Accounting for Business Combinations: Bendigo & Adelaide Bank Case

This case study provides a detailed analysis of the accounting aspects of a business combination, focusing on the acquisition of Adelaide Bank Limited by Bendigo Bank Limited. It examines the economic rationale behind the acquisition, including brand recognition, tax savings, and skill enhancement. The study delves into the incentives for board members pre- and post-acquisition, the scheme of arrangement method used for the acquisition, and the reasons for its selection. Furthermore, it evaluates the acquisition analysis, including the offer price, FVINA allocation, and goodwill calculation, alongside the share market reaction during the announcement. The case study also analyzes the post-acquisition accounting performance of the merged entity using profitability ratios and assesses whether the takeover enhanced shareholder value. This document is available on Desklib, where students can access a wealth of solved assignments and past papers.

Accounting of Business Combination 1
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Accounting of Business Combination 2
Accounting of Business combinations
Economic rationale behind the acquisition
Acquisition of Adelaide bank limited helped Bendigo limited to enhance its brand
recognition by separating the brand identities. The acquiring company was able to maintain its
brand name and goodwill from their esteemed customers. Acquisition of Adelaide helped the
parent company to save on taxes by filling the consolidated statements of tax return. The
acquisition helped the two banks to avoid and reduce the rate of financial overlap. The merger
acquisition was conducted so as to bring together good different skills and experience which
would enhance their profile and market capitalization (Hilpert and Chen,2012,np)
Acquisition of Adelaide would help in decentralization of management because the
company had separate team of management which help in easy decision making and work can be
done efficiently and effectively. The other reason for acquisition was to be able to create distinct
partner and customer-centered financial services and by so doing the company was able to
generate more income (Jedin,2016,np). The acquisition was done so as to combine special skills
and experience in retail banking in order to offer quality services and therefore make good
amounts of profits
The acquisition will enable the two banks to form good financial business with
complementary services and goods to be delivered at low-level costs to their customers and in
the end create good sustainable value to the stakeholders. Bendigo acquired Adelaide so as to
increase the financial strengths, better the scale of efficiency and ability to obtain finds so as to
pursue their expansion opportunities and venture in innovation to be able to achieve its growth
targets. The acquisition of Adelaide will enable both staffs to access greater career opportunities

Accounting of Business Combination 3
in large and more diversified organization. The shareholders of Bendigo bank limited were
assured of benefits from Adelaide bank shares. The other reason for merging was for Bendigo to
be able to establish good control in the financial services (Munn, Zhang and Schimitt
2009,pp,310-328).
Incentives during the pre-acquisition dates and post-acquisition dates
Pre-acquisition dates
The incentives of the board of directors in both companies were low due to the level of
profitability of the company. The board of directors held lower-level ranks and therefore they
received low remuneration. Adelaide was a small bank and therefore the level of incentives of
board of directors was lower compared to those of Bendigo.( www.adelaide.com)
Post-acquisition dates
Looking at the incentives of the board of directors as compared to their previous earnings
they incentives have improved due to increased levels of experience for example the executive
director has experience of about 29 years. There was also increased level profits from the
company’s activities compared to the profits raised by the individual banks and this makes them
earn more incentives compared to the previous years. Some of the directors of both companies
are also the shareholders of the merger and they ended up benefitting from increased earnings
per share and in the end increasing their incentives.
Method of acquisition
The method of acquisition was through scheme of arrangements, whereby the processes
of merging between Adelaide and Bendigo needed to be approved by the shareholders of

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Adelaide in a meeting conducted in November 2007. The proposal and announcement of the
merging by the two companies was done by the board of directors and the process was approved
by shareholders and then it was taken to court for approval and before the courts approval every
company was supposed to investigate the other and if found to have provided misleading
information then there was an agreed penalty of $ 15 million shillings.
Reasons why the scheme of arrangement method was used.
This method was used so as to avoid outright insolvency and it is also cost-effective to
both banks. The banks used the scheme of arrangements method because it is legally binding and
involves the courts approval. This method allowed the banks to pay their tax arrears in a
structural way. This method of acquisition gives the directors of banks with a continued income
since it provides them with the ability to trade, as the acquisition process is taking place every
bank continues with its daily operation as it does not require closure of the business for
acquisition to take place (Srinivasan and Balsara,2014,pp,1421-1423). This method allows
merging companies to restructure and reorganize without intervention of the creditors, creditors
are assured of payment since the banks do not cease to operate it makes it even easier to pay
creditors due to pulling funds together. Adelaide bank and Bendigo bank limited were able to
restructure and they changed the company name into Bendigo and Adelaide bank limited.
Scheme of arrangement method is less expensive as compared to other methods of acquisitions
as it only requires approval of courts and that of the shareholders. This method does not give the
banks a strict deadline they should adhere to, Adelaide and Bendigo announced their merger
acquisition the year 2007 but the real acquisition was to take place in the year 2009. The banks
used the scheme of arrangements in order to protect the interests of their shareholders as this

