Business combinations often become corporate actions carried out by companies in maintaining business continuity. Business combinations that can be carried out are in the form of mergers, acquisitions, or consolidations. Merger means maintaining the existence of one entity and dissolving other entities. Acquisition means taking ownership of an entity and maintaining the operations of both entities. While consolidation means the formation of a new entity resulting from a combination of the two entities.
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One of the goals of corporate action is to adapt the organization to the company’s life cycle, where business expansion is expected to be realized from the business synergy of the two parties in supporting company growth (especially for implementing companies) and divestments due to companies entering a declining cycle (especially for target companies).
Understanding Goodwill in Business Combinations
Transactions related to business combinations generally result in goodwill for the new or surviving entity. Goodwill is an intangible asset owned by a company as the difference between the transaction value and the target company’s net asset value. It can be calculated by subtracting the transaction value paid by the implementing company (acquisition company) based on the results of the fair value calculation with the target company’s book value. the positive one is recorded if the transaction value exceeds the target company’s net asset value and vice versa, negative goodwill is recorded if the transaction value is below the target company’s net asset value.
Examples of Corporate Actions and Their Goodwill Amounts
Corporate Actions of Domestic and Foreign Companies that Record Goodwill in the Company’s Financial Statements
|No||Name of Company||Corporate Action||Execution Date||Expected Result based on Corporate Action||Goodwill Amount|
|1||PT Indofood CBP Sukses Makmur Tbk||Acquisition of Pinehill Company Limited (PCL)||August 27th, 2020||Market expansion to other countries with cost & lead time efficiency||IDR 52.230 Billion|
|2||PT GoTo Gojek Tokopedia Tbk||Merger process between Gojek and Tokopedia||May 17th, 2021||Enhancing the digital ecosystem and strengthening market shares in the industry competition||IDR 93.106 Billion|
|3||Grab Taxi Holdings Pte Ltd||Acquisition of Uber Technologies||March 26th, 2018||Business ecosystem improvement in on-demand service (public transportation & food delivery)||US$ 631 Million*|
|4||AT&T Inc.||Acquisition of Time Warner Inc.,||June 15th, 2018||Synergy between parties to improving global media & entertainment market with technology feature||US$ 38 Billion|
Execution of business combinations is commonly carried out by both domestic and foreign companies. Based on the example above, it shows that implementers are willing to pay more than the target company’s book value in an effort to achieve the expected synergies and be able to increase the company’s growth. However, in reality, the benefits received by the company are more profitable or detrimental than the goodwill?
Short-term Impact of Goodwill on Company Profitability
In the short term, the merger process between Gojek and Tokopedia had a negative impact on the profitability of the implementing company. This is reflected in the decline in the value of goodwill in the company’s assets of IDR 11 trillion, which caused further loss of EBITDA and profit before tax for the company, from -22.8 trillion and -25.7 trillion rupiah respectively in 2021 to -38 and -40.5 trillion rupiah in 2022. Impairment in the value of goodwill was due to an increase in interest rates which affected the company’s market price.
Analyzing the Company’s Performance and Goodwill’s Role
Over the past 3 years, the company has recorded revenue growth starting from 46.641 billion rupiah in 2020 to 64.797 billion rupiah in 2022 with a Compound Annual Growth Rate (CAGR) of 17.87%. This growth was also accompanied by growth in the company’s net assets from 50.232 billion in 2020 to 57.473 billion in 2022 with a CAGR rate of 6.96%. However, the company’s net profit did not grow significantly, and even decreased in 2022 with a CAGR rate of -12.17%. This was due to a significant increase in interest expenses from year to year, due to the company’s interest-bearing loans to execute company acquisition transactions, from 670 billion rupiah in 2020 to 6.184 billion rupiah in 2022.
Considering the Realities of Business Combinations and Goodwill
Based on the case studies above, the expectations of the implementing company from a business combination may not necessarily go according to expectations, especially in the short term. Implementing companies need to carefully consider the overall benefits and risks. Identification of benefits obtained through synergies that are manifested in projected financial reports and systematic and non-systematic risks needs to be carried out, both by internal parties and through independent parties.
If you’re a company looking to embark on a transformative business combination journey, SW Indonesia is your trusted partner in unlocking the true potential of goodwill. Our expert team is dedicated to guiding you through the complexities of mergers, acquisitions, and consolidations, ensuring that your synergy-driven goals are achieved, and business continuity is maintained. Let us be the driving force behind your success, harnessing the power of goodwill to elevate your company to new heights. Contact us today at +62 2993 2132 and let’s create a brighter future together!