Business Combinations Research Articles

An Insight into SPACs and their Valuation Conundrum

There has been a great deal of SPAC activity in the last year and a half, but there are still a lot of unknowns in the dynamics of a SPAC deal. In this paper, I explain Special Purpose Acquisition Companies (SPACs), their origins in the 1990s and evolution to current status, celebrity endorsements, and resultant SPAC bubble. A recent SPAC acquisition – ARBE Robotics’ acquisition by ITAC, a publicly-traded SPAC is used as an example of the valuation conundrum faced by SPAC sponsors. The findings summarized in this paper are arrived from analyzing publicly available data. I perform a valuation analysis on the deal above and try to reconcile the values used in the investor presentation to 2 commonly used valuation methodologies that highlight the lack of correlation of valuation to value. It is important to note that the majority of business combinations associated with SPACs have no requirement for independent valuation opinions. My findings indicate that this lack of requirement is going to lead to more failures and losses for investors in SPACs and therefore public investors in SPACs should refrain from investing in their IPOs. Public investors are advised to wait till after the business combination is announced despite the benefits associate with warrants in the IPO units. I analyze recent SEC guidance on warrants and how that will limit future SPAC deals. This paper argues that SPACs have recently lost investor interest as they have come out of the positive feedback cycle due to negative media coverage, SEC focus, expected regulation tightening, and weak returns in the past year.

SPAC IPOs and Sponsor Network Centrality

The structure of a special purpose acquisition company (SPAC) provides a special role for its sponsors. We show that while few characteristics can explain SPACs' returns, sponsors' connections and network, measured by their centrality, explain a large portion of return variation in the cross-section. A one standard deviation increase in sponsors' network centrality leads to a 3.7% higher merger and acquisition success probability and a 2.1% higher post-merger monthly abnormal return. We attribute this outperformance of firms with high network centrality to superior deal sourcing and fundraising abilities. Overall, we show that the network connections of the SPAC management teams can add value to SPACs' deals despite the general underperformance of SPACs after business combinations.

РЕСТОРАННИЙ БІЗНЕС В УМОВАХ ПАНДЕМІЇ COVID-19: ШЛЯХИ ВИХОДУ З КРИЗИ

According to the World Travel and Tourism Council (WTTC), the sphere of tourism and travelling were losing one million jobs every day during the peak of the crisis. Small and medium-sized businesses, which account for 80% of the hospitality sector, have become particularly vulnerable. The crisis associated with the COVID-19 pandemic has been the biggest challenge facing the restaurant business in its history and has led to mass bankruptcies, closures and systemic problems of operating businesses due to the loss of market access, cash gaps, and liabilities such as rent and utility bills. This caused mass layoffs, which led to unemployment. The number of guests in restaurants has decreased, as well as their purchasing power, which is reflected in the average check and revenue of establishments. Under these circumstances, restaurant companies around the world have hopes for recovery and are looking for and finding ways out. Analysis of restaurants activity during the pandemic allowed to identify trends, namely: introduction and improvement of delivery, take away services, digitalization in all areas of business, diversification of services, including online stores selling food and beverages at home, creative marketing activities, traditional and creative security measures. The introduction of delivery requires the establishment of logistics processes and necessitates the adjustment of the menu. A combination of restaurant business and retail is promising: shops-restaurants, shops-cafes. Not all formats of restaurants can implement delivery, in particular it is challenging for bars, pubs, cafes. Of particular importance is the food design of delivered dishes. The introduction of the Drive-through service is promising. It is obvious that the Drive-through (drive-thru) service, which allows the customer to buy products without leaving the car, will be in demand in the near future and will be adopted by both restaurants and other areas of activity, such as pharmacies, retail trade. The most important component of crisis response is hygiene and health care, as people's greatest social value is their lives. Institutions taking this into account are more trusted among consumers and can count on loyalty. New realities require new business models.

What Defines High-Quality SPACs and are They Future Proof?

While SPACs have been the focus of different research since their rise in popularity, the correlation of SPAC quality and their performance is widely undiscovered. In this paper the focus lies on establishing a method of classifying the quality of a SPAC before it goes public. Furthermore the performance after the business combination depending on SPAC quality is highlighted. With the newly carved out information the future viability of SPACs as a way of going public is questioned.

