The Politics and Economies of Accounting for Goodwill at Cisco Systems Harvard Case Solution & Analysis

The Politics and Economies of Accounting for Goodwill at Cisco Systems Case Solution

This factor resolves the concerns of POWELL as this would be helpful to the IT COMPANIES such as CISCO who would be able to base its Goodwill according to its reporting units or intangible assets. The areas will be identified and if the impairment has not occurred then this will not create an impact on the Income statement of the organization.

Price Offering By Cisco Company

Price offered more than book value

Cisco Company has contemplated to acquire another company at price more than book value and pre- market value due to taking the full hold and control of the company. The company has been offering price more than the book value of Arrowpoint Company to ward off the competition and to close the deal.

The company might pay acquisition premium because of the future prediction that acquisition would most likely create synergy, and the created synergy would be greater as compared to the total acquiring cost (Eccles, 2017)

The company might also offer higher price by keeping in mind following listed factors;

  • Competition within the industry
  • Presence of other bidders
  • Motivation of the seller and buyer

Price offered more than pre-market value

The stock of the company being targeted by Cisco Company rose when the company announced that it would acquire ArrowPoint Company sooner. The target stock price rose due to the premium that the Cisco Company was ready to pay for the acquisition.

The purpose for the acquisition premium is that the shareholders of the target company whose approval regarding the takeover is essential would unlikely make approval of the acquisition until and unless the price of the stock is beyond the prevailing market price.

If the bid of the takeover tends to be equated to the lower price of the stock as compared to the current price of the target company, the target company’s current owners would get less incentive in selling their shares to the acquiring company (Why Companies Overpay For Acquisitions, 2016)

Allocation of Purchase Price

Deal Value   5700 Million
Arrow point Communications Balance Sheet
as at April 30, 2000 Allocation
Total Current Assets 199 199
Investments 0 0
PP&E 6 6
Goodwill 0 5450
Other Assets 1 1
Total Assets 206 5656
Total Current Liabilities 9 9
Other Liabilities 35 35

The assumptions for this allocation is that the value being provided by the 337 employee database, the use of ISP systems, and the CEO of the Arrow point are items which are intangible in nature, and thus all the valuation provided should be held at intangibles or Non Fixed Assets section in the balance sheet after accounting for the Current Assets, liabilities, and any other long term payables of the organization.

Journal Entries

The journal entries to record the acquisition of the Arrowpoint in the book of the Cisco Company are summarized below;

General Entries to record the acquisition of Arrow.
Cisco Option 2.1218
Value 74.263 Million Shares
Market Value at 4 May,2000 63.625
Total Value paid 4724.983
Cash 975.0166
Total Deal 5700
Assumption: We Assume that the total deal for the organization is at 5.7 Billion according to sources: We allocate $ 4724.983 million for shares, and cash 975.02 Million
General Entry for CISCO: Debit Credit
Investments at Arrow 4941.16
Goodwill 758.84
Share Capital ($0.001 Par Value)              0.1
Share Premium      4,724.9
Cash 975.0166

Cisco System Balance Sheet

Balance Sheet
as at 6th May, 2000
Cash and Cash Equivalents 4840
Accounts Receivables, net 1930
Inventory 882
Other Current Assets 1627
Total Current Assets 9279
Investments, net 16530.16
PP&E, Net 1159
Good will and other Intangibles, net 3972.84
Other Assets 1050
Total Assets 31991
Accounts Payable, net 600
Other Current Liabilities 4508
Total Current Liabilities 5108
Other Liabilities 995
Common Stock 11838.1
Share Premium 4724.9
Retained Earnings 7624
Other Comprehensive Income 1701
Total Stockholder's Equity 25888
Total Liabilities and Stock. Equity 31991

Effect of Acquisition on the Income Statement of Cisco Company  

Under the purchase method of acquiring another company, the difference between the purchase price and fair value of the acquired company will result in negative goodwill.

Under acquisition method, the negative goodwill is most likely considered as a gain with the acquisition on the income statement. The further effect of the acquisition on the income statement of the Cisco Company can be viewed through;

After acquiring ArrowPoint Company, the items listed on the income statement of Cisco Company will be highly affected;

  • The net sales of the Cisco Company after acquisition will be increased to $30 million.
  • The cost of sales of Cisco Company will be increased to $12 million over the entire period of the fiscal year.
  • The combined selling, general and administrative expenses of Cisco company will be increased to $27 million.
  • The research and development cost listed on the income statement will be increased to $6 million.
  • The other expenses will be increased to $9 million for the period of the first fiscal year.

To sum up, the overall effect of the acquisition on the income statement can be summarized as the overall expenses will be increased to $54 million. As it can be seen that the company went into the unprofitable zone in the initial quarter, the net loss of the company will be $24 million............


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