I work as the company CEO of Wal-Mart the world’s largest retail store. The company wants to expand further and increase its asset and revenue base, a strategy which can be achieved through acquisition. After assessing the market and firms that operate in same market segment, Wal-Mart would like to acquire target through the acquisition of its voting stock. This can be done through acquisition of 35% or 51% or 100% of the Target voting stock.
Brief Company Background Information
Founded in 1962, Wal-Mart is a chain of retail stores based in Bentonville, Arkansas, U.S, with presence in various parts of the world. The company runs hypermarkets, discount department stores and grocery stores (Walmart.com, 2018). The company operates in more than 28 countries with over 11,620 stores. The company is listed as the single largest employer, and is world’s largest in terms of revenues. The company has segmented its market and offers a range of product lines including health and beauty, electronics, apparel and footwear and groceries.
The Target Corporation was founded in 1902 and is a discount retailer in the United States which is second in terms of total revenues after Wal-Mart. The company has over 1,800 locations it operates in the United States. The major products that the company deals in include beauty products, music and movies, sportswear, books, clothing, gardening supplies and electronic equipment among others (Intl.target.com, 2018). The company has witnessed growth over the years, recording revenues of about $72.618 billion in 2014, though it recorded net loss in the same year owing to closure of some of its stores in Canada. However, the company is one of the largest employers, with over 347, 000 employees.
How the Acquisition fits into Wal-Mart’s Strategic Direction
Target and Wal-Mart offer products for similar target markets. However, Target is superior when it comes to fashion oriented shoppers. In addition, it offers high quality goods, unlike Wal-Mart that focuses on low price and high volume. The different focus in market makes the acquisition of Target to fit well into Wal-Mart strategic direction. The acquisition will allow the company to attract high quality fashion oriented customers to its stores and increase the overall company revenues. In addition, the highly experienced staff, the vast retail experience of Target makes it ideal acquisition for Wal-Mart. The fact that Target made some losses in previous years, which saw the closure of some of its stores in Canada, provides a strong bargaining ground for Wal-Mart.
Possible Synergies that could Occur due to the Acquisition
Acquisitions have the potential of increasing the value of the acquiring company, creating value driver called synergy (Faulkner, Teerikangas & Joseph, 2014). They are often the major acquisition objective as the acquiring company targets to increase its value. Owing to acquisitions, synergies can result from several reasons. The three possible synergies that can result from Wal-Mart’s acquisition of Target are financial synergies, operational synergies and cost synergies. The financial synergy occurs due to reduced financial risks and possibilities of lower borrowing costs. The operational synergy occurs due to increased productivity as a result of acquisition of the target company workforce and facilities. They help to make operations easier and flexible owing to the reduced costs. On the other hand, the cost synergy can be achieved through the consolidation of the operations of business, which helps the acquiring company to decrease costs.
The three choices vary in terms of percentage of ownership of the company voting stock. In the first choice, the 35% of the voting stock does not give controlling rights and power. Therefore, the paper selects the 51 and 100% acquisition of Target’s voting stock.
The Key Accounting Requirements for the Two Choices
The acquisition of Target by Wal-Mart will lead to a change in status of the two companies, where at the time of acquisition Target will be regarded as the subsidiary, whereas Wal-Mart will act as the parent company. Acquisitions are often reported and analyzed with a use of unique accounting methods (Carrington, 2009). The International Accounting Standards (IAS) 27.13 asserts that an acquisition of more than 50% of voting rights of a company by another one warrants the acquiring company to take control. Accordingly, the IFRS 10 demands the parent company to prepare and present the consolidated financial statements. The IAS 27.4 demands that consolidated financial statements of both firms be prepared and presented as one entity. There in the two cases, Wal-Mart is the parent company and is required to prepare consolidated financial statements.
The strategy that would be employed in preparation of the financial statements for Wal-Mart after acquisitions would be the use of the purchase method. According to (Bruner, 2016) the Financial Accounting Standards Board (FASB) 141and 142 that became effective in 2001, altered the accounting for mergers and acquisitions. Under this accounting procedure, the goodwill is recognized as an asset. Bruner (p. 480) further asserts that the price paid must be allocated to the various intangible and tangible asset categories and anything left classified as goodwill.
The Most Advantageous Choice
The most advantageous form of acquisition would be the 51% acquisition of the voting stock. This will ensure Wal-Mart attain the same controlling rights at low acquisition costs unlike in 100% acquisition of the voting stock. The other rationale behind the choice of the strategy is to allow for the sharing of risks such as losses unlike in 100% acquisition. Moreover, in case of need for future capital, it can be raised easily through the issue of shares of the subsidiary company.
The Cost of Fair Value
In the case of public offering that occurs after two years, the assets in a balance sheet of a subsidiary can be valued through the fair value of the assets (Bruner, 2016). According to the author, the fair value method values the company assets at fair market price. In the case of Target Corporation, most of its assets are in the form of hypermarkets and supermarkets, which make it easier to evaluate their fair values. Since the period of the company acquisition was the year in which Target made some losses, this will be assumed to be the case for the next two years. This will have a negative impact on the stock value of the company. However, since the assets have got a higher value, investors will be convinced to buy the company shares. Thus, Wal-Mart board of directors is going to make profits through the sale of the company shares.