Financial Reporting for Pollution Reduction Programs

We develop a conceptually grounded approach, based on the International Accounting Standards Board’s conceptual framework, to the accounting for the rights and obligations embodied in a cap-and-trade program. Under this approach, firms recognize allowances as intangible assets, initially measured at fair value with a credit to cash for purchased allowances and to a current period gain for allocated allowances; firms recognize current period expense and accrue liabilities, at fair value, as they emit; both asset and liability are remeasured at fair value at every reporting date. We apply our treatment and three alternative treatments, based on current practice and proposals considered by standard setters, to transaction-level data from the U.S. sulfur dioxide cap-and-trade program to calculate as-if financial statement outcomes using actual data. The alternative treatments result in noncomparable accounting for otherwise similar arrangements. To provide ex ante evidence on the effects of noncomparable accounting, we analyze reporting outcomes and show that alternative accounting treatments of the same arrangement result in meaningful differences in reported assets and liabilities, income volatility, and commonly used performance and leverage metrics. Because the financial reporting effects of noncomparable accounting are exacerbated by business combinations and plant-level purchases of allocated allowances that may have been initially recorded at zero, our analysis explicitly accounts for the effects of these transactions. Finally, we find that among the four accounting treatments we consider, reporting outcomes under our proposed approach are most aligned with investor perceptions, as indicated by the associations between the market value of equity and assets, liabilities, and income. This paper was accepted by Shiva Rajgopal, accounting.

Research on financial platform of railway freight supply chain based on blockchain

Purpose This paper aims to systematically expound the theory and development background of supply chain finance and blockchain, design a railway freight supply chain financial platform based on blockchain, determine the risk management system and business support system of supply chain finance business and analyze the value generated by the combination of supply chain finance business and blockchain. Design/methodology/approach Investigation and research method; Prototype method; Model method; Value analysis. Findings The business model integrating supply chain finance and blockchain technology will bring great changes to freight industry. The development of supply chain finance is beneficial to the healthy development of the core participants of railway freight transport business and its upstream and downstream ecosystems. It links commerce, logistics, warehousing and financial services together and builds an industry-integrated ecological service platform through information technology platform and supporting system, taking data as the basis and combining information technology such as blockchain as innovative means. Originality/value This paper will provide important reference value for related research. This paper innovatively designs the supply chain financial platform of freight transportation industry-integrating blockchain technology and analyzes its business model, technical system, risk management and control system and value system in detail, which will provide technical support for the innovative reform of freight information technology and realize the stable and high-speed development of freight logistics informationization.

Deferred Tax Accounting for SMEs: Modified Income Statement Approach

Purpose: Accounting for income tax under International Financial Reporting Standards (‘IFRS’) is dealt with in IAS 12 Income Taxes. It is often said that users of financial statements do not find information produced in accordance with IAS 12 useful. This is a serious problem because for many businesses tax is one of the largest expenses. In some cases, preparers find the requirements of IAS 12 difficult to apply in practice. Its requirements are said to be unclear, and preparers sometimes question the relevance and understandability of the information that is provided in accordance with the standard. The IFRS for SMEs currently require use of balance sheet approach for accounting of deferred taxes. In India, the Institute of Chartered Accountants of India (ICAI) – the apex standard-setting body in India, is formulating revised accounting standards for SME’s in India. This article examines an alternative to the balance sheet approach which is less complicated and easy to implement.[Reviewer1] [AB2] Methodology: This article proposes a new method i.e. Modified Income Statement Approach. This method is a mix of income statement approach and balance sheet approach, as it requires recognition of deferred taxes using temporary difference approach but calculated using income statement and the other comprehensive income (in effect, Comprehensive income statement). Modified Income Statement Approach requires comparison of tax expense with the underlying related income and expenses so that they are recognized in the same period. In doing so, it also considers income and expenses recognized in the income statement as well as the Other Comprehensive Income. Hence, this approach is more of temporary difference approach but applied by using income statement method. It covers all items of timing differences and most items of temporary differences. The SMEs have less complicated structures and transactions. Also, in many countries, including India, there exists no concept of tax balance sheet. Hence, it would be worthwhile to ease-out the deferred tax accounting for SMEs. The hypothesis is that application of modified income statement approach can result in similar outcome as the balance sheet approach.Findings: A survey of 50 top companies in India was conducted. The results show that 60% of the companies would have recognized the same deferred tax asset/ liability under both the methods i.e. modified income statement approach and balance sheet approach. Balance 40% had some minor differences, but such transactions may be less frequent for SME. On an average, the impact of using modified income approach as against balance sheet approach is a mere 4%. The only items not covered by the modified income statement approach as against the balance sheet approach are Fair valuation of assets/ liabilities on business combination, Compound financial instrument and the existence of undistributed profits of subsidiaries, branches, associates and joint arrangements[Reviewer3] .[AB4] Unique contribution to theory, practice and policy: [Reviewer5] [AB6] To balance out the cost and benefits of implementing an accounting standard as per the framework, it is critical that SME’s use a simpler and less complicated method which is easy to understand and implement. Modified income statement approach is easy to apply and not complicated or technical to understand. In India, companies are used to calculating deferred tax using income statement approach. Hence, this will be a small change from the existing approach, while achieving the objectives of the balance sheet approach. Hence, modified income statement approach seems to be an appropriate method for SMEs.

