JDSU Case Questions

2012 Merger Course: Paul André, PhD, CA
ACCOUNTING FOR ACQUISITIONS AT JDS UNIPHASE

Case Facts/Assumptions:
Assume the deal was completed on December 31 2000 and the following breakdown of ‘Tangible net assets’:
Current assets $586.4m
Property, plant and equipment $131.8m
Current liabilities $101m.

JDSU had around 1,000 million shares outstanding before the deal of which 11.2% were held by directors and officers

1. How did the 2001 acquisition of SDL impact JDSU financial statements?
(see facts/assumptions above)

• Gained a complimentary technology: faster data transmission over fiber-optic networks
• Satisfy customer demand for faster broadband
• USD $39.2B theoretical boost in Intangible Assets (Goodwill). 
• Purchase made with 333.8M shares of JDSU. Total outstanding shares swell to 1.338 Billion (34% increase in outstanding shares) ->Owner's equity temporarily boosted by 34%

Discuss the choice of accounting method.

• "purchase method"
• amortize goodwill on a straight-line basis over five years
• $300M in bonus compensation classified as SG&A

Draw the deal and discuss why the purchase/acquisition method was chosen.

• deferred tax
• very low cash transaction ($200,000) compared to offer price >$50 Billion
• timed to benefit from inflated share price

Discuss the purchase price allocation including valuation techniques for intangibles, the treatment of In process research and development IPR&D and the transaction costs.

• Most of the purchase price was accounted for by the black hole of "Goodwill"

2. The staggering losses announced in July 2001 relate primarily to the write-downs of
goodwill. JDSU determined the amount of the goodwill write-down based on the fall in
its own stock price. What do you think of this procedure? Also consider why JDSU is
taking the write-downs now. What is the effect of taking the write-downs sooner rather
than later? Is there a potential downside? How will the write-down impact JDSU’s
financial statement?

3. Did JDSU go wrong with respect to the SDL acquisition? Did management abuse the
equity capital of JDSU? Did management fail to act in the best interest of shareholders?
Should management be held accountable? Comment.

Bonus question:
The deal was done before the recent changes in the rules with respect to accounting for
mergers and acquisitions (SFAS 141, 142 in 2001 and IFRS 3 in 2004). How would these
changes have affected the choice of method, the purchase price allocation, the financial
statement impact and the subsequent write-down of goodwill? What do you think of the
changes to the accounting for business combinations?