More disclosures about synergies, or: I’m demoralized!

Here’s an extract from the January 2023 IASB Update:

  • The IASB tentatively decided in September 2022 to propose adding to IFRS 3 Business Combinations a requirement for an entity to disclose quantitative information about synergies expected from a business combination in the reporting period in which the business combination occurs. 
  • At the January 2023 meeting, the IASB tentatively decided to require an entity:
    • to disclose quantitative information about expected synergies by category (for example, total revenue synergies, total cost synergies and the total for each other type of synergy).
    • to consider, for any case in which a disclosure of totals by category would qualify for an exemption, whether disclosure as a total for all categories could remove the reason for applying the exemption to the total by category and, if so, to disclose the total of all categories.
    • to describe the synergies by specifying each category of expected synergy.
    • to disclose when the benefits expected from the synergies are expected to start and how long they will last. This disclosure would require an entity to identify whether the synergies are expected to be finite or indefinite. 

The exemption referred to in the second item refers back to the September 2022 meeting, at which the IASB tentatively decided to propose an exemption in specific circumstances that would permit an entity not to disclose information about management’s objectives for a business combination; the metrics and targets management will use to monitor whether the objectives for the business combination are being met; and quantitative information about synergies expected to arise from the business combination. The exemption is intended to apply in “situations in which disclosing an item of information can be expected to prejudice seriously any of the entity’s objectives for the business combination,” supplemented with application guidance. It reflects concerns expressed by many respondents to the earlier discussion paper, for example: “The quantum of expected cost synergies often sends a stronger signal of the size and scope of potential redundancies than a qualitative statement about the existence of synergies…quantitative information about expected synergies could therefore demoralize an entity’s workforce and lead to legal complications if redundancy plans are disclosed in financial statements before that information is communicated to affected employees.”

A reader may immediately wonder what the definition of “synergies” might be for this purpose. The IASB had earlier decided though not to define the term, noting among other things that “various IFRS Standards such as IFRS 3, IFRS 13 Fair Value Measurement, IAS 36 Impairment of Assets and IAS 38 Intangible Assets already use the terms ‘synergy’ and ‘synergies’ but do not define the phrase,” and that “although feedback during the development of the Discussion Paper suggested users need more quantitative information about expected synergies, feedback did not suggest that entities were not appropriately identifying expected synergies.” Examples included in an earlier paper include “reductions in headcount, expected cost savings associated with shutting down a production line or closing a location, or anticipated sales growth from expanding product or service offerings.”

Will this information be useful? Well, an earlier agenda paper had reviewed the academic research in this area, concluding that it at least can be:

  • The academic evidence shows that disclosures about expected synergies are value relevant—they are positively associated with the bidder’s and target’s share price changes at the time of the acquisition announcement. There is evidence that credible disclosures of expected synergies are valued by investors and analysts. On the determinants of disclosures of expected synergies, the academic evidence shows that entities are more likely to disclose synergy estimates when the synergy information is relatively precise and when they need to inform the bidding entity’s shareholders. Entities are less likely to disclose synergy estimates when the synergy information is uncertain and there are litigation concerns. There is no evidence that the disclosures of synergy estimates are related to concerns about commercial sensitivity or used to influence takeover premiums.
  • … Amel-Zadeh and Meeks (2019) studied a sample of 1,133 business combination announcements during the period 1990–2017. They found that pro forma earnings forecasts by bidding entities during business combinations were associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium—but only in share-financed business combinations. Analysts also responded to these pro forma earnings forecasts by revising their forecasts for the bidder upward. However, the benefits of forecast disclosure only applied to bidders with a strong forecasting reputation prior to the business combination…

One can never forget though that a shocking number of major corporate transactions (maybe between 70% and 90%) fail by one measure or another, indicating that even when management’s disclosures about expected synergies from a particular transaction are diligently derived and clearly disclosed, they’ll provide a shaky basis for any kind of forward-looking assessment. Looked at this way, the arguments for the exemption may seem a bit suspect: disclosure of anticipated synergies is hardly the main thing that’s likely to “prejudice seriously any of the entity’s objectives for the business combination.” Still, it’s all well-intended I suppose…

The opinions expressed are solely those of the author

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