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method ensures that there is no loss in terms of investments by the shareholders and in fact the
shareholders of Bendigo benefit from the shares of Adelaide shareholders.
Detailed evaluation of acquisition analysis
The offer price of the two strong Australian commercial banks, Adelaide Bank and
Bendigo Bank was $ 4 billion shillings. This merger made the shareholders of Bendigo bank
limited to acquire shares of 1.075 of every shares owned by Adelaide bank shareholders. The
merger acquisition of the $ 4 billion shillings within this two great banks was the third biggest
arrangement made in the commercial banks of Australia.
The method of payment used as advance payment. Adelaide bank and Bendigo bank
announced their intentions to merge after signing a $ 4 billion deal which they regarded as
friendly price. The amount was paid before the courts approval on the merger and every bank
was supposed to compensate the other an amount of $ 15 million in case they declined the
merger offer. Payment of the Acquisition by Bendigo was done in the year 2007 but the actual
merger acquisition was conducted in the year 2009.
FVINA allocation is done by comparing the cost of acquisition of the new company by
the acquiring company with the fair value of assets and liabilities in the acquired company,
( advanced Valuation Methods for Measuring the Fair Value of Intangible Assets,2015,np)..
Acquisition analysis can only be done where there is goodwill during the acquisition and that
there was a bargain purchase.
Calculation of FVINA in the acquisition of Adelaide
At the date of acquisition, the retained earnings were $ 230,390,000

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At the date of acquisition, the share capital was $ 400,274,000
The total book value of net assets was $ 630,664,000
Fair value adjustments
After-tax income on sale revaluation $ 1,925,000
FVINA allocation $631,589,000
Goodwill Calculation
In calculation of goodwill by the acquirer, there are a number of things that should be
considered and they include; Cash instruments, amount of shares, liabilities that were taken by
the acquired company, contingent considerations, asset revaluation and equity instruments.
( Goodwill and Patents,n.d,np)
Bendigo bank investment in Adelaide bank $ 4,000,000,000
Less: Retained earnings 230,274,000
Share capital 400,274,000
$ 33693360000
The share market reaction during the announcement date.
The reason why the share market reacted during the announcement date of the merger
between Bendigo and Adelaide was that the board members of Bendigo bank limited had
rejected an advance offer by the Victorian group of the bank of Queensland concerning merging
which could have been of more value to shareholders than Adelaide acquisition and they claimed
that they were already holding talks with the board of Adelaide bank before the Victorian group

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of the bank of Queensland made their offer. The share market criticizes Bendigo and Adelaide
merger because Bendigo acted inferior for merging with Adelaide a small bank than merging
with a bank which could take control over it and increasing the shareholders’ worth. The
financial analysts criticized Bendigo bank by claiming that the banks main goal is to establish
control over its business rather than maximizing on shareholders’ value. The other reason was
that the bank of Queensland could have offered the shareholders of Bendigo a better share value
of $17.18 compared to what they got from Adelaide bank. Many of the share market criticized
the merger due to valuation basing on the size of Adelaide bank which was smaller than that of
the Victorian bank of Queensland.
The share market steered clear of buying other Bendigo stock options and they
recommended the sale of their shares because if Bendigo could have accepted the offer from the
bank of Queensland that could be a fair deal to shareholders and they could have benefited from
investing in Bendigo. The shares of Bendigo fell from 42c to $ 15.98 and those of Adelaide fell
from 31c to $ 16.20 and this was the largest response of the share market at the announcement
date. The share market also expressed their doubts about the possibility of the two banks work
well under the merger acquisition.
Analysis of Post-Acquisition Accounting Performance.
Analysis of accounting performance involves the evaluation of the financial statements of
a company. This analysis is used to monitor stability, profitability and viability of a company. It
explores the performance of a company in the past period in order to come up with estimations
of future performance of the company (Hartman 200, pp, 571-574). There are four ratios that can
be used in assessing accounting performance which are profitability ratios (net profit before
tax/net sale), efficiency ratios (average sales in credit/debtors), solvency ratios (loan/equity) and

