Note

0.0(0)

Chat with Kai

Explore Top Notes

Unit 4: Financial Sector

Note

Studied by 8748 people

4.7(15)

economic strategies/systems

Note

Studied by 3 people

5.0(1)

NORWAY, DENMARK, SWEDEN, FINLAND,THE BRITISH ISLES

Note

Studied by 16 people

5.0(1)

Chapter 6: Pitching and Selling the Project

Note

Studied by 17 people

5.0(1)

Civil War and Reconstruction

Note

Studied by 78 people

5.0(1)

Chapter 11 - Minimum Wage Laws

Note

Studied by 11 people

5.0(1)

Session 24: Intangibles - Notes

Intangibles

Mini Case 3

Read the case and finish “Mini Case 3 Quiz” by Tuesday, May 6 at 10 PM.
The questions are based on the case materials.
There are five multiple-choice questions, and you have 20 minutes to complete the quiz.
You only have one attempt.
You may refer to the case while answering questions.

Intangibles

Basics
Patent
Trademark
R&D
Goodwill (LN6)
- M&A Basics
- Accounting for goodwill
- In-class exercise: Facebook’s acquisition of WhatsApp

M&A Basics

Merger

A merger describes two firms joining forces to move forward as a single new entity.

When Daimler-Benz and Chrysler merged in 1998, both companies ceased to exist, and a new company, DaimlerChrysler, was created.
Both companies' stocks were surrendered, and new company stock was issued in its place.

Acquisition

An acquisition describes one company purchasing most or all of another company's shares to gain control of that company.

e.g., Facebook acquired WhatsApp in 2014.

Method of Payment

Cash

The acquirer can pay cash for all the equity shares of the target company.
Pay each shareholder of the target company a specified amount for each share.

Equity (stock)

The acquirer can issue and provide its own shares to the target company's shareholders.
Essentially, shareholders of the target trade their shares for shares in the acquirer.

Goodwill (LN6 p.2)

Goodwill only exists when one company (acquirer) acquires another company (target).
Represents the excess of the purchase price over the fair value of identifiable net assets of the target company.
Goodwill = Purchase price – FV of identifiable net assets of the target

Goodwill = Purchase price – FV of identifiable net assets of the target

Essentially, it’s the amount of premium you pay when you buy a company.
Question: Why would an acquirer be willing to pay a premium?
- Future growth potential
- Synergies
- Intangibles
- How much the target company is worth

Goodwill (LN6 p.2)

Note that…

Recorded on the acquirer’s book.
Cannot be separated from the business as a whole.
“Indefinite-life” intangible asset \Rightarrow No amortization of goodwill.

Accounting for Goodwill (LN6 p.3)

Example: ABC Corp. pays $160k in cash to acquire XYZ Corp., whose book value of equity is $20k and whose books reflect the following balances:
XYZ’s balance sheet before being acquired (book value of assets and liabilities)


Current Assets	50
Fixed Assets	140
Stockholders’ Equity	20
Current Liabilities	40
Long-Term Liabilities	130

ABC (Acquirer): How to account for this transaction?

Accounting for Goodwill (LN6 p.3)

XYZ’s fair value of assets and liabilities

Determine the fair value of all identifiable (including tangible and intangible) assets and liabilities of the target company.
Suppose these values are:


Current Assets	50
Fixed Assets	200
Patent	30
Current Liabilities	40
Long-term Liabilities	140

Fair value of identifiable net assets: Fair Value of Assets – Fair Value of Liabilities
(50 + 200 + 30) – (40 + 140) = 100
Compute goodwill as the “left-over” value:

Goodwill = Acquisition price - Fair value net assets acquired = 160 – 100 = 60

How much the target company is worth
Only assets and liabilities, ignore SE

Accounting for Goodwill (LN6 p.3)

XYZ’s fair value of assets and liabilities

All assets and liabilities acquired must be recognized at their fair value.


Current Assets	50
Fixed Assets	200
Patent	30
Current Liabilities	40
Long-term Liabilities	140

ABC’s journal entry (acquiring company) to record the acquisition:
Three steps

Record all the acquired assets and liabilities from the target at fair value.
Record goodwill.
Record either cash (-A) or shares (+SE) to pay for the transaction.

| | | |
| :------------------- | :- | :- |
| Current Asset (+A) | 50| |
| Fixed Assets (+A) | 200| |
| Patent (+A) | 30| |
| Goodwill (+A) | 60| |
| Current Liabilities (+L)| | 40|
| Long-term Liabilities (+L)| | 140|
| Cash (-A) | | 160|

Accounting for Goodwill

Suppose ABC (the acquiring company) had the following B/S prior to the acquisition:


Cash	200
Current Assets	100
Fixed Assets	100
Total Assets	400
Current Liabilities	30
Long-Term Liabilities	70
Shareholders’ Equity	300
Total Liabilities and Equities	400

Then ABC’s post-acquisition B/S would be:


Cash	200 – 160
Current Assets	100 + 50
Fixed Assets	100 + 200
Patent	30
Goodwill	60
Total Assets	580
Current Liabilities	30 + 40
Long-Term Liabilities	70 + 140
Shareholders’ Equity	300
Total Liabilities and Equities	580

How does Goodwill get on the books?

Total goodwill on the books of S&P 500 companies
$3 trillion

Graph showing an increase in total goodwill on the books of S&P 500 companies from 2013 to 2019.

