Problem:
The problem is whether the company overpaid for the acquisitions and what does the
existence of goodwill on the finical statements tell investors about the economic position
of the company.
Decision:
The company should recognize the remaining balance of goodwill impairment in
accordance with the new accounting rules which will better reflect the company position in
the existing marketplace. JDS Uniphase overpaid for the numerous acquisitions, but the
fact that the mergers were financed with company stock, verses cash, will not have a
detrimental impact on the company in the long run.
Analysis:
Based on JDS Uniphase acquisition history, the total purchase price for the 14 companies
acquired between June 1999 to February 2001 was $66,482.2 million of which $60,640.7
million consisted of goodwill. That a markup of roughly 91%. The goodwill was recorded
because “hard assets” of the companies acquired could not be identified. The companies,
as well as investors, bought businesses that showed potential promise, but didnt have
anything of substance; thus when they were purchases, the only thing to book was
goodwill. At the time, the company management was optimistic that the future income
flow from the mergers will offset the premiums.
JDS Uniphase used over-inflated company stock to make the acquisitions. In this sense, no
monetary value was deducted from the cash flow statement. Had they used cash instead of
stock to make these acquisitions, the company would be more accountable to its
shareholders. Sincegoodwill charge doesnt represent a cash outlay, many investors ignore
it when valuing a company performance.
Nevertheless, goodwill is reflected on the Balance Sheet under assets and amortized on the
