Methods for Acquisition of Yahoo Corporation - Term Paper Example

Financial Reporting Financial Reporting Institute Introduction After getting approval from FASB, it is advisable to choose Microsoft for submitting a report preferring pooling of interest method as it is trying to acquire Yahoo. The real contexts of the reaction of the directors of both the companies can be presented in the report as the combination attempt generated much hype in investors and media. However, apart from the reactions of the directors the incidents happened and the present background for the acquisition is a good scenario to advise Microsoft regarding adoption of pooling of interest method. The company can be advised based on combination of balance sheet items as acquisition of an online company involves intangible assets. Due to the afore-mentioned factor, Microsoft can find the combination of balance sheets more useful in acquiring Yahoo, as it is an online Company. One more aspect that is useful for Microsoft in Pooling of interest method, it does not result in creation of goodwill. This leads to report higher earnings. (Answers.com, 2008) Methods for Acquisition Dear Sir, Steve Ballmer, Thanks for giving us a chance to advise you on adoption of 'pooling interest' method. So that we can let you know, why it is beneficial for a company trying to acquire another, while you are contemplating to acquire Yahoo Corporation. While acquiring a company a firm follows one of the two methods. The first one is pooling of interest and the other is purchase method. The later involves the goodwill, which is a premium for buying a business. The goodwill is a result of subtracting purchase price from its book value. However, this is not advisable as Microsoft is trying to acquire Yahoo for more than the book value and this may result in negative goodwill according to purchase method. Hence, pooling of interest method is advisable for acquisition of Yahoo, for reporting higher earnings and a probable resultant higher share price. (About.com , 2008) Earnings in the Context of Pooling of Interest Method When we consider the situation of Microsoft taking over Yahoo.com, let us take into consideration the earnings of both the companies at the end of 2007. The earnings of Microsoft at the end of 2007 is $11,030 and that of Yahoo is $1,403. Let us suppose that the book value of Yahoo's share is $10. Microsoft is contemplating to pay $32.5 per share. If it happens, the company has to pay $ 227987.5 million. However, the book value of Yahoo shares is $ 70150 million only. The difference is $ 157837.5 million. This will be termed as good will if Microsoft follows the purchase method and needs to be amortised in 40 years by amortising 1/40th part of the earnings every year. (Microsoft, 2008) If the company follows pooling interest method, there is no need of showing good will and the resultant company's balance sheet is the combination of balance sheets of two companies before acquisition. If the Book value of Yahoo share is $10 then the total book value of 7015 million Yahoo shares equal to $7.0150 billion. However, Microsoft has to pay $ 22. 8billion. The difference is $ 15.785 billion. (Ad vision, 2008) This has to be amortised in the resultant entity within 40 years according to purchase method. In Pooling of Interest method, there is no way to consider the goodwill as the company pays the amount to the investors and the balance sheets are combined from word to word and value to value. This reports the higher earnings and in the future years and allows higher earnings per share resulting in a higher share price in the market, which is not possible with purchase method as every year 1/40th part of the earnings cannot be included in reporting the earnings. A company like Microsoft, which have enough reserves of cash do not need the amortisation and can concentrate on For example, when we consider, the earnings of Microsoft and Yahoo in the year of 2007, the number of shares in Microsoft is 9848 million and the number of shares in Yahoo is 7015 million. The total number is 16,863 shares. The total earnings is $#12433 million. The 40th part of these earnings is taken as goodwill in the context of purchase method. It means that the $4973 million of cash goes for amortisation. Advantages of Pooling of Interest The resultant entity of the acquisition of Yahoo by Microsoft can take over all the assets and all the liabilities of Yahoo. It is beneficial for Microsoft, as the liabilities of Yahoo are less than the assets as the book value is more than the face value. Pooling-Interest method compels 90 percent of shareholders to join the new entity. This results in acceptance of more investors for the merger or acquisition. As the company can give shares along to recompense the shareholders, it can use minimum amount of cash needs for acquisition. As Microsoft is in intention of continuing the operations of the