MASTER OF THE UNIVERSE

Case 11-3: Master of the Universe



Case 11-3: Master of the Universe

Background

Mergers and Acquisitions are a normal part of the Corporate Finance world. Every week we hear news about large and small corporate mergers and buy-outs. They bring separate companies under the umbrella of a larger company that can be more efficient, created more profits and often offer more products, services and better quality. In this project we look at a joint venture type of merger that brings two companies together in order to form a third company and compete in new market segment.

Saturn Inc. and Venus Inc. are two unrelated companies that have decided to form a Joint Venture to form a third company that will be called Jupiter Inc. The new company will be owned 51 percent by Saturn and 49 percent by Venus. At the forming of the Jupiter Inc., Saturn contributed $561 million and Venus contributed four manufacturing facilities and assembled the workforce. Venus' contribution came with a fair value of $539 Million. Venus was already in the clothing manufacturing business and was looking for an exit strategy because it no longer seemed like a good fit for Venus Inc. Saturn Inc. wanted to expand its manufacturing of children's clothing. The newly formed company, Jupiter Inc. would satisfy both of the needs by entering into a relatively new industry in making and selling organic clothing to be sold to unrelated retailers. Saturn and Venus received a combination of Debt and Equity for their contributions to new firm Jupiter Inc.

Facts

The articles of incorporation of Jupiter Inc. states the terms of governance and management of Jupiter as follows:

Board of Jupiter is comprised of eight members, four from Venus and four from Saturn.

Both Saturn and Venus are able to nominate individuals for the position of CEO of Jupiter Inc.

The CEO is responsible for the day to day operations of Jupiter Inc.

Most board actions are passed by simple majority votes, except the following:

Appointment and removal of CEO

Decision to make calls for Capital contributions

Admission of new joint venture members

Issues

The power to make strategic decisions regarding the operations of Jupiter has been divided between Saturn and Venus. Saturn controls all decisions regarding the design, manufacturing, pricing, and sales of the clothing. Venus controls all decisions regarding distributing clothing in fulfillment of sales negotiated by Saturn on Jupiter's behalf.

Strategic decision making regarding operations of Jupiter was divided between Saturn and Venus. But Saturn would control all decisions about design, manufacturing, pricing and sales of the clothing. Venus controls all decisions regarding distribution of clothing in fulfillment of sales. Profits and losses of Jupiter Inc. were split in accordance to the percent ownership of 51 percent for Saturn and 49 percent for Venus. A consolidation analyses was made by Saturn Inc. In it Saturn determined that Jupiter did not qualify for the Joint Venture scope exceptions.

Applicable Laws and Pronouncements

IFRS 11: Joint agreements

A common agreement is an agreement in which ...