What about tangible resources? How can these be integrated?

From a balance sheet perspective, these will typically be combined. Therefore, in addition to financial assets (for example, cash, marketable securities, and accounts receivable), a consolidated balance sheet will include combined values for plants, equipment, inventories, and land.

In addition to being combined on a balance sheet, are these tangible assets ever actually combined from an operational standpoint?

Plants, equipment, and inventories may be combined in whole or in part when two companies integrate their operations. Land and real estate, of course, cannot be combined physically, but the leasing or ownership terms for the use of the land may be consolidated.

Plants

How can plants be combined operationally (as opposed to merely on the balance sheet)?

First, let’s define our key term. A plant is a production operation at a defined physical location. It is usually envisioned in a manufacturing context. A plant’s major assets include real estate, structures (foundations, buildings, framework, and related improvements), equipment (for production, communication, control, and administration), distribution assets (such as piping, conveyers, and docks), wiring and instrumentation (for electrical supply, communications, and control of operations), and software programs, including those operating with artificial intelligence (AI). (For more on AI, see the discussion on technology later in this chapter, p. XXX.) In a service context, a plant may be a physical location in which services are performed. Examples of service plants include a computer processing facility, a branch bank facility, and a call center.

In both the manufacturing and the service sectors, plants can be consolidated in many different ways, ranging from plant closings to integration of plant operations through common, integrated systems.

What are the main costs associated with plant consolidation?

In consolidating plants, employers may incur costs associated with disposal of assets (including environmental aspects); relocation, termination, and/or recruitment of employees; investments in physical assets or software to support consolidation; and redesign of products and/or services to accommodate integration. In addition, acquirers may have to spend money on new marketing efforts to preserve goodwill if plant consolidation has involved layoffs. Finally, closing or relocating plant operations may cause the loss of a group of customers or increase transportation and distribution costs to a set of customers (see the final section in this chapter on fulfilling commitments to employees).

Equipment

How can equipment be combined operationally?

Physically combining equipment is uncommon unless the equipment is mobile or unattached, such as forklifts, trucks, office equipment, and furniture. Combining companies are often at distant locations. Even when operations are consolidated, it is often preferable (if money permits) to purchase and install new equipment, rather than to remove, transport, and install older equipment from a discontinued operation. Furthermore, in addition to equipment purchased for replacement, some equipment may be purchased for enhancement—for example, to facilitate the integration of systems and operations.

What are the main valuation issues associated with the combination of equipment in a purchase?

All the equipment that will continue to remain in use after the acquisition should be restated at fair market value in use and integrated into the balance sheet accordingly. “Fair market value in use” means that certain delivery, installation, and setup costs should be included in the valuation of the equipment since an acquirer of the equipment would have to bear the costs if each individual unit were acquired separately. Appraisers may consider replacement or reproduction cost as if new (including installation and freight), less economic and physical obsolescence, as an appropriate measure of value. In general, equipment that is to be used in the future should be capitalized and depreciated rather than treated as an expense.[i]

What are the cost implications of combining equipment?

The value of some equipment held by the acquired entity and/or the acquirer may be written off because of costs associated with disposing of it or transferring it (the aforementioned cost of transportation, installation, and setup that is part of fair market value in use).

Inventories

What tips do you have on valuing and combining inventories on a consolidated balance sheet and in reality?

Inventories of the acquirer are stated, as always, at the lower of cost or market (wholesale) value. If certain units in inventory become obsolete, are likely to be sold at a discount, or will require more time to sell, some downward adjustment in the value of these items in inventory may be appropriate. If significant, the inventories of the acquired entity should be audited during the due diligence process and appraised at the current fair value in exchange (wholesale).

For large inventories—even with heterogeneous units—it is possible to use sampling techniques to value the inventories with reasonable precision by comparing the market value of a set of units sampled to the current book value for those same units. For example, an acquired salvage operation reports $2,560.35 million on its balance sheet as the cost basis of its inventory of used parts. A sample of 5,000 out of 100,000 items (representing $245,199.10 of inventory at original cost) reveals that the current cost (at wholesale auction) of these items would be $250,619.50. This yields a value-to-book ratio of 1.022106. Thus, the overall inventory can be valued based on this cost-to-book ratio at $2,616,751.50.

Land/Real Estate

How can land and/or real estate from two different companies be valued and “combined” on a consolidated balance sheet?

The real estate of the acquired entity should be valued at fair market value. Each tract of real estate is typically valued separately but in connection with any surrounding tracts commonly owned by the same entity.

What are some valuation issues to consider when combining the land and/or real estate of two companies?

It is possible for the value of two adjoining properties to increase as a result of having common ownership. A change in the expected use of a specific piece of real estate may impair the value of that real estate, especially if the property is to be sold after being acquired and the future use of the property would require some modification or remedial efforts. Conversely, land associated with a profitable manufacturing operation may be worth more than equivalent value land, especially when it is in full use. Finally, any postmerger change in land zoning should be explained with reference to the stated values of the acquirer.[ii]