Collegia International Co., Ltd. - ［Service Lines］M&A

1. Overview

M&A has become widespread procedure to realize company's growth since companies can recognize revenue from the first day of M&A by buying "time and contingency" as the Japanese economy matures. However, it is also true that M&A is a high-risk procedure. You will understand that how difficult to make successful M&A since a statistical research shows that 70% of the managements answer that their company's M&A has failed. We think it is necessary for the managements to perform adequate due diligence and valuation before making the final decision of investment in order to minimize the possible investment loss from M&A.

"Investment loss" of M&A is accounted for as an "Impairment loss of goodwill"

IFRS (International Financial Reporting Standards) will be adopted as early as 2015 in Japan. Once IFRS is adopted, company should perform “Impairment test” each period instead of amortizing the positive “investment difference” for less than 20 years *1. Therefore, investment difference should not be amortized but be tested (impairment test) each period. Therefore, once it is judged to be recorded as impairment as a result of the test, larger amount of loss should be recorded at once compared to Japan GAAP. *2

In case that such large amount of impairment loss is recorded and disclosed at once, the failure of M&A is clearer for public and the management would be accused of. The managements who perform M&A will be always in exposure of such accusation by the large amount of “impairment loss of goodwill”. Therefore, it is important to minimize the risk of "impairment loss of goodwill" in M&A strategy in the future.

We think that the following procedures are key to minimize such "impairment loss of goodwill".

1. To prevent payment of unreasonable consideration of M&A by accurate due diligence and precise valuation prior to the acquisition.
2. To minimize goodwill and non-depreciable intangible assets by strategic PPA (Purchase Price Allocation) beforehand prior to the acquisition.
3. To prevent impairment of stand-alone value due to the outflow of human resource and the synergy effect by PMI (Post Merger Integration).

*1: "Investment loss" had been amortized to recognize gain for less than 20 years in Japan GAAP previously. Effective 1st April 2010, such loss is amortized at once to recognize gain therefore, Japan GAAP complies with IFRS
*2: Impairment loss is measured at discounted cash flows in IFRS, therefore such loss is tend to be more material than in Japan GAAP.