Case Study

“Merger of NOVA Corporation &

TransCanada Pipelines Limited”
Kushagra Kaushal
M1608

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Introduction of Case:
• Analysis of Merger of “Nova Corporation” & “TransCanada Pipelines
Limited by Oil & Gas Investment analyst Bev McCune.
• Method used to account for the Merger- Pooling of Interest Method
or Purchase Method.
• Reasons for using either of the method.

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Company Overview:
• NOVA Corporation
Headquarter: Calgary, Alberta
Virtual monopoly on transmission of Natural Gas in Alberta
Net Book Value: $ 3.8 Billion
Market Value: $ 7.2 Billion
No. of Shares: Twice Compared to TransCanada
Price: Half compared to TransCanada

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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• TransCanada Pipelines
Headquarter: Calgary, Alberta
Owned & Operated a natural gas pipelines system (from Alberta to
Quebec)
90% of the Gas was supplied by NOVA.
Net Book Value: $3.5 Billion
Market Value : $ 7.1 Billion
No. of Shares: Half compared to NOVA
Price: Twice compared to NOVA

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Why Merger was desired?
• It was a merger of equals : Financially Compatible firms
• Both Companies have approx. similar book value & marker value
• Complimentary firms in terms of business, corporate objectives &
growth strategies.
• Merger would eliminate the duplication of the services they provided
• Merger will give birth to 4th largest energy services company in North
America($16.8 Billion revenue, $21.4 Billion Book Value Asset, cost
savings & Stronger Competitive position)

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Merger Design
• Merger was announced on January 26, 1998 & became effective on
July 2, 1998.

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Merger & Acquisition : Merger of NOVA Corp. & Transcanada
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Merger & Acquisition : Merger of NOVA Corp. & Transcanada
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• After the merger, the shareholders of both the companies will
exchange their current shares in NOVA Chemicals & EnergyCo. As per
Case:
- Each NOVA common share will be exchanged for 0.52 of TC common
share.
- Each NOVA preference share will be exchanged for 0.5 of an EnergyCo
preference share.
- Each TC common share will be exchanged for 0.2 of NOVA chemicals
common share & on EnergyCo. Common share.

No fraction shares will be issued, Shareholders will receive cash in lieu

of fractional sahres.
Merger & Acquisition : Merger of NOVA Corp. & Transcanada
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Method of Merger Measurement
• Management of both the companies wanted to used Pooling of
Interest method.
• Why ?
According to case pooling of interest method:
-Market provides higher market premium
-Higher P/E Ratio and Market to Book Ratio

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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What is Purchase Method?
• This method should be used to account for all the business
combinations, except for those rare transactions where an acquirer
cannot be identified.
• Asset & Liabilities of the acquired company is adjusted to their market
value & excess of the purchase prices over market value of the
company’s assets & liabilities are allocated to goodwill.
• Financial statement of the merged company shows the market value
of the asset of the acquired company. (if necessary goodwill)

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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What is Pooling of Interests Method?
• This method should be used to account for those rare business
combinations in which it is not possible to identify one of the parties
as the acquirer.
• So, where an acquirer can’t be specifically identified, the merger may
be:
- Uniting of resources, talents & risks of two or more businesses to
carry on in combination their previous operations. (PoI)
- The formation of a new entity which acquires the assets & assumes
the liabilities of the previous business (Called as New Entity concept)

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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• In this method:
- The assets and liabilities of both companies are recorded in combined
financial statement at their book value on the date of merger (at
depreciated values)
- No adjustment are made
- No goodwill is created
- Income of the merged company includes the incomes of both
companies.

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Can we identify an acquirer?
• Yes.
• If one company is offering cash or assets or assumed liabilities to
acquire the assets or voting shares of another – it is considered as an
Acquirer.
• If the voting shares are issued or exchanged & one company’s
shareholders has more than 50% of the voting shares of the
combined company- It is considered as an Acquirer.
• If the above two ways fails, the regulator looks at the composition of
the board of directors, no. of voting shares, company’s participation
in the merged company to determine the Acquirer.
Merger & Acquisition : Merger of NOVA Corp. & Transcanada
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Why two Different Methods?
• Canadian companies has been practicing pooling of interest method
so that their financial statements could be prepared in a similar
manner to their US counterparts.
- The term “Operating on a level playing field” was used by Canadian
companies as an argument in request to permit pooling method.
• Canadian policy makers wanted to standardise the accounting
method and move towards the exclusive use of purchase method.

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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Conclusion!!
• The different methods is creating difficulty to analyst.
• The use of two methods result in different measurement of assets,
revenue & expenses.
• Extra time & money has to be spent on information processing to
identify the accounting method used and on adjustments to ensure
that the statements of various companies were comparable.
• Analysts concern (McCune’s) is whether they would be able to assess
& compare pooling companies with those using purchase method.
• Pooling method is not a perfect & transparent method, it omits some
key information.

Merger & Acquisition : Merger of NOVA Corp. & Transcanada

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!!!Thank You!!!
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