Facebook’s Acquisition of WhatsApp

In 2014, Facebook acquired 100% of WhatsApp shares for $17 billion.
The acquisition price was indicative of a market value for WhatsApp.
- Exceed American Airlines, Ralph Lauren, and Coach
As another point of reference
- Facebook bought Instagram for $1 billion
- Microsoft bought Skype for $8.5 billion
- Yahoo! Bought Tumblr for $1.1 billion

Facebook’s Acquisition of WhatsApp

A tiny startup with 55 employees
$50 million of total assets (far less than the purchase price!)
It was unprofitable
But it grew rapidly
- 450 million monthly users
- 1 million new users signing on per day
- 70% users are active daily
- Handle 19 billion messages per day, including 600m photos

In-class Exercise:

Facebook's Acquisition of WhatsApp (LN6 p.4)

Note 2: Acquisitions

Goodwill generated from the WhatsApp acquisition is primarily attributable to expected synergies from future growth, from potential monetization opportunities, from strategic advantages provided in the mobile ecosystem, and from the expansion of mobile messaging offerings.

Simplified acquisition journal entry


Intangible assets (+A)	2,783
Goodwill (+A)	15,342
Liabilities (+L)	33
Deferred tax liabilities (+L)	899

Note 2: Acquisitions


Intangible assets (+A)	2,783
Goodwill (+A)	15,342
Liabilities (+L)	33
Deferred tax liabilities (+L)	899
Cash (-A)	4,589
Common stock (+SE)	12,604

Plug number: 17,193 – 4,589
Assume that, in addition to the cash payment, the balance is settled by issuing common stock.

WhatsApp in 2013: Income Statement (p.7)

STATEMENT OF OPERATIONS (in thousands)

	2013	2012
Revenue	$10,210	$3,821
Cost of revenue	52,867
Research and development	18,858
General and administrative	76,911
Sales and marketing	34,487
Total costs and expenses	148,678	59,397
Loss from operations	(138,468)	(55,576)
Other income (expense), net	(264)	8
Loss before benefit from income taxes	(138,732)	(55,568)
Benefit from income taxes	586	899
Net loss	$(138,146)	$(54,669)

WhatsApp in 2013: SCF (p.8)

STATEMENTS OF CASH FLOWS (in thousands)

	2013	2012
Net loss	$(138,146)	$(54,669)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	71	61
Share-based compensation expense	98,805	38,259
Changes in operating assets and liabilities:
Accounts receivable	2,159	(819)
Prepaid expenses and other current assets	(1,884)	(166)
Other assets	817	(985)
Accounts payable	2,858	712
Accrued liabilities and other current liabilities	5,366	92
Deferred revenue	20,014	14,016
Net cash used in operating activities	(9,940)	(3,499)
Cash flows from investing activities:
Changes to restricted cash	(1,800)
Purchase of property and equipment	(166)	(119)
Net cash used in investing activities	(1,966)	(119)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred stock	49,802
Proceeds from exercise of stock options	1,088	82
Net cash provided by financing activities	50,890	82
Net increase (decrease) in cash	38,984	(3,536)
Cash, beginning of period	6,558	10,094
Cash, end of period	$45,542	$6,558

WhatsApp, Inc. 2013 Financial Statements (excerpts)

BALANCE SHEETS (in thousands, except for number of shares and par value)

	2013	2012
Assets
Current assets:
Cash	$45,542	$6,558
Accounts receivable	2	2,161
Prepaid expenses and other current assets	2,866	933
Total current assets	48,410	9,652
Restricted cash	1,800
Property and equipment, net	281	186
Other assets	295	1,112
Total assets	$50,786	$10,950
Liabilities, redeemable convertible preferred stock, and stockholders' deficit
Current liabilities:
Deferred revenue, current portion	3,983	1,125
Total current liabilities	5,810	332
Early exercise liabilities, non-current portion		43
Deferred revenue, non-current portion	16,247	5,119
Total liabilities	26,588	6,722
Redeemable convertible preferred stock	60,049	31,008
Stockholders' deficit	(429,544)
Total liabilities, redeemable convertible preferred stock, and stockholders' deficit	$50,786	$10,950

Why Facebook paid $17b?

Synergies!

Graph showing that:
- Total Liabilities = 26,588
- Redeemable convertible preferred stock = 60,049

What did Facebook get for $17b?

… expected to provide us with strategic advantages in the mobile ecosystem and expand our mobile messaging offering. …

Expand into overseas markets
Attract a younger audience
Strengthen mobile presence
Block competitors like Google from acquiring it

Facebook Inc. 2014 10-K Financial Statements (excerpts)

CONSOLIDATED BALANCE SHEETS (in millions, except for number of shares and par value)

	2014	2013
Assets
Current assets:
Cash and cash equivalents	$4,315	$3,323
Marketable securities	6,884	8,126
Accounts receivable, net	1,678	1,109
Prepaid expenses and other current assets	793	512
Total current assets	13,670	13,070
Property and equipment, net	3,967	2,882
Intangible assets, net	3,929	883
Goodwill	17,981	839
Other assets	839	637
Total assets	$40,184	$17,895

Cash flows from investing activities:


Purchases of property and equipment	(1,831)	(1,362)	(1,235)
Purchases of marketable securities	(1,362)	(9,104)	(7,433)
Sales of marketable securities	(9,104)	2,988	2,100
Maturities of marketable securities	2,988	3,563	3,333
Acquisitions of businesses, net of cash acquired	3,563	(368)	(911)
Change in restricted cash and deposits	(368)	(11)	(2)
Other investing activities, net	(11)	(1)	(2)
Net cash used in investing activities	(1)	(2,624)	(7,024)