Business combinations in cooperatives. A critical view of accounting standards

Cooperatives have a different ownership structure compared with investor owned firms, which causes frictions in the development of accounting standards. This paper critically reviews the history of cooperatives in the accounting standards for business combinations and identifies and studies five problematic aspects of the application of the acquisition method. A guidance to identifying Business Combinations Under Common Control between cooperatives is proposed. Incompatibilities between the cooperative law and accounting standards are identified, a modified cost of business combination is proposed, inequalities between members arising in the application of the acquisition method are indicated and above all it is shown that the IASB’s decision to allow only one method has proven ineffective in avoiding accounting arbitrage.

Predecessor versus Acquisition: Evidence of Business Combination under Common Control from China

ABSTRACT We investigate the value relevance of two different accounting methods, predecessor vs. acquisition, for business combination under common control (BCUCC) in China. Based on the return and price models, we find that net income under the predecessor method is of higher value relevance than that under the acquisition method. Further analysis suggests that the difference appears to be driven by uncertainties in fair value estimation surrounding the BCUCC and that net incomes under predecessor method can better predict future earnings and future operating cash flows than under the acquisition method. Our research provides some initial evidence to support the use of the predecessor method in China, and at the same time, we discuss implications for the IASB standard setting project for the BCUCC.

A New Theory of Material Adverse Effect Clauses

MAE clauses in business combination agreements almost never define the phrase “material adverse effect,” and so the meaning of that key expression derives primarily from a line of Delaware cases starting with In re IBP Shareholders Litigation. In that case, the court said that a material adverse effect requires an event that substantially threatens the overall earnings potential of the target in a durationally-significant manner. In implementing this standard in IBP and subsequent cases, the courts have had to determine how the target’s earnings should be measured (e.g., by EBITDA or by some other measure of cashflow), how changes in earnings should be determined (e.g., which fiscal periods should be compared with which), and how large a diminution in earnings is material. Neither IBP nor subsequent cases have provided clear and convincing resolutions of these issues. On the contrary, later cases have introduced yet new problems, such as whether it matters that the risk that has materialized and adversely affected the target’s business was known to the acquirer at signing, whether material adverse effects should be measured in quantitative ways, qualitative ways, or both, and whether a material adverse effect must be felt by the company within a certain period of time after the occurrence of the event causing the effect. This article proposes a new understanding of material adverse effects that solves all of these problems. Beginning from the foundational premise that a material adverse effect should be understood from the perspective of a reasonable acquirer, this article argues that such an effect is a material reduction in the value of the company as reasonably understood in accordance with accepted principles of corporate finance—that is, as a material reduction in the present value of all the company’s future cashflows. Hence, to determine if there has been a material adverse effect, the court has to value the company twice, once as of the date of signing and again as of the date of the alleged material adverse effect, in each case much as it would in an appraisal action. Valuing the company is easier and more reliable in the MAE context than in the appraisal context, however, not only because the court need obtain only a range of values for the company at the two relevant times (and not pinpoint valuations as in appraisal proceedings) but also because it turns out that there is a canonical way to determine if a reduction in the value of the company would be material to a reasonable acquirer. The new theory of MAEs presented here solves all of the problems in the caselaw noted above and explains why those problems could not be solved with the conceptual resources available in the existing caselaw.

Material Adverse Effect Clauses and the COVID-19 Pandemic: How Sophisticated Parties Allocate Risk Contractually

Currently pending in the Delaware Court of Chancery and other courts around the country are numerous cases in which the parties to a public-company merger agreement are disputing whether the target (the company being sold) has suffered a "material adverse effect" (an MAE) because of the COVID-19 pandemic. Tremendous amounts of money are at stake in such cases. In the LVHM-Tiffany transaction, for example, if Tiffany has suffered an MAE, LVHM may terminate the agreement and walk away from the deal; otherwise, it will likely have to close and pay the full $16.6 billion purchase price for a company that, it says, is no longer worth anywhere near that amount. Sophisticated commercial parties allocate between them risks that may materialize during the pendency of the merger through MAE clauses, extremely elaborate contractual provisions that have given rise to more litigation than any other standard provision in public-company merger agreements. This short essay considers how courts will construe MAE clauses in connection with the COVID-19 pandemic and, in so doing, explains more generally how sophisticated parties allocate risks efficiently in order to create value in business combination transactions.