present Yahoo Corporation after acquisition, the Pooling of Interest method will allow it to do so. No Problem with Intangible Assets As the pooling of interest method needs to aggregate the line by line of the book values, the consolidation of accounts of the resultant entity is possible. This reduces the trouble regarding intangible assets as Yahoo is an online company and have intangible assets like cyber space. The calculation of goodwill in purchase method may result in problems regarding cyber space as the goodwill regarding cyber assets improve only with development of online business. Information for Shareholders About the Impact of Acquisition However, one can point out that this method does not allow the shareholders to know about the impact of acquisition. The afore-mentioned objection is not a reasonable objection, as the impact is not known just after the acquisition or merger. To know the impact of the acquisition on bottom line and balance sheet, the resultant company has to do business for a year and has to report the earnings. Unlike the purchase method, the extra amount paid for the shareholders and investors is not mentioned as good will. This helps in factual calculation of the cash spent on acquisition. As the Microsoft is having enough cash reserves, the amount spent on acquisition will not result in decreasing the reported or to be reported earnings. The good will paid to the shareholders or investors of Yahoo Corporation will be reported as expenditure in the resultant entity's cash reserves and this helps in factual calculation of profit when compared to the expenditure for acquisition. In case of purchase method, the amortisation of 1/40th part of the earnings of the resultant entity at the end of each year do not allows reporting the actual earnings. The purchase method takes into consideration the share-exchange ratio and pooling of interest method does not. The pooling of interest does not consider the time and energy spent on the merger or acquisition activities, as they are all the part of the ways Microsoft is trying to increase its online advertising business. The proponents of purchase method claim the interest for allotting number of shares for a particular number of shares of the acquired company. As the allotment of shares reduces the cash paid, the question of interest should not arise and however, Microsoft is keen on paying cash for acquiring Yahoo Corporation. There is controversy about settling the exchange ration of 1:10 and then aggregating the share capital of two companies as if the exchange ration was 1:1. After aggregation of the share capital of the two companies, the total number of shares divides it after acquisition and the book value is reported. However, investors or shareholders in the context of acquisition or merger do not consider exchange ratio, but the book value and the market value of the share. This helps Microsoft, the acquiring company in reporting increased earnings as well as the value of assets of the investors in the form of shares. As the acquisition of Yahoo by Microsoft is not an insider offer, and can be considered as acquisition of adversary in the context of Yahoo not willing to accept the initial offer of acquiring company, the goodwill in purchase method is not advisable. Hence, Pooling of Interest method is suggestible to acquire Yahoo by Microsoft. Learning Statement The learning outcome in the current assignment is about the advantages of Pooling of Interest over Purchase Method. The points discussed were about the advantages of Pooling of Interest method in the context of acquisition of an outsider company like Yahoo by Microsoft. The advice of adoption of Pooling of Interest by Microsoft in acquiring Yahoo, involves the reduction of the problems regarding intangible assets. Moreover, the acquisition of Yahoo by Microsoft displays transparency and accuracy as both the balance sheets are combined value by value and reading by reading. As Microsoft is contemplating to increase online advertisement business by acquiring Yahoo, the Pooling of Interest method will help in higher earnings reporting in the coming years resulting in the increase of share value. As the Microsoft or Yahoo are not in a position of lack of reserve cash, the calculation goodwill and amortising it is not necessary and reporti8ng higher earnings and increase of share value in the near future is significant. References: Answers.com, 2008, Pooling of Interest, Retrieved on 24th May 2008 from http://www.answers.com/topic/pooling-of-interestcat=biz-fin About.com , 2008, Analysing a Balance Sheet, Retrieved on 24th May 2008 from Microsoft, 2008, Microsoft Reports Record Third-Quarter Revenue , Retrieved on 25th May 2008 from M Ad vision, 2008, Yahoo: Q4 07 Financial Highlights, Retrieved on 25th May 2008 from S. Murlidharan , 2001, Pooling to Fool, Business Line, Volume 14, Retrieved on 25th May 2008 from Read More