Multinational Acquisition: HP & Compaq - Research Paper Example

Multinational Acquisition – HP & Compaq 1. Description of the Acquisition The merger of Hewlett-Packard and Compaq faced a lot of controversy from Hewlett-Packard’s board of director. Yet, the $19 billion acquisition was formed in May 2009. It was lead by Hewlett-Packard CEO Carly Fiorina. This was a very important move for HP as it was going to acquire a weak operations company. 63% shareholding was retained by HP and 37% shareholding was acquired from Compaq in order to combine the ownership of both the struggling companies. Retrospectively, this move is considered as a failure. The reason is the shareholding values which HP paid for acquisition were no way near to its values. Pre-Merger Dollar Amounts Percentage Hewlett-Packard Compaq Total Hewlett-Packard Compaq Share Price $23.50 $12.50 Shares Outstanding (million) 1,900 1,739 Total Market Value (billion) $44.650 $21.738 $66.388 0.673 0.327 Exchange Terms 0.6325 for 1 Post-Merger No. of Shares (million) 1,900 1,100 3,000 0.63 0.37 HP allotted 0.6325 shares to Compaq at the share price of $23.50. HP gave the value of $14.86 to the CPQ which had the market price of $12.50 hence, paying a premium of 18.9% to Compaq. Considering the fact that Compaq has been encountering cumulative net income of minus $2.390 billion for the past four year till 2011, this question raised serious issues whether the premium of 18.9% was unnecessarily excessive or not. HP has never had a strong market of computer operations and Compaq also had same problems in its market of PC. This induced criticism about how two weak organizations can be merged together to form a stronger one. Despite of this, HP relinquished to Compaq its 37% of ownership. The strength of HP lies in its Printing and Imaging Sector with a substantial market share of 40%. The merger with Compaq can act as a bi-product in retaining the value of shareholders of HP, who hold only 63% of ownership after this merger. After having stock prices down to about $20 per share, and substantially reduced amount of earning, surely HP needs a better and new direction. Recently, the board of directors of HP has taken steps to alleviate these problems. The most prominent step is that of the resignation if CEO Carly Fiorina. This has increased the value of HP by $4 billion. After this, the board of directors is looking for new course of actions to be taken. 2. general criteria for the accounting of business combination under us gaap Accounting treatment of business combination under US GAAP involves the combination of two distinct entities under a single financial statement. US GAAP highly recommends the adoption of purchase method in respect of merger and acquisition as part of the accounting treatment. Generally, there are two kinds of approaches which are used by the acquiring entities in order to acquire another entity that is either to purchase the net assets (Total Assets – Current Liabilities) of the acquired entity or the purchasing of overall equity of the acquired entity. US GAAP permits both kinds of treatment to purchase both kinds of stakes. One exception to that criterion is that if the acquired entity has not commenced its commercial operations as part of its business, then assets and liabilities of that acquired entity will be valued at their fair market values. In such cases, there would not be accounted any recognition for the amount of goodwill. Acquisition Date US GAAP has set the date of acquisition as the date on which acquiring entity takes the control of the business of the acquired entity. Cost of acquisition In order to acquire an entity, cost of acquisition needs to be computed which might consist of the following: Cash or Cash Equivalents, or Fair value of exchanged assets which are based on non-monetary terms US GAAP allows the consideration to be paid in the form of shares. Those shares are needed to be valued at their market prices between the days in which parties complete the acquisition agreement and the final settlement of the proposed transaction is to be announced to the general public. In order to ascertain the market values of the shares, there are no regulatory or shareholders’ approval required in respect of the proposed acquisition. Criteria for the valuation of Identifiable Assets The basic and general criterion set by the US GAAP to measure the identifiable assets of the acquired entity is the fair value measurement. The reporting entity is obliged to measure the fair value of the identifiable assets of the acquired entity at the date of acquisition. Intangible assets The criteria set out by US GAAP in respect of identifying intangible assets other than goodwill, is that the intangible asset should present legal or contractual rights to the acquiring entity or can be separated, split and disposed, licensed, exchanged, transferred or rented out by the acquiring entity in the future and there are reliable estimates of measuring the fair value of those intangible assets. Those intangible assets should be amortized over their useful lives. Acquired In-Process Research and Development (IPR&D) For Acquired in-process research and development (IPR&D), the criteria framed by US GAAP is to be expensed out in the income statement if there is no alternative use of IPR&D in future. Minority interests at acquisition US GAAP states the criteria for the valuation of minority interest such that the stakes of minority interest need to be values at the book values pertaining to historical cost. Under US GAAP, the parent entity is allowed to use fair values only for the valuation of share of net assets acquired by the acquiring entity. 