Wal-Mart Acquisition of Target
Assume that you are the CEO of one of the selected companies. You are responsible for gaining control over the other company. You have three (3) choices, either of which you believe that the Board of Directors will support.
- Choice 1: Your company acquires 35% of the voting stock of the target company.
- Choice 2: Your company acquires 51% of the voting stock of the target company.
- Choice 3: Your company acquires 100% of the voting stock of the target company.
I am CEO of Wal-Mart Stores, Inc. which is world’s largest company in terms of revenue. The company is earning good profits and wants to increase its size in terms of revenue and assets. To increase the size I am made responsible to gain control over Target Corporation which is one of the other retail giant. The three available choices for gaining control over the target company are acquisition of 35% of the voting stock, acquisition of 51% of the voting stock and acquisition of 100% of voting stock. A brief back ground of both the companies is given under:
Wal-Mart Stores, Inc.
Wal-Mart Stores Inc. is an American retail corporation having its presence all over the world. The company runs its business as Walmart and the business of the company is chain of grocery stores, hypermarkets and discount departmental stores. On July 2, 1962.Mr. Sam Walton founded the company in Rogers, Arkansas, United States. The headquarters of the company are situated at Bentonville, Arkansas. The total number of the stores of the company as on December 31, 2015 was 11,620 and operates in 28 countries under 65 banners. The Walton family holds more than 52% stock of the company and is owners of the company. Gregory B. Penner is the chairman and Doug McMillon is the president and CEO of the company. According to Fortune Global List of 2014 the company is world’s largest company in terms of revenue and is the world’s largest private employer. The total numbers of employees are more than 2.2 million out of which 1.4 million are in US. The main products of the company are hypermarkets, supermarkets, health and beauty, cash and carry, home improvements, movies and music, apparel and footwear, discount stores, etc. 59.8% of the total revenue of the company is from grocery business. Total revenue of the company, for the year 2014, was $485.651 billion and earned a net income of $16.363 billion. WMT is the ticker symbol of the company. The company is a component of Dow Jones Industrial Average and S&P 500. Slogan of the company is ‘Save Money. Live Better’.
Target Corporation is the second largest discount retailer company in United States, first being Wal-Mart. It was formerly known as Goodfellow Dry Goods. The company was founded in 1902 by George Dayton in Minneapolis, Minnesota. Headquarters of the company are situated at Target Plaza North, Target Plaza South, 1000 Nicollet Mall, Minneapolis, Minnesota, U.S. Brian C. Cornell is the Chairman and CEO and John Mulligan s the EVP and COO of the company. The company operates in more than 1,805 locations in United States. Primary products of the company are clothing and accessories, movies and music, books, beauty and health products, gardening supplies, shoes, sports equipments, toys, etc. The total revenue for the year 2014 stood at $72.618 billion with a net loss of $1.636 billion. The primary reason for the losses the company sustained was shut down of its Canadian operations. The total number of employees is more than 347,000. Ticker symbol of the company is TGT and is a component of S&G 500. Slogan of the company is ‘Expect More. Pay Less’.
How Acquisition Fits Wal-Mart Strategic Direction
The business of Target Corporation is same as that of Wal-Mart. Target Corporation is a 114 year old company and has more than 1,805 locations in different cities of US. Most of the commodities offered by Target are same as Wal-Mart, but when it comes to fashion oriented shoppers, Target is superior. Wal-Mart focuses on high volume and low price whereas Target stores offer high quality goods. By making this acquisition Wal-Mart can also attract fashion and high quality oriented customers to its stores. The company has a good experience in retailing and has a good knowledge of the pulse of US market. The workforce of more than 347,000 employees is strength of Target. High experienced managers and workforce can be of great use for Wal-Mart. The company sustained loss of $1.636 billion during the year 2014 due to shut down of it Canadian operations. The total assets of the company are more than $41.404 billion. Losses sustained by the company and shut down of its operations in Canada can be helpful in bargaining the price of acquisition. The acquisition will also increase the Wal-Mart’s revenue and total assets.
