Keith Seibert 6/3/2012
Prof. Neil Riley ACC 401
PEPSICO AND QUAKER OATS COMPANY
By the end of 1999, following a multi-year restricting effort, PepsiCo had once again become one of the most successful consumer products companies in the world. In less than four years, it had achieved an 80% increase in net income, on 30% lower sales, and with 75% fewer employees! PepsiCo’s major subsidiaries were the Pepsi-Cola Company, which was the world’s largest manufacturer and distributor of snack chips, and Tropicana Products, the largest marketer of branded juices. Throughout 1999, PepsiCo was closely tracking several potential strategic acquisitions. ...view middle of the document...
However, PepsiCo’s managers, led by CEO Roger Enrico and CFO Indra Nooyi, were committed to upholding the value of PepsiCo shares, and as a result, they were determined not to pay too much for Quaker. There were no material transactions between pre-merger PepsiCo and Quaker.
The merger between PepsiCo and Quaker Oats was structured as a stock for stock exchange. PepsiCo shareholders own 82% of the combined firms and Quaker Oats shareholders own the remaining 18%, therefore, PepsiCo owns the majority of the stock. This also means that Quaker Oats is now a subsidiary of PepsiCo. The approximate amount for the recorded value of the acquisition of PepsiCo’s books was $613 million and the market value of the acquisition was $13 billion. Under the Quaker merger agreement dated December 2, 2000, Quaker shareholders received 2.3 shares of PepsiCo common stock in exchange for 1 share of Quaker common stock, including a cash payment for fractional shares. PepsiCo issued approximately 306 million shares of common stock in exchange for all the outstanding common stock of Quaker Oats. Quaker Oats’ trademark, goodwill, and in-process research and development will not be recorded in the acquisition.
The pooling-of-interests method was the accounting method that was used to account for the PepsiCo and Quaker Oats merger. The reporting implications for the pooling-of-interests method are as follows:
1) Revenues and expenses were combined retroactively for the two companies.
2) Assets and liabilities of subsidiary (Quaker Oats) continue to be reported at book value
3) Combination costs are expensed as incurred.
4) Both companies were combined at book value.
5) Both companies continue to exist.
6) No goodwill is recorded.
7) Shares issued to create business combination is recorded based on the book value of subsidiary’s contributed capital and retained earnings at the beginning of year. The pooling of interests method impedes several necessary and important accounting characteristics such as representational faithfulness, neutrality, and comparability. First, since PepsiCo recorded all the assets and liabilities acquired from Quaker Oats based on its book value, financial statement users cannot tell how much was invested in the transaction nor track the subsequent performance of the investment. So both the predictive value and feedback value of the financial information about the acquisition are impaired. Second, the internally developed intangibles may go entirely unrecorded under the pooling of interests method. At the same time, the potential financial benefits from the synergy of the business combination won’t be recognized either. Since these items can be recognized under the purchase method, representational faithfulness is impaired here. The neutrality of accounting information is also impaired because the pooling of interests may boost earnings of the combined entity and accordingly, make the combined entity appear more...