Question

Advanced Accounting, ACCT 401
Assignment #3

You have been placed on a confidential team. The company you work for, Stripe, Inc., is planning an acquisition and has identified a specific company as the target. The acquisition is expected to expand Stripe’s existing markets in the U.S. and internationally. The target company (we’ll call it RedCo) has a complimentary product line that will also expand Stripe’s markets.

The CFO (Pat) hands you RedCo’s most recent statement of financial position. Pat supplies the following information.

• Stripe expects to pay $3.4 billion in cash to acquire all of RedCo’s outstanding common stock, a premium of nearly 100% over RedCo’s current market value.

• Pat asks you to prepare a pro forma statement of financial position for RedCo immediately following acquisition. You should give your best estimates, and specifically identify the amount of goodwill that will result.

• Pat notes that the RedCo has about $1.8 billion of intangible assets (in addition to goodwill from a previous acquisition). The acquisition team has evaluated the intangibles and believe the value is actually about $2.6 billion. RedCo has almost $1 billion of long-term debt, all of which is at floating interest rates, currently at the market rate of 3.5%.

• Pat wishes there was more information to guide you, but there isn’t. Since this potential acquisition has not been announced, the company must be careful to not reveal its intentions, so seeking more information is not possible.

• A glance at the income statement (which is not provided here) shows gross profit at about 35% of sales.

Pat concludes: “Good luck, I know you’ll do a great job and really help us make a decision.” Additional background on the company reveals the following.

RedCo a packaged food company that develops, manufactures, markets, sells, and distributes fresh sweet baked goods in the United States. It offers a range of snack cakes, donuts, sweet rolls, breakfast pastries, snack pies, and related products. The company operates in two segments, Sweet Baked Goods and In-Store Bakery. The Sweet Baked Goods segment offers fresh and frozen sweet baked goods and bread products under a variety of brands, as well as store branded products. The In-Store Bakery segment primarily provides branded eclairs, madeleines, brownies, and iced cookies in the bakery section of grocery and club stores. The company was founded in 1919 and is based in Lincoln, Nebraska.
REQUIRED:

Use Excel (or another spreadsheet, must be a spreadsheet) that shows the starting statement of financial position, adjustments you believe should be made, and the adjusted statement of financial position immediately following the proposed acquisition. Make the final document something you would be proud to give to a CFO.

One additional requirement. The purchase price could change, so you must create the spreadsheet so that the purchase price can be easily changed, adjusting statement of financial position. The most recent statement of financial position for

RedCo appears on the next page.

REDCO

Statement of Financial Position
As of a recent date
dollars in millions
Cash $ 285
Accounts receivable, net 105
Inventory (FIFO)
Ingredients 21
Finished goods 27
Property, Plant & Equipment
Land 2
Building 52
Right of use assets 24
Machinery & Equipment 209
Less, accumulated depreciation (50)
Goodwill 536
Intangible assets, net 1,853
Other noncurrent assets 13
Total Assets $3,077
Current portion of long-term debt $ 12
Accounts payable 69
Accrued liabilities 8
Other current liabilities 2
Long-term debt 975
Deferred income tax liabilities 256
Common stock 1
Additional paid-in capital 649
Retained earnings 1,105
Total Liabilities and Equity $3,077

Answer 1

The financial position of the company ia as follows:

Financial position statement
Paticulars	Net Book Value	Adjustents for fair value	Net Assets at fair value
Cash	285		285
Accounts receivable, net	105		105
Inventory FIFO
Ingredients	21		21
Finished goods	27		27
Property, Plant and equipment
Land	2		2
Building	52		52
Right of use asset	24		24
Machinery & equipment	209		209
Less: accumulated depreciation	-50		-50
Intangible assets	1853	747	2600
Other non-current assets	13		13
Assets	2541		3288
Less:
Current position of long term Debt	12		12
Accounts payable	69		69
Accrued liabilities	8		8
Other current liabilities	2		2
Long term debt	975		975
Deferred income tax liabilities	256		256
Liabilities	1322		1322
Net Asset Value	1219		1966
Purchase price			3400
Goodwill	=Purchase price-Net asset value		1434
	=3400-1966
	1434