Synergies from Acquisition
Synergy means the extra value that can be achieved by one company from acquisition of the other. It has been observed that most of acquisitions do not produce synergies as they had expected at the time of acquisition or merger because the synergies are overestimated (Miles, L et. al. August 13, 2014). The acquirer company pays reasonable price at the time of acquisition showing that no extra value is made. Eliasson, S. (December, 2011) explain the concept of synergy and suggests that the it is all about creating value by the way of sharing the resources and acquiring benefits which have not been possible to achieve or could be achieved by incurring higher cost. Possible synergies that Wal-Mart will acquire as a result of the acquisition are: a) Revenue Synergies, b) Cost Synergies c) Operational Synergies.
Revenue Synergies: These are the synergies that help acquiring company (Wal-Mart) in increasing revenue and price as a result of acquisition. Following are the sources of revenue synergies:
- Using and sharing distribution channel of Target
- Elimination of competition between Wal-Mart and Target
- Accessing the new and ready market of Target
- Increasing revenue by selling complementary goods.
Cost Synergies: These are the synergies that help the acquiring company to decrease the cost by consolidating operations of business. Following are the sources of cost synergies:
- Lessening the number of workforce.
- Reduction in various common overheads
- Elimination of extra facilities
- High bargain power with the supplier as the volume of the quantity to be ordered will be high.
Operational Synergies: These are the synergies that are helpful in making the operations easier and flexible with reduction in cost.
Selection of Choices
Choice number one is acquisition of 35% of voting stock. I will eliminate it as it does not give controlling rights and power. I will select choice number two of acquiring 51% voting power and choice number three of acquiring 100% voting power of the company.
Key accounting Requirements and Strategy
At the time of making acquisition Wal-Mart will be treated as parent company whereas Target Corporation will be treated as subsidiary company. IAS 27.13 states that in case where acquirer company acquires more than 50% of the voting rights of the other company the control is presumed. Paragraph 9 of Statement 141 indicates that “for an acquisition of equity interests to be a business combination, the entity acquiring the equity interests must obtain control. Control is generally indicated by ownership by one company, directly or indirectly, of over 50 percent of the outstanding voting shares of another company.” According to IFRS 10 the parent company is required to prepare and present consolidated financial statements. It also defines the principles of determining that if the investor controls the investee. IAS 27.4 makes it mandatory to prepare consolidated financial statements of both the companies and present them as a single economic entity. So in both the cases the Wal-Mart will be treated as parent company and will be required to prepare consolidated financial statements.
Methods of Accounting
Fair Value Method: If the company making acquisition acquires small percentage of equity of Investee Company, fair value method is used. It is a situation where Acquirer Company cannot affect the operations of Investee Company.
Consolidation of Financial Statements: Where the acquirer company acquires more than 50% equity or voting rights of the investee company, this method is used. The acquirer company enjoys significant control over the investee company. A separate set of financial statements is prepared under this method.
Equity Method: Where the acquirer company has the capability to significantly influence the operations of the investee company, equity method is used. But the acquirer company does not have full control over the investee company. This method is used where the ownership in Investee Company is more than 20% and less than 50%.
Most Advantageous Choice
The most advantageous choice will be to acquire 51% of the voting rights of the Target Corporation, i.e., choice number two. The three reasons for making this choice are:
- Acquiring 51% of voting rights will enable Wal-Mart to have controlling rights over Target Corporation. Acquiring 100% voting rights will amount to high acquisition cost and the same control that can be gained by acquiring 51% of voting rights.
- Target Corporation has sustained loss of $1.636 billion in year 2014. Looking into the losses, it will be too early to make acquisition of 100% of voting stocks. Acquisition of 51% of voting rights will get the risk shared with the other stockholders. After looking into the performance of the company for a few years the voting rights can be increased.
- In future if a need of capital arises it could be raised by issuing shares for the subsidiary company.
Valuation of Assets on Fair Value
For public offering after two years the method of valuation of subsidiary’s assets in its balance sheet will be fair value of the assets. According to this method the assets are valued at their market price. Most of the assets of Target Corporation are in form of super markets and hypermarkets and it is easy to determine their fair value. Since Target Corporation sustained losses in the year of acquisition so it is presumed that it will sustain losses in the next two years. The losses of the company will make a negative impact on the value of stock. But the high value of the assets will attract the investors to buy the shares of the company. In this way the board of directors of Wal-Mart can make profit on selling the shares.