Accounting of Business Combination 8
liquidity ratios (current assets/current liabilities). For Bendigo and Adelaide Company we shall
assess the accounting performance for three years using profitability ratios,
(www.bendigoadelide.com.au)
Accounting performance for the year 2015
Profitability: net profit before tax 589,500,000
Sales 399,500,000
The profitability ratio would be 589,500,000/399500,00 =1.4755 which is 14.48%
Accounting performance for the year 2016
Profitability: net profit 606,900,000
Sales 411,600,000
The profitability ratio was 606,900,000/411,600,000 = 1.47448 which is 14.45%
Accounting performance for the year 2017
Profitability: net profit before tax 628,300,000
Sales 461,600,000
The profitability ratio was 628,300,000/461,600,000 =1.3611 which is 13.61%

Accounting of Business Combination 9
Evaluation of the Take Over
Shareholders of firm are supposed to benefit from activities of the board of directors,
(Saxena, 2012,np). The takeover can be said to have enhanced the shareholders' value to a small
extent whereby the shareholders of Bendigo benefitted from increase of their shares with 1.075
shares on each Adelaide share. The shareholder benefited from owning shares in a unique
company with improved profile and great capitalization of $ 4 billion shillings. Bendigo and
Adelaide enhanced the shareholders’ value by delivering important values and earnings per share
for both preferred shareholders and common shareholders. The shareholders also benefitted from
reduced financial overlaps. The takeover enhanced the value of the shareholders’ value of
Adelaide bank because they acquired ownership in a more developed company than theirs.
Basing at the method of acquisition which was through the scheme of arrangements, we can say
that shareholders value was enhanced in that the board used an acquisition method which
ensured that the shareholders would not lose their ownership in the shares and it was less costly.
On the other hand, we can say that the takeover did not benefit well the shareholders as Bendigo
majorly focused in maintaining its business control and ego instead of adding value to
shareholders’ wealth. Bendigo should have accepted the Victorian group bank of Queensland
offer they could have maximized well the shareholders’ value. The shareholders who majorly
benefitted were that of Adelaide bank because they acquired ownership from a large entity.
Looking at the profitability of the company for three years; 2015,2016 and 2017 the profitability
ratio is not improving and that indicates that the takeover did not fully enhance the shareholders’
wealth.

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References
Advanced Valuation Methods for Measuring the Fair Value of Intangible Assets. (2015). Fair
Value Measurement, PP,307-332. doi:10.1002/9781119203308.ch9
Adelaide annual report (2007). (Online). Available at:
https://www.adelaide.com/shareholders/annual/report(Accessed at 9th sep 2018)
Bendigo and Adelaide annual report (2017). (0nline). Available
at:https://www.bendigoadelide.com.au/public/share/annual-report-2017 (Accessed at 9th sep 2018)
Goodwill and Patents. (n.d.). QFINANCE Calculation Toolkit. doi:10.5040/9781472920294.0058
Hilpert, C. and Chen, A. (2012). Merger and Acquisitions - Collar Contracts. SSRN Electronic
Journal.
Hartmann, F. (2008). Accounting for performance evaluation: effects of uncertainty on the
appropriateness of accounting performance measures. European Accounting Review, 7(3), pp,571-
574. doi:10.1080/096381898336420
Jedin, M. H. (2016). Relationship Engagement in Mergers and Acquisition through Collegial
Leadership. doi:10.15405/epsbs.2016.08.84
Munn, A., Zhang, X., & Schmitt, C. (2009). Acquisition of plurality in a language without
plurality *. Merging Features, pp,310-328.doi:10.1093/acprof:oso/9780199553266.003.0017
Srinivasan, S., & Balsara, P. (2014). Energy-efficient sub-DAC merging scheme for variable
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Saxena, S. P. (2012). Mergers and Acquisitions as a Strategic Tool to Gain Competitive
Advantage by Exploiting Synergies: A Study of Merging & Non Merging Firms in Indian
Aluminium Industry. SSRN Electronic Journal. doi:10.2139/ssrn.2086114