Wal-Mart Acquisition of J C Penney
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.
In the given situation I have assumed that I am CEO of Wal-Mart and the other company for which I am responsible for gaining control is J C Penney. A brief back ground of Wal-Mart and J C Penney is provided hereunder.
Wal-Mart Stores, Inc.
Wal-Mart is a US based multinational retail company operating chain of discount departmental stores and warehouse stores. The company was founded on July 2, 1962 by Sam Walton in Rogers, Arkansas, US. The company is headquartered at Bentonville, Arkansas, US. The company has more than 11,500 stores in 28 countries. It is the world’s largest company by revenue. Walton family owns more than 52% stocks of the company. The company has more than 2.2 million employees worldwide and 1.4 million in US. Gregory B. Penner is the chairman and Doug McMillon is the president and CEO of the company. The main products of the company are hypermarkets, supermarkets, cash and carry, apparel and footwear, discount stores, eCommerce, etc. The revenue for the company stood at $485.651 billion for the year 2014 with a net income of $16.363 billion. Total assets of the company are $203.706 billion. Ticker symbol of the company is WMT. Website of the company is www.walmart.com. The slogan of the company is ‘Save Money. Live Better’.
J C Penney Company, Inc.
J C Penney is a US based retail company operating mid-range departmental stores. The company was founded by James Cash Penney and William Henry McManus on April 14, 1902 at Kemmerer, Wyoming, US. The company operates around 1,050 departmental stores in 49 US cities. The company is headquartered at 6501 Legacy Drive, Plano, Texas, United States. Marvin Ellison is the CEO and Mike E. Ullman III is the chairman of the company. The company employs more than 114,000 employees. The primary products that the company sells are clothing, footwear, house wares, cosmetics, jewelry, furniture, etc. Total revenue of the company was $12.527 billion with a net loss of $342 million for the year 2014. The total assets of the company are $10.404 billion. Ticker symbol of the company is JCP and the official website is www.jcpenney.com
How Acquisition Fits Wal-Mart Strategic Direction
J C Penney is 113 year old company having more than 1,050 stores in different cities of US and the business of the company is confined in US. The company specializes in mid-size departmental stores and its managers are much familiar with the pulse of US customers. The business of JC Penney is similar to that of Wal-Mart and J C Penny attracts customers with discounted prices. The customers who are willing to spend more if the discount is offered do visit J C Penney stores. The work force of 114,000 employees of J C Penney is a big strength for the company. The company is incurring losses from past 3 years and also faced a decline in sale in year 2013. Considering this downfall in sale trend and losses sustained the acquisition price can be bargained with the management of J C Penney. The revenue of the company is $12.527 billion which will further add to the revenues of Wal-Mart.
Three possible Synergies from Acquisition
“The concept of synergies is all about creating added value by sharing resources and acquire benefits that otherwise would not have been possible to achieve, or possible to achieve but at a higher cost” Eliasson, S. (December, 2011). Synergies refer to the extra value that one company can make from the acquisition. If the acquirer company is required to pay a reasonable price for the acquisition it means that no extra value is made. Miles, L et. al. (August 13, 2014) suggested that most of the acquisitions are not able to produce synergies as they expect at the time of announcement of merger because of overestimation of synergies.
Cost Synergies: These refer the ability of the acquiring company to decrease cost by consolidating operations. The various sources of cost synergies are:
- Reduction in headcount
- Eradicate extra facilities
- Reduction in overheads
- Increase in bargaining power with supplier.
Revenue Synergies: These refer to the capacity to sale more or increase prices as a result of acquisition. Various sources of revenue synergies are:
- Sharing of distribution channels
- Access to a new ready market
- Reduced competition
- Selling of complimentary products.
Operational Synergies: These refer to the flexibility and ease in operations with reduction in cost.
Selection of Choices
In the given scenario I will select choice 2: Your company acquires 51% of the voting stock of the target company and Choice 3: Your company acquires 100% of the voting stock of the target company.
Key accounting Requirements and Strategy
For both, choice 2 and choice 3, the acquiring company, i.e. Wal-Mart, will be treated as parent company and the acquired company, i.e. J C Penny, will be treated as its subsidiary. IAS 27.4 requires preparation of consolidated financial statements as a group presented as those of a single economic entity. As per IAS 27.13 the control is presumed when parent company acquires more than half of the voting rights of the entity. The strategy for preparation of accounts will be that consolidated financial statements will be prepared by passing consolidating and eliminating entries. IFRS 10 requires the parent company to present consolidated financial statements. It also defines the manner of applying the principle of control to find out that if an investor controls an investee and therefore must consolidate the investee.
Methods of Accounting for Investment in Equity
The various methods of accounting for an investment in equity shares of another company are:
Fair Value Method: This method is generally used when the investing company acquires a small percentage of equity of the investee, e.g. 20%, and the investing company cannot affect the operations of the investee’s operations extensively.
Consolidation of Financial Statements: It is used when the ownership of the investor company exceeds above 50% of voting stocks of the organization. In this method one set of financial statements is prepared.
Equity Method: This method is used when the investor company has the capability to influence the operations of Investee Company considerably. It is generally used when the ownership is between 20% to 50%.
Most Advantageous Choice
In my opinion the most advantageous choice will be choice 2, i.e. acquiring 51% of the voting stocks of J C Penny. The reasons for my choice are given below:
- Acquisition of 100% voting stock will bring full control over the subsidiary but on the other hand it will require huge funds. The same control can be done by acquiring 51% voting stocks. Further, looking into the need, the share of voting stocks can be increased.
- Acquiring 51% of voting rights will expose to less risk as compared to 100%. This choice will also work as division of risk for the company with other stockholders. In case if the losses incurred by J C Penney will increase, loss for Wal-Mart will also be less.
- In future if there is further need of capital it can be acquired by issuing shares for the subsidiary company.
Method of Valuation of Assets
The method for valuation of assets that I will use for the purpose of public offering is market value method. In this method the assets of the company are valued at the market price. This method will be useful as J C Penney is having maximum of its assets in the form of super markets and establishments and their market value can be determined easily. The other reason behind using market value method is that after two years the value of the properties owned by JC Penney will significantly increase and it will be a good attraction for the general public to invest in the shares.
IAS 27 – Consolidated and Separate Financial Statements (2008). Retrieved from
IFRS 10 – Consolidated Financial Statements. Retrieved from
Miles, L et. al. (August 13, 2014) Why some merging companies become synergy overachievers.
Retrieved from: http://www.bain.com/publications/articles/why-some-merging-companies-become-synergy-overachievers.aspx