Management discussion and analysis in annual reports

¶ … FedEx 2009 Annual Report, the Management Discussion and Analysis discusses the impairment of the Kinko's trade name and the financial repercussions thereof. Recall that with significant fanfare FedEx announced in late 2003 that it was buying Kinko's, the chain of office services stores. The move had significant strategic implications. UPS had previously purchased Mailboxes Inc. And FedEx wanted to counter that move. In addition, it was felt that Kinko's would be able to drive more business to FedEx, which would become a source of synergy from which FedEx would derive value from the transaction.

Some observers at the time did not view the transaction favorably and it became apparent within a year or two that the corporate cultures of Kinko's and FedEx clashed. The synergies were not being realized and the integration of Kinko's into FedEx was going very slowly. The acquisition of Kinko's became a textbook example of an ill-conceived, reactionary acquisition that failed to offer genuine value to the purchasing company. The move by FedEx in fiscal 2009 to change the name of the stores from Kinko's to FedEx Office came as no surprise to those familiar with the industry.

The accounting treatment of that move illustrates the financial cost of such ill-fated acquisitions. In simplistic terms, the difference between the acquisition price that FedEx paid for Kinko's and the book value of Kinko's became goodwill. This goodwill, in theory, included that goodwill that arose from the strength of the Kinko's brand, the result of that brand having been built up for several years and having strong recognition in the market place.

In terms of earnings, FedEx's failure to generate significant synergies from the Kinko's deal does not result in a writedown. It simply results in anticipated earnings or savings failing to materialize. The writedown was the result of the extinguishing of the goodwill that FedEx acquired in the Kinko's purchase. The Kinko's brand was eliminated, and this essentially dictated the timing of the writedown. All of the goodwill in the marketplace that came with the Kinko's name no longer exists, therefore FedEx needed to write that amount down.

The result was that in 2009, FedEx took a charge of $891 million, or $2.23 per diluted share, on writing down the Kinko's goodwill. FedEx attributes the writedown primarily to the discontinuing of the Kinko's name, but also to a "decline in the fair value of the FedEx Office reporting unit in light of economic conditions." The writedown had a significant impact on the company's net income. Already faced with an environment marked by stagnating revenues, the writedown resulted in a net income of $98 million, down from $1.125 billion the year before.