3. analysis of hp-compaq merger accounting treatment   Cash and Cash Equivalent 3,615   Accounts Receivable 4,305   Financing Receivable 1,241 Tangible Assets Inventory 1,661   Current Deferred Tax Assets 1,475   Other Current Assets 1,146   Property, Plant and Equipment 2,998   Long-term Financing Receivable and Other Assets 1,914   Amortizable intangible assets     Customer Contracts and Lists, distribution agreements 1,942 Acquired Intangible Assets Developed and core technology, patents 1,501   Product Trademarks 74   Intangible Asset with an Indefinite Life 1,422   Goodwill 14,450   Accounts Payable (2,804) Liabilities Assumed  Short- and Long-term Debt (2,704) Accrued Restructuring (960)   Other Current Liabilities (5,933)   Other Long term Liabilities (1,908) IPR&D In process research and development 735   Total Purchase Price $24,170 The settlement of the acquisition of Compaq made by HP finally completed for $24.17 billion on May3, 2002. By using purchase method of acquiring, HP held the control of Compaq with the exchange chare deal. HP exchanged its 0.6325 common stocks for every 1 outstanding share of Compaq. HP also incurred around $701 million in respect of the expenses pertaining to acquisition of Compaq which includes expenditures on account of professional services of solicitors, legal experts, financial analysts, advertising and other related costs. Along with the acquisition of the tangible assets and assumption of the liabilities of Compaq, around $793 million were allotted by HP in respect of in-process technologies. Those intangible assets which had the definite lives were amounted to around $3,517 million. These intangible assets contain patents, distribution agreements, lists of customers and various the recently developed technologies. The brand name of Compaq was sold to HP for $1,422 million. In-process research and development (IPR&D) amounted to around $735 million which needs to be expensed out immediately under US GAAP. 4. Goodwill Goodwill can be defined as the amount which is computed as the difference between the values of cost acquisition and the fair value of the amount of share of interest in the identifiable net assets of the acquired entity. Purchased goodwill should be considered as intangible asset and it needs to be capitalized. Under US GAAP, the amount of goodwill is reviewed for impairment at least once a year rather than amortized at the reporting level. The assignment of goodwill relates to the operating segment of the entity or its component. Higher testing level of goodwill is required under US GAAP than that of IFRS. The amount of goodwill was set to $14,450 million in HP-Compaq merger. This is the amount that needs to be tested for any impairment loss once in every year. 5. Provisions for Restructuring US GAAP requires the acquiring entity to recognize the provisions relating to restructuring in case of meeting the specified criteria at the acquisition date. There should be proper assessment and formulation a plan by the management of the acquiring entity for the purpose of making an exit route to the activity of the acquired entity at the date of acquisition. US GAAP allows one year time to complete the detailed plan after the date of acquisition regarding the business combination. In case of Compaq acquisition by HP, prior to the acquisition of Compaq by HP, Compaq also made certain provisions in respect restructuring like HP. Those provisions amounted to $960 million and HP included those provisions on acquisition date in the balance sheet of Compaq in both current and noncurrent liabilities. This restructuring liability is allocated by HP as a portion of the purchase price to be paid by HP. HP charged around $631 million of those restructuring liabilities in the last second half of the year 2002. 5. Similarities & Differences Following are some of the major differences in the accounting treatment of business combinations. Certainly these changes do affect the profitability of the acquiring entity, but due to convergence of the two frameworks, in near future, there might not longer be any chances of gaining profitable approaches in case of adopting any particular framework. Here are some of the existing differences between US GAAP and IFRS. US GAAP IFRS Differences Pooling are prohibited  Pooling are eliminated Variable Interest Entities (VIE) are required to apply special consolidation rules. IFRS does not address VIE but it does consider Special Purpose entities.  Measurement criteria for Non controlling interest is fair value   Measurement criteria for Non controlling interest is either: 1) at fair value, or 2) as a proportionate share of identifiable net assets acquired  No obligation for the conformance of parent and subsidiary accounting policies  Conform parent and subsidiary accounting policies is strictly necessary Acquired in-process R&D needs to be expensed as purchased  Capitalization and then amortization of purchased in-process R&D Contingent consideration should be recognized as soon as the condition is met  In process of allocating the purchase price, fair value of contingent consideration should be considered Permission of recognizing the accrued expenses by the acquired entity in case of planned post-acquisition restructuring. General prohibition of restructuring reserves unless the acquired entity had preciously recorded the contingent liability before acquisition Similarities Equity includes Non-controlling interest.  Similar to US GAAP For mergers of those entities which are under common control, pool-type accounting is used.  Similar to US GAAP Test for impairment of goodwill. Similar to U.S. GAAP  References Accounting for Business Combinations and Consolidated Financial Statements IFRS versus GAAP. (n.d.). Retrieved from http://www.ifrsaccounting.com/ifrs-combinations.html Hewlett-Packard: A Pack Ard (of) Mess. (n.d.). Retrieved from www.swlearning.com/.../hewlett_packard_mess_web_case_1.doc Reporting and Analyzing Inter corporate Investments. (n.d.). Retrieved from www.buec.udel.edu/scottw/ACCT800/FA_MBAsMod06.ppt The GAAP Differences and Balance Sheet in Detail. (n.d.). Retrieved from  www.sba.pdx.edu/faculty/elizabetha/eaaccess/517/MIMLecture2.ppt Hewlett-Packard. (n.d.). Retrieved from   www.anderson.ucla.edu/faculty/john.weston/papers/HP-Compaq.doc Read More