Case 14-1 Pooling-Purchase

7/31/2019 Case 14-1 Pooling-Purchase

1/17

Teguh Laksana

Purwaningrum

Hafidh


2/17

June 19, 2000 Pfizer (PFE) merged with

Warner-Lambert (WLA),

issuing approximately 2.440 million PFE

shares in exchange for all of the equity of WLA

The merger used a pooling of interests

method.


3/17

Balance Sheets PoolingPFE WLA Consolidated

Cash & cash equivalent 739 1.943 2.682

Inventories 1.654 979 2.633

Other current Assets 8.798 2.768 11.566

Property (net) 5.343 3.342 8.685

Invesment & other assets 3.277 793 4.070Intangible assets 763 1.616 2.379

Totals 20.574 11.441 32.015

Short term debt 5.001 297 5.298

Other current Liabilities 4.184 3.391 7.575

Long term debt 525 1.250 1.775Deffered Income Tax 301 463 764

Other long term liabilities 1.676 942 2.618

Stockholder Equity 8.887 5.098 13.985

Totals 20.574 11.441 32.015

Shares outstanding (millions) 4.260 6.700

Historical


4/17

Income Statement Pooling

PFE WLA Consolidated

Sales 16.204 12.929 29.133

COGS (2.528) (3.042) (5.570)

SG & A (6.351) (5.959) (12.310)

R&D (2.776) (1.259) (4.035)

Other Expenses, net (101) (228) (329)Pretax Income 4.448 2.441 6.889

Income tax expense (1.244) (798) (2.042)

Other deduction,net (25) - (25)

Net Income 3.179 1.643 4.822

Historical

Using the pooling method, WLs income statement willbe added to Pfizers.


5/17

Cash Flow Statement PoolingPFE WLA Consolidated

Operating Activities 3.076 2.437 5.513

Investing Activities (2.768) (1.234) (4.002)

Financing activities (1.127) (500) (1.627)Other (20) - (20)

Exchange rate effects 26 (15) 11

Increase /(decrease) in cash (813) 688 (125)

Historical

Using the pooling method, Pfizers cash-flow statement will

receive additional amount from WLs.


6/17

Ratios Pooling

PFE WLA Consolidated

Current Ratio 1,22 1,54 1,31

Total Debt to Equity 0,62 0,30 0,51

Book value per share 2,09 N/A 2,09

Gross Profit Margin 84,40% 76,47% 80,88%

Operating Profit Margin 27,45% 18,88% 23,65%

Return on Equity 35,77% 32,23% 34,48%

CFO to Debt 0,56 1,58 0,78

Historical


7/17

Cash PFE shares Price $ 32,44 at the date of merger

Fair values of WLA assets (million $):

Inventories 1.250

Fixed Assets 4.000

In process R&D 1.000

Thus, Total Cash equivalent for issuance of 2,440

million PFE shares is: ($32,44 x 2.440 million) = $ 79.154


8/17

WLA Book Value Fair Value AdjustmentCash & cash equivalent 1.943 1.943 -

Inventories 979 1.250 271

Other current Assets 2.768 2.768 -

Property (net) 3.342 4.000 658

Invesment & other assets 793 793 -

Intangible assets 1.616 1.616 -In Process R&D 1.000 1.000

Goodwill 72.115 72.115

Totals 11.441 85.485 74.044

Short term debt 297 297 -

Other current Liabilities 3.391 3.391 -Long term debt 1.250 1.222 (28)

Deffered Income Tax 463 463 -

Other long term liabilities 942 958 16

Stockholder Equity 5.098 79.154 74.056

Totals 11.441 85.485 74.044


9/17

Total Assets at FMV 13.370

Total Liabilities at FMV (6.331)

Net Assets 7.039Purchase Price by PFE 79.154$

Goodwill 72.115$

Comparing the WLs net assets at FMV andpurchase price give us the Goodwill.


