Business Combinations under IFRS 3: the case of Intesa Sanpaolo and UBI Banca

Since the ‘80s, the EU focused its interest on the importance of undertaking a harmonized accounting policy, so to meet the growing need to have a comparable economic and financial information on a European and global-scale. This awareness took place as a process of uniformization through a progressive change in the Member States’ laws, thanks to the introduction of International Accounting Standards used by companies as a way of preparing financial statements. The following paper will introduce a theoretical framework on IAS, with particular attention to the application of business combinations – regulated by IFRS 3 – and an overview on mergers and acquisitions. The structure is composed of four chapters, starting from the definition of extraordinary business transactions, up to an economic and financial analysis on the Intesa Sanpaolo and UBI Banca’s merger operation. The decision to analyze this case, arose from the interest to better explore a topic of great depth, and trying to make known the acquisition transaction between the two banking giants. The first chapter will focus on the business combinations operations: nowadays, this phenomenon seems to be an efficient response to the complexity of the financial environment that surrounds the production units. One of the reasons why a company decides to undertake an acquisition operation, is the creation of value, since it may be interpreted as a pursuit of an objective of business development and growth, thus promoting the improvement of company’s profitability. The International Accounting Standard Board have laid down specific provisions over business combinations which have been subject of significant actions over time: the most relevant is the change in the method of accounting. It will be explained how the original IAS 22 differs from the recent IFRS 3, adopted in 2008. After setting a general framework on business combinations, we move to the second chapter, which deals with M&As. The merely theoretical aspects will be explained, as well as the modalities of the operation and the phenomenon of M&A in the banking sector. It is appropriate to anticipate that mergers in the banking sector have always aroused particular interest, as in the last two decades the banking industry has experienced an unusual rationalization phenomenon. The bank’s use of such M&A transactions coincides with the advent of an increasingly competitive market and increasing globalization. All these changes have led to a more competitive market which has forced banks to implement a restructuring process aimed at restoring efficiency and competitiveness. Subsequently, the analysis of the recent merger of Intesa Sanpaolo and UBI Banca will be presented. Thus, the third chapter will be based on an economic-patrimonial analysis, starting from the description of the Offer, the details of the operation and the financial position of both banks, so to understand what encouraged Intesa Sanpaolo to promote such Offer. Moreover, a sub-chapter will be dedicated to the 2020 Financial Statement’s analysis of Intesa Sanpaolo and moreover to the application of IFRS 3, the measurement and recognition of goodwill. In conclusion, the last chapter will demonstrate how the stock market of Italian banks performed over the past five years and, in particular, during 2020, comparing the trends of the most important listed Italian banks, then focusing the attention to the Intesa Sanpaolo's performance before and after combination.