Long-term profit for electric vehicle charging stations: A stochastic optimization approach

Electric vehicles are gradually finding their position as an alternative to fossil fuel vehicles. To accelerate the replacement process, a number of new infrastructural facilities such as charging stations (CS) have to be widely deployed. In order to encourage the private sector to invest in this area, it is necessary to introduce a combination of business and technical model for CS that comprises management tools for guaranteeing their long-term profit. Given that the price of electricity and the number of vehicles drive to the CS are random variables, the proposed model should consider all these uncertainties. In this paper, the desired model is introduced by utilizing stochastic optimization framework. Long-term Durable Profit for Charging Station (DPCS) algorithm is proposed to maximize the long-term profit of CS owner. By means of the DPCS algorithm, CS owner can decide on the electricity sales price, vehicle entrance and number of working pumps at each time interval. Simulation results show that the CS owner would have an increase of 107% in profit at a cost of incurring 80% more delay to vehicles. If a parking barrier is used in the CS, the achievable profit would be increased by 12% and the waiting delay of vehicles would be decreased by 25%.

The motives of reverse acquisitions and rules of their settlement

In recent years, there has been increasing talk about reverse acquisitions in capital concentration process- es. These situations are associated with the use of certain economic, tax, and other privileges by compa- nies that are often the initiator of such undertakings. The purpose of the article is, among others, to pre- sent the premises that guide economic entities when making decisions about reverse acquisitions. It is a process in which there is a specific type of acquisition of control of one entity by another. In these cases, there is a reversal of typical relationships between entities involved in the merger, because the entities that have control over the entities that acquire them are taken over. The regulations of the Interna- tional Financial Reporting Standard (IFRS) No. 3 "Business Combinations" have a very important role in accounting for these processes. They allow for the proper recognition of these relationships. Based on numerical examples, the authors present the rules for accounting for such a combination. Thus, they confirm the role of accounting, which implements the principle of faithful and reliable presentation of this process. A critical analysis of the literature and legal regulations, as well as deductive reasoning, made it possible to determine the most important motives of this type of connection.

Continued Impact of International Financial Reporting Standards on U.S. Generally Accepted Accounting Principles

The milestone outcomes of over a decade of close cooperation between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on the convergence of U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) have been highly publicized in the professional media. Great attention has been paid to such joint FASB and IASB projects as accounting for business combinations, fair value measurement, and revenue recognition. The impact of U.S. GAAP on IFRS has also been discussed and highlighted in many professional and academic resources. It should come as no surprise since FASB is considered a world leader in creating high-quality standards through an exemplary standard-setting process. In this paper, we look at the least noticed outcome of the convergence process: the impact of IFRS on U.S. GAAP. We reviewed all of the Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification®, from the first issued in June 2009 to 2016, and listed instances where U.S. GAAP was significantly modified to reflect international solutions. These examples of U.S. GAAP modifications indicate that the impact of IFRS on U.S. GAAP continued well after the bilateral cooperation between FASB and IASB effectively ended in 2014. Furthermore, look at the most recent FASB pronouncement let us conclude that the FASB continues to be engaged in seeking comparable global accounting solutions.

Contemporary governance of urban mega-projects: a case study of the Belgrade waterfront

ABSTRACT The study analyses the decision-making, planning and governance (DMPG) of urban mega-projects (UMPs) and elaborates on it in a case study of real estate financialization by the Belgrade Waterfront Project (BWP). In order to systematize numerous challenges in urban planning and governance that enabled the BWP, various analytical tools are applied. This approach combines the components of qualitative ex-post analysis, critical discourse analysis and stakeholder analysis. The analyses of the legislation and the DMPG related to the BWP indicate: (1) a regulationist state-led process as a ‘top-top’ approach in governance; and (2) the existence of certain controversies in the legal and planning approaches (e.g., lex specialis for expropriation, out-sourcing of planning decisions, a closed fast-track decision-making cycle, and the alienation of public construction land free of charge). It is argued that a combination of top-down political power, international business and limited citizens’ participation shapes the BWP. Finally, an improved approach for governing UMPs is suggested which is based on greater transparency, an improved regulatory and institutional framework, as well as innovation in the urban planning and governance arrangements to facilitate challenges for ongoing UMPs.

