Question

Westfield Exploration Inc.(WEI) is a public company listed on the UK Stock Exchange. The company was...

Westfield Exploration Inc.(WEI) is a public company listed on the UK Stock Exchange. The company was a mineral explorer that has subsequently become dormant with only directors and an administrative staff remaining. There was an opportunity for the company to move into the IT industry following the slowdown in the mining industry. Dream IT Company is a London based IT company. WE Inc. has entered into a share sale agreements to acquire 100% of Dream IT.

The following key terms of the acquisition was announced to the market on September 13, 2014. At this time WE shares price is $0.10.

  • The acquisition is conditional upon
    • WEI being satisfied with due diligence on Dream IT
    • WEI re-complying with UK stock exchanges chapter 1 & 2 including raising sufficient funds so that WEI holds a minimum of $3,000,000 cash ( via issue of 15,000,000 share)
    • Obtaining the approval of WEI shareholders
    • A consolidation of WEI’s capital
  • On completion of the acquisition, WE will issue 60,000,000 shares to the existing shareholders of Dream IT. This represents 60% of current issued capital of WEI. Dream IT to appoint 3 of 5 directors in WEI.
  • Following successful completion of this acquisition, WEI will change its name to “Dream IT Groups”.

On 15 October 2014, the shareholders of WEI approved the various transactions in the acquisition of Dream IT. The share price on the date of approval was $0.18.

On 20 October 2014, consideration shares were issued to the existing shareholders of Dream IT at $0.20 per share and shares were issued to general public as part of capital raising also at $0.20.

The following is the statements of financial position of WEI and Dream IT at the date of acquisition.

WEI

Dream IT

Current Asset

Cash and Bank balances

700,000

1,000,000

Trade and other receivables

60,000

460,000

Total current assets

760,000

1,460,000

Non-current asset

Property, plant & Equipment

50,000

500,000

Intangible asset

0

2,000,000

Total non-current assets

50,000

2,500,000

Total assets

810,000

3,960,000

Current liabilities

Trade and other payable

200,000

350,000

Total current liabilities

200,000

350,000

Non current liabilities

Borrowings

100,000

1,000,000

Total Liabilities

300,000

1,350,000

Equity

Issued capital (WEI:40 million shares)

72,000,000

2,000,000

Retained Earnings

(71,490,000)

610,000

Total Equity

510,000

2,610,000

1.    What type of business combination occurred in case study 1?

2.    Non-controlling interest hold ____________ % of the consolidated stock.

3.    The consideration share that was issued on October 20,2014 is called ___________.

Homework Answers

Answer #1

1. The type of business combination is Circular combination. When two or more business units dealing in different products join hands is called circular combination. For instance, combination of sugar mill with cement factory. This type of combination is also known as mixed combination. The main advantage of this this type of combination is to secure the benefits of administrative integration through common management.

2. Non controlling interest hold 13.04% of the concolidated stock. The general public which is being issued 15,000,000 shares will hold the non controlling interest in the company. (15,000,000/115,000,000*100 = 13.04%)

3. The consideration share that was issued on OCtober 20, 2014 is called as Target shares i.e the shares issued to the shareholders of Acquired company.

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