each stockholder. Upon notice that such stock and bonds have been issued to its shareholders, the vendor company closes up its records completely by cancelling its proprietorship accounts against the charge account set up against the merger company until the stock is issued.
Opening the Books of the Merger
As a merger is a corporation, the opening of its records follows the same lines as that of any other corporation, excepting that when payment of subscriptions for capital stock is to be recorded, cognizance must be taken of the manner of payment. The subscription contract, in so far as it relates to the various subsidiaries, is usually canceled by turning over the properties of the subsidiaries. The assets are taken over at an appraised price which becomes the basis for the amount of subscription to the stock of the merger by each subsidiary. In Chapter I, where mention was made of the payment of stock subscriptions in property, it was pointed out that it may be desirable to bring onto the books the lump sum representing the appraised purchase price paid for the subsidiary some time before the appraisal committee has submitted its report on the detailed valuation of the various items of property taken over from the subsidiary. The customary method of handling the situation on the books of the merger was there shown. The bookkeeper is not concerned with the valuation of any of the items taken over, but must make his entries in accordance with the valuation report turned in by the appraisal committee. The main problem in the merger, then, is one of valuation and not of accounting. As stated above, payment to the subsidiaries may be made by the merger in either of two ways. An entire block of stock may be turned over to the subsidiary company and be distributed by it as liquidating dividends to its stockholders, or the merger may issue shares to the individual stockholders of the subsidiaries in accordance with information furnished by the subsidiary.
CHAPTER XXX
BRANCH HOUSE ACCOUNTING
Advantages of Branch and Agency System
The branch and agency forms of increasing sales in large enterprises are an outgrowth of the policy of “service” combined with economy of management which dominates all present-day capitalistic enterprises. The tendency of a successful business is to absorb other businesses in the same line through combinations and amalgamations, and thus the policies of apparently independent units in a single district or throughout the entire country may be controlled by the central management at a head office.