Resilience to crises of Thai MICE stakeholders: A longitudinal study of the destination image of Thailand as a MICE destination

The COVID-19 outbreak has changed rapidly the business operation and travel behavior of global communities and calls for research on resilience. This study aims to identify the changing destination image of Thailand as a MICE destination during crises and examine the resilience of Thai MICE stakeholders. A mixed method of qualitative and quantitative design was employed using interviews, observations and questionnaire surveys. A longitudinal study of Thai MICE stakeholders during 14 years revealed that the Buddhist concepts of resilience and Thainess contribute to psychological resilience. Buddhism and Thainess cultivate the concept of crisis concierge. Surveys showed unchanged image of exhibition facilities during the political instability. Thailand's incentive travel benefits from the availability of bleisure (a combination of business and leisure) attractions. Good value for money, Thai hospitality, bleisure attractions, and international standard venues are key resilient factors.

Metso Minerals and Outotec complete merger

Metso Outotec Corporation has started operations following the combination of Metso's Minerals business and Outotec (see Pump Industry Analyst, May 2020 and July 2019).

Metso Minerals and Outotec complete merger

Metso Outotec Corporation has started operations following the combination of Metso's Minerals business and Outotec (see Filtration Industry Analyst, May 2020 and July 2019).

Particulate Matter and COVID-19 Disease Diffusion in Emilia-Romagna (Italy). Already a Cold Case?

As we prepare to emerge from an extensive and unprecedented lockdown period, due to the COVID-19 virus infection that hit the Northern regions of Italy with the Europe’s highest death toll, it becomes clear that what has gone wrong rests upon a combination of demographic, healthcare, political, business, organizational, and climatic factors that are out of our scientific scope. Nonetheless, looking at this problem from a patient’s perspective, it is indisputable that risk factors, considered as associated with the development of the virus disease, include older age, history of smoking, hypertension and heart disease. While several studies have already shown that many of these diseases can also be favored by a protracted exposure to air pollution, there has been recently an insurgence of negative commentary against authors who have correlated the fatal consequences of COVID-19 (also) to the exposition of specific air pollutants. Well aware that understanding the real connection between the spread of this fatal virus and air pollutants would require many other investigations at a level appropriate to the scale of this phenomenon (e.g., biological, chemical, and physical), we propose the results of a study, where a series of the measures of the daily values of PM2.5, PM10, and NO2 were considered over time, while the Granger causality statistical hypothesis test was used for determining the presence of a possible correlation with the series of the new daily COVID19 infections, in the period February–April 2020, in Emilia-Romagna. Results taken both before and after the governmental lockdown decisions show a clear correlation, although strictly seen from a Granger causality perspective. Moving beyond the relevance of our results towards the real extent of such a correlation, our scientific efforts aim at reinvigorating the debate on a relevant case, that should not remain unsolved or no longer investigated.

Financial Analyses and Corporate Evaluation on Sustainable Ability to Generate Excess Profit

This study empirically examined financial analyses and a market assessment on goodwill. Goodwill is not an individually identifiable asset but is recognized as an intangible asset because it is viewed as having future economic benefits from a business combination. The verification period for this study was from 2011 to 2019. The sample companies were 13,522 firms-years satisfying the selection criteria among listed companies in the Korean stock market. As a result of empirical analysis, it was found that goodwill is related to stock prices. Goodwill was shown to serve as useful accounting information by reflecting the economic realities of intangible assets called creating excess profitability and sustainable profit. For analysis, regression analysis was conducted by separating the companies listed on the KOSPI stock market and those listed on the KOSDAQ stock market. The results of the analysis were as follows. In the case of listed companies in the KOSPI stock market, goodwill was found to have a positive (+) stock price relationship as useful accounting information. These results suggested that goodwill is an asset that represents the ability to generate excess profit as a sustainable profit. The contributions of this study are as follows. First, this study verified that goodwill is related to stock prices even after the adoption of International Financial Reporting Standards (IFRSs). Second, it will be possible to induce rational decision-making regarding goodwill to accounting standards setters, supervisors, and users of financial information. Third, it recognized that the value of the financial market can be recognized only by providing reliable accounting information to the managers who prepare financial statements. This can lead managers to provide capital markets with more useful information.