Week 2 Solutions to Assigned Problems & cases for class discussion and take-up

Case 3-3: Pool Inc. and Spartin Ltd.

Objectives of the Case

This case is intended to illustrate some of the different ways in which a business combination can be effected, and the fact that the form of the combination does not affect the substance of the transaction. The financial reporting for the transaction should follow the substance rather than the form.

Analysis of Alternatives

Prior to the combination, Pool has 1,600,000 common shares outstanding at a market price of $33 per share. Spartin has 1,200,000 common shares outstanding with a market price of $20 per share. In the combination, whatever the form, new shares will be issued in the ratio of two Spartin shares to one Pool share. The alternative exchanges would have the following results:

Alternative 1: Pool will issue 600,000 new shares in exchange for Spartin’s shares. Pool will then have 2,200,000 shares outstanding, of which 1,600,000 (73%) will be held by the original shareholders of Pool and 600,000 (27%) will be held by the former shareholders of Spartin. Spartin will still have 1,200,000 shares outstanding, all of which will be owned by Pool Inc. Pool is the legal acquirer, and also is the acquirer in substance.

Alternative 2: Spartin will issue 3,200,000 new common shares in exchange for Pool’s shares. After the exchange, Spartin will have 4,400,000 common shares outstanding, of which 3,200,000 (73%) will be held by the former shareholders of Pool and 1,200,000 (27%) will be held by the original shareholders of Spartin. Pool will still have 1,600,000 shares outstanding, all owned by Spartin Ltd. In this alternative Spartin is the legal acquirer because it is the issuer of the shares and ends up owning the shares of Pool. In substance, however, Pool is the acquirer because Pool’s former