10/17

PFE WLA Adjustments Consolidated

Cash & cash equivalent 739 1.943 - 2.682

Inventories 1.654 979 271 2.904

Other current Assets 8.798 2.768 - 11.566

Property (net) 5.343 3.342 658 9.343

Invesment & other assets 3.277 793 - 4.070Intangible assets 763 1.616 - 2.379

In Process R&D - - 1.000 1.000

R&D write-off - - (1.000) (1.000)

Goodwill - - 72.115 72.115

Totals 20.574 11.441 105.059

Short term debt 5.001 297 - 5.298

Other current Liabilities 4.184 3.391 - 7.575

Long term debt 525 1.250 (28) 1.747

Deffered Income Tax 301 463 - 764

Other long term liabilities 1.676 942 16 2.634

Stockholder Equity 8.887 5.098 73.056 87.041

Totals 20.574 11.441 105.059

Historical Purchase Method


11/17

Other assumptions, if:

Property useful life 10 years

Long-term debt & liabilities period 5 years

Tax rate 35%

Description Amount Description Amount Assumption

Inventories 271 COGS (271)

Property (net) 658 Depreciation (66) 10 years

In process R&D - R&D expense (1.000)

Goodwill 72.115 -73.044 (1.337)

Long term debt (28) Amortization (6) 5 years

Other Long term liabilities 16 Amortization 3 5 years

73.032 (1.339)

Tax deduction 469 35%

(870)

Balance sheet adjustment Income Statement Effect


12/17

Income Statement


Sales 16.204 12.929 - 29.133

COGS (2.528) (3.042) (271) (5.841)

SG & A (6.351) (5.959) - (12.310)

R&D (2.776) (1.259) - (4.035)

In process R&D - - (1.000) (1.000)

Depreciation expense - - (66) (66)

Interest expense - - (2) (2)

Other Expenses, net (101) (228) - (329)

Pretax Income 4.448 2.441 (1.339) 5.550

Income tax expense (1.244) (798) 469 (1.573)

Other deduction,net (25) - - (25)

Net Income 3.179 1.643 (870) 3.952

Purchase MethodHistorical


13/17

Cash Flow Statement


Operating Activities 3.076 2.437 - 5.513

Investing Activities (2.768) (1.234) 1.943 (2.059)

Financing activities (1.127) (500) - (1.627)

Other (20) - - (20)

Exchange rate effects 26 (15) - 11

Increase /(decrease) in cash (813) 688 1.943 1.818

Purchase MethodHistorical

The only adjustment in cash flow statement under purchase

method is the inclusion of Cash & equivalents from WLs

balance sheet which is reported as an inflow in cash from

investing activities.


14/17

Ratios Pooling Purchase

PFE WLA Consolidated Consolidated

Current Ratio 1,22 1,54 1,31 1,33Total Debt to Equity 0,62 0,30 0,51 0,08

Book value per share 2,09 N/A 2,09 12,99

Gross Profit Margin 84,40% 76,47% 81% 79,95%

Operating Profit Margin 27,45% 18,88% 24% 19,05%Return on Equity 35,77% 32,23% 34% 4,54%

CFO to Debt 0,56 1,58 0,78 0,78

Historical


15/17

Using purchase method increase Pfizers total assets

substantially. In this case, the use of purchase method createsa huge amount of goodwill. Total asset is significantly highercompare to under pooling method.

On the other hand, the use of purchase method results inlower Net income comparing to pooling method.

The combination of huge total assets and lower net incomeunder purchase method results in very low Return on assetscompare to the one under pooling method.

Pooling Purchase

Net Income 4,822 3,952Total Assets 32,015 105,059

Return on Assets 15.06% 3.76%


16/17

Using purchase method will also increase Pfizers equity by

significant amount. As Pfizer acquire WL by issuing new PFEshares, Pfizers equity will increase at the amount of cashequivalent of the new shares issued.

Given the lower net income under purchase method, thejump on equity will significantly reduce Pfizers Return on

Equity.

Pooling Purchase

Net Income 4,822 3,952

Total equity 13,985 87,041

Return on Equity 34.48% 4.54%


17/17

From balance sheet point of view, the difference

of IAS purchase method and US purchase method

in only in In-process R&D. Under IAS purchase

method In-process R&D is not written-off.

Case 14-1 Pooling-Purchase

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