Amazon’s Acquisition of Whole Foods: Strategic Fit, Accounting, and Growth
The parent company chosen is Amazon while the subsidiary is Whole Foods Market. Both companies are under NASDAQ. Amazon is an e-commerce company founded in 1994 and headquartered in Seattle, Washington. The multinational technology company has its central focus on e-commerce, online advertising, cloud computing, artificial intelligence, and digital streaming services (Amazon, 2023). The company has several subsidiaries, among them being Whole Foods Market. This Amazon subsidiary is an American multinational supermarket chain with its headquarters in Austin, Texas. The company sells products that do not have hydrogenated fats, flavors, or artificial colors (Whole Foods Market, 2022). Reports indicate that Amazon acquired Fast Foods about five years ago for $13.7 billion. Several changes have been made to Fast Foods since its acquisition by Amazon but a common observation is that the subsidiary only controls slightly over 1% of the grocery market as reported by research firm Numerator (Tarasov, 2022). This brings to light the aim of the analysis of the best choice in the aforementioned business acquisition, which is to determine an acquisition choice that does not just represent control and significant influence over the subsidiary, but also provides substantial company growth in the next three years.
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How the acquisition fits into the company’s strategic and operational directions
The acquisition fitted both the strategic and operational directions of Amazon. Operational directions like cost and quality of services provided were greatly improved by acquiring Fast Foods. The prices of goods and services rendered to customers reduced. As more clients sought the services of Fast Foods, the cost of production went down, hence making business operations more efficient and smooth. Strategic directions of the parent company were varied and included areas like penetration of new markets, attraction and retention of more customers, and entry into new industries. By acquiring Whole Foods Market, the strategic and operational directions of Amazon were improved through the introduction of additional areas of focus that strengthened the organizational goals. Amazon became a larger company with more subsidiaries and other than physical growth, there was increased growth in revenue and an opportunity for increased investments to dominate the industry. Both Amazon and Whole Foods Market operate within the same industry of e-commerce and rely on modern technological services to make their operations and services more efficient.
Key accounting requirements for two choices in the scenario
There are three choices provided that support short and long-term goals of common stock. Of the three choices provided, key accounting requirements will be evaluated for the choices one and three. The first choice is that the company acquires 80% percent of the common stock of the target company with a minority interest of 20%, while the other choice for analysis is that the company acquires 100% percent of the common stock of the target company. The common key accounting requirements for the two choices is recognition of fair value of the assets acquired from the target company, understanding fair value of liabilities, and allocation of purchase price. The fair value of the asset entails what the assets are currently worth in the market currently. Thus, if the current market favors the fair value of assets and liabilities from the acquired firm, then it is rational, from an accounting perspective, to acquire 100% of the common stock of the target company. The purchase method is the most important accounting consideration because recording the assets and liabilities of the target company at their fair values helps in consolidation of the financial statements of both the acquiring and target companies.
A different important accounting requirement is the calculation of goodwill. This is all about excess of the purchase price over the fair value of net assets that have been acquired. In the context of the first choice, the parent company calculates its goodwill based on the fair value of 80% ownership interest that is acquired. In the case of the second choice, goodwill would be calculated based on 100% of the ownership interest acquired. Non-controlling interest is another accounting requirement that must be considered. In the first choice, a minority interest of 20% represents the segment of the target company’s equity that has not been acquired by the parent company. For the case of acquiring 100% of common stock, there is no provision for non-controlling interest. Consolidation is also an important accounting requirement because the parent company will consolidate financial statements of the subsidiary company, which contributes to the overall financial position and performance of both companies.
Why the selected choice is best for the company
The proposed choice is acquiring 80% of common stock of the subsidiary company with a minority interest of 20%. This is because there are both long term and short term goals that the parent company has. The company needs to achieve growth within the next two to three years and for this reason, a significant portion of the common stock must be acquired from the target company. The choice of acquiring only 80% while leaving 20% to minority shares is best for the company because it eliminates costs and financial risks associated with acquiring 100% of common stock, it makes regulatory requirements and legal issues easy to control and manage, minimizes the threats of cultural and operational challenges in new locations, and helps in retention of valuable knowledge and skills. Acquiring 100% of the common stock can be very beneficial but when the goals of the company in two to three years are considered, it follows that certain areas must be compromised to make operational and strategic directions more efficient, hence the importance of acquiring 80% of the common stock with a minority interest of 20%.
Strengths, threats, and mitigation
The proposed acquisition choice provides strengths such as streamlined decision-making process which are a direct result of the massive 80% control over the subsidiary company, easier integration of operations which leads to reduced cost and enhanced competitiveness, and greater financial benefits in terms of access to the company’s cash flows, assets, and future revenue. There are also some significant threats associated with acquiring part of the common stock and leaving 20% to minority shares. First, there may be potential conflict with the minority shareholders. This is mitigated by maintaining an honest and open communication with all shareholders, fair treatment of minority shareholders through ways like appropriate compensation for their ownership needs, and ensuring the interest of shareholders are protected. Another threat is conflict in governance and making decisions that affect the company. This threat is mitigated by minority representation and establishing a clear governance framework that is agreed upon by all shareholders on roles and responsibilities. The final threat is increased financial and legal obligations as a result of acquiring huge common stoke. This is mitigated by providing enough resources to meet the financial obligations, and ensuring the company complies with all applicable laws and regulations.
References
Amazon. (2023). What We Do. About Amazon; www.aboutamazon.com. https://www.aboutamazon.com/what-we-do
Tarasov, K. (2022, August 25). Amazon bought Whole Foods five years ago for $13.7 billion. Here’s what’s changed at the high-end grocer. CNBC. https://www.cnbc.com/2022/08/25/how-whole-foods-has-changed-in-the-five-years-since-amazon-took-over.html#:~:text=Tech-
Whole Foods Market. (2022). Whole Foods . Wholefoodsmarket.co.uk. https://www.wholefoodsmarket.co.uk