Google's acquisition of Motorola Mobility: accounting and reporting challenges

Multinational Acquisition Due Week 8 worth 240 points Use Internet research a publically traded U.S. multinational corporation recently acquired multinational corporation. Write a (6-8) page paper: Briefly describe acquisition selected.

Corporate acquisition

The case of Google's acquisition of Motorola Mobility

Google Inc. was established in 1998 in California, United States, and has made its presence felt within the IT community through the development of the most popular research engine. Since then however, the company has come to develop several other services, as well as hardware products.

The Google company has implemented a business model based on innovation and centered on the creativity and the important role of people. Still, aside from this, the success of Google is also due to its aggressive growth strategy, through the acquisition of more than one hundred companies in an estimated decade.

Through these acquisitions, Google has gained new talent, access and expertise in numerous other fields, such as blogging, photograph management, maps, operating systems (Android), video sharing (YouTube), chatting, emailing and so on. In 2011, Google acquired American corporation Motorola Mobility in one of the greatest business transactions, with a value of $12,500 million.

Throughout this project then, the focus falls on assessing this particular acquisition at several levels, namely accounting challenges, goodwill, special issues or reporting.

2. The acquisition

Google's acquisition of Motorola Mobility was finalized on the 15th of august 2011, and the boards of the two companies have agreed upon a final price of $40 per share. Overall, Google paid $12.5 billion for the transaction and the primary determinant of the business deal was represented by Motorola's commitment to the Android operating system, which determined Google to perceive the partnership as a "natural fit" (Website of Google Inc. 2012).

Additionally, the acquisition of Motorola was stimulated by the complementarity between the two firms. More specifically, Google possessed a competitive advantage in the creation of software, whereas Motorola possessed a competitive advantage in the creation of devices. By combining these two strengths, the new organization would become more competitive within the IT sector.

Overall, the partnership between the two firms is seen as suitable and successful as it would lead to future innovation and development; in such a setting, the IT community would advance and the customers would be presented with better options for devices, especially smart telephones. Additionally, the partnership creates benefits by safeguarding the well-being and future evolution of the Android operating system. In the words of the Google executives, the benefits of the company's acquisition of Motorola Mobility are:

"Google and Motorola Mobility together will accelerate innovation and choice in mobile computing. Consumers will get better phones at lower prices.

Motorola Mobility's patent portfolio will help protect the Android ecosystem. Android, which is open-source software, is vital to competition in the mobile device space, ensuring hardware manufacturers, mobile phone carriers, applications developers and consumers all have choice" (Website of Google Inc., 2012).

3. Accounting requirements and financial statement challenges

Google's acquisition of Motorola Mobility is a promising, but also challenging, business endeavor. The newly formed entity would have to respond to a series of challenges in fields such as personnel integration, functional and operational integration or financial integration.

At the level of the financial integration, a first challenge was represented by the necessity for the two organizations to prepare their financial statements in a similar manner. In other words, they had to use the same formats for the financial statements (such as balance sheets, cash flow statements, income statements and others), the same abbreviations and the same amounts of money (e.g. sums in thousands, millions and so on). This requirement was necessary to be fulfilled in order to ensure the integration of the two companies' revenues, debts, assets and liabilities.

In order to ensure this integration and support the future financial reporting stability of the business combination, both Google and Motorola had to comply with the regulations of the 141st statement of the Financial Accounting Standard Board (QFinance). Furthermore, the two entities had to implement the purchase method, through which the assets and liabilities are assessed at their market value at the point of the acquisition. The result of this process is that the liabilities of the combined firm will equal the sum of the liabilities of the two previous firms, yet the drawback is that "it may overrate depreciation charges" (Finance Maps of World).

4. Goodwill and intangible assets

Google Inc.'s decision to purchase Motorola Mobility has been based on a combination of tangible and intangible benefits, observable at both corporate as well as community level. At the level of the corporation for instance, the benefits revolved around hopes for further development and evolution, which would ultimately materialize in improved competitive position and added profitability rates.

Still, aside from the tangible company effects, several intangible gains would be felt as a result of the acquisition. According to the company's 2011 annual report, the goodwill assets had increased from 2010 to 2011 from $6,256 million to $7,346 million. Aside from this however, other intangible benefits are created and some of examples in this sense include the following:

The IT industry would be driven by new innovation and competition, which in turn would materialize in customer gains such as improved product quality or decreased retail prices on the IT devices.

The increased financial success of the company would eventually materialize in higher taxes paid out to the United States government. The federal institution would as such access higher budgets and would be better able to direct these funds in the advantage of the society.

Through the combination of the forces of the two companies, additional benefits would be created for the employees and prospective employees in the IT industry. These would be presented with more employment opportunities, as well as better opportunities for professional development.

6. Acquisition reporting differences under IFRS instead of GAAP

At a theoretical level, an important difference would be provided by the ability to select the accounting method used in the accounting of the acquisition. More specifically, the acquisition accounting could have traditionally been completed by either of the purchase method or the pooling of interests method. Still, after 2001, the United States enforced the obligation of all merging firms to use the purchase method; also, the International Accounting Standards Board (IASB) has also made this method complementary across the countries implementing the IASB accounting system (QFinance). In other words, a potential difference would have resulted in the accounting method, but, at the practical level, the U.S. legislation now requires the usage of the same method as the International Accounting Standards Board.

At a more practical level, some notable differences refer to the following:

The value of liabilities in the case of acquisitions is established at market value under both GAAP and IFRS; the initial recognition of the assets under GAAP is also done at market value, whereas in the case of IFRS, the initial recognition of the assets is not completed

At the point of the acquisition, as the point of entity combination under the same control, the GAAP sees that "the receiving entity records the net assets at their carrying amounts in the accounts of the transferor," whereas in the case of the IFRS, the regulations are less stricter and allow the companies to either implement the GAAP approach, a similar one, or "the acquisition method if there is substance to the transaction" (Ernst and Young, 2011).

7. Conclusions

In the world of rapidly evolving technologies, IT companies base their success on innovation and the creation of user friendly, hi-tech devices. Still, due to the intense competition in the field, innovation is no longer sufficient to ensure success. In such a setting then, IT companies develop and implement various business strategies, such as strategic partnerships, customer centric operations and so on.

Google Inc. has based its growth strategy on both innovation, as well as sustained acquisition of competitive or complementary firms. These decisions have made the company stronger and better able to compete in various fields and sectors. In this growth pattern, Google has also signed a $12.5 billion deal for the purchase of Motorola Mobility, through which, the company hopes to generate important corporate, society and industry gains.

References:

2011, U.S. GAAP vs. IFRS, Ernst and Young, http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/U.S.%20GAAP%20v%20IFRS%20Dec%202011.pdflast accessed on August 31, 2012

2012, Facts about Google's acquisition of Motorola, Google Website, http://www.google.com/press/motorola / last accessed on August 30, 2012

Acquisition accounting, QFinance, http://www.qfinance.com/mergers-and-acquisitions-checklists/acquisition-accounting last accessed on August 31, 2012

Google Inc. 2011 annual report, http://www.sec.gov/Archives/edgar/data/1288776/000119312512025336/d260164d10k.htm last accessed on August 30, 2012

Merger and acquisition accounting, Finance Maps of World, http://finance.mapsofworld.com/merger-acquisition/accounting.html last accessed on August 31, 2012