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When a Powerhouse Pharmaceutical Made a Major Acquisition

Our business and accounting capabilities helped facilitate a smooth transition


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Abstract

Our client, a world-leading pharmaceutical company, made a major acquisition valued in the tens of billions of dollars. The acquired business would become a wholly owned subsidiary. The acquiring company needed valuation and related accounting services.

Deloitte built a customized purchase accounting tool to facilitate the client to account for adjustments to fair value of the assets purchased in the transaction.  As a result, the company was able to efficiently and effectively control the purchase accounting adjustments associated with the transaction.

In addition, we consulted with the merging companies to help them understand each other’s appetite for risk and to develop and implement controls that would allow smooth integration of the two entities.

The challenge

The pharmaceutical industry is undergoing  rapid and fundamental change on several fronts.In particular, it is seeing extensive consolidation  as companies seek competitive advantage through new compounds, manufacturing capabilities, and intellectual property.

But large mergers and acquisitions present complex accounting problems. Acquiring companies need to manage the transition, as they absorb the target organization into their financial processes.  In this case, the acquiring company issued a request for proposal (RFP) for valuation and related accounting services. The accounting services included  building  a customized tool for purchase accounting to assist the company in accounting for the acquisition transaction.  The tool would facilitate company management to record the initial step-up in fair value in the initial period, as well as control adjustments in subsequent period,until the transaction could ultimately be pushed down to its various legal entities.

How we helped

Deloitte’s Financial Advisory Services (FAS) group and Audit & Enterprise Risk Services(AERS) group teamed to respond to the client’s RFP and  win the work for Deloitte. The team then worked together to develop an innovative model to assist the client in accounting for the large business combination.

In addition, Deloitte Consulting LLP worked with the client and its target to promote a smooth merger. In particular, we helped the two entities evaluate and manage key issues around integration.  This started with gaining an understanding of their relative risk appetites. It continued with the development and implementation of appropriate monitoring controls. We determined that controls were in place on day one of the integration, and we also designed and put in place controls that would help manage the interim merger state.

The FAS and  AERS team worked closely with the client’s management to understand the complexities and define the functionality needed in the purchase accounting tool. This functionality  included the ability to assist the company management in identifying, reviewing, tracking, and recording adjustments to the initial purchase accounting entries over the one-year measurement period,until it could push down the accounting to its subsidiaries.

The tool that Deloitte created allows the client to manage purchase accounting and tracking of fair value changes, both retroactively and prospectively. Using inputs from the client, it also calculates the deferred taxes following the layering-on approach, calculates the depreciation and amortization until push-down using methods consistently applied throughout the client, and calculates the currency translation adjustments at periodic reporting dates. It allows the client to track adjustments related to certain transactions, such as impairment, write-offs,  disposals, approval of in-process research and development,  tax rate changes, and change in remaining useful lives.

Further, the tool provides customized management reports on a consolidated  and entity-level basis to allow different  levels of review by various management groups and external auditors. It also can interact directly with the client’s consolidation system to more efficiently feed the resultant adjustments tothe close systems.

According to the client’s assistant corporate controller, “Deloitte has been instrumental in assisting us with the accounting for our recent significant acquisition. Their experienced subject matter experts worked with us to develop a practical approach and a purchase accounting tool that facilitated us to effectively and efficiently manage the purchase accounting associated with the transaction. Their dedication and commitment to client service was a critical success factor  of the project.

Solution

The accounting  and business knowledge  the team brought to the table, combined with its technological experience, facilitated it to build an innovative and powerful purchase accounting tool. At the same time, Deloitte provided understanding and controls that helped facilitate a smooth transition.

Recognizing a need in the marketplace, the team decided to create a baseline purchase accounting model from which it could customize input sand outputs and build similar tools for other clients. With all of their knowledge and experience, the team was able to sell similar services to another large pharmaceutical to assist it in accounting for a multibillion-dollar acquisition.

The building of the baseline model helped the team quickly respond to the needs of the new client. It also facilitated the client to find efficient and effective solutions to some of the complexities inherent in any large acquisition transaction.

The team built a customized tool in a short period of time to assist in the accounting and reporting for the transaction. Through understanding the client’s critical paths, the team is continually developing enhancements to meet the client’s different requirements and assisting management with the push-down accounting process.

In the words of the client’s controller, “Deloitte’s work on the purchase accounting and internal controls project was phenomenal. The team was responsive, but more importantly, the work created exceptional value for us.”

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