Case Study on Youku and Tudou
In March 2012, Yuk Inc.
(NYSE:YOKE) (“Yuk”) and the Company announced that they had signed a definitive agreement for Outdo to combine with Yuk in a 100% stock-for-stock transaction. After the merger, the new company Yuk Outdo Inc will keep the Yuk and Outdo brands, continuing to occupy the 1st and 2nd positions in the online video industry.
Yuk and Outdo together will achieve synergy In numerous aspects, including video copyrights price, bandwidth servers cost, back- tags data consolidation, search, media library, and advertisement publishing. Both Yuk and Outdo expect to benefit from the operating synergy and financial synergy. The faster they achieve synergies. The quicker they can break even.
Case abstract: This case led us to discuss the impact of Yuk and Dugout’s business combination on Dugout’s historical and future financial statements.
Case Questions: What is the impact of the merger on Dugout’s historical financial statements? As a result of the merger, Dugout’s financial figures had to be adjusted in accordance to Hookup’s accounting policy. This Involved reclassifying some accounts, revaluing Items and removing certain items. Income statement adjustment In the profit-loss statement, there were several significant changes. Firstly, business tax was reclassified.
It was taken out of net revenues and added to the cost of revenues. This had no net effect on profit.
Secondly, Hookup’s policies Identified heretofore unrecognized intangible assets. The amortization expense for this was added to cost of revenues, product development expenses and general and administrative expenses. This had a negative net effect on profit. Thirdly, share- based compensation expense of assumed Outdo opens had to be adjusted as Dugout’s shares would no longer exist.
This had a net positive effect on profit. Fourthly, certain sales and marketing expenses were reclassified into product development expenses. This had no effect on profit.
Fifthly, amortization expense for purchased licensed contents and production costs were also deducted. As a result, the adjustments would result in Outdo reducing its losses. Balance sheet adjustment In the balance sheet, there were also considerable adjustments.
Firstly, cash and ash equivalents were reduced as a result to the possible merger transaction costs. Secondly, the value of capitalized content production costs was increased and content production costs were reclassified into non-current assets. This had no effect on the value of current assets, but had a positive effect on non-current assets.
Thirdly, purchased software licenses were reclassified into fixed assets and this had a ‘Off positive erect on non-current assets Fourthly, a reserve gallant unrecoverable receivables was made and this reduced non-current assets. Finally, a decrease in accruals reduced current liabilities.
An increase in deferred tax liability will increase long-term liabilities. Thus, the merger will reduce Dugout’s current assets, increase its non-current assets, reduce its current liabilities and increase its long-term liabilities. In sum, the merger had a positive effect on Dugout’s profitability.
It also expanded its assets by newly recognizing intangible assets. On the other hand, it also resulted in a considerable increase in liabilities in the form of deferred tax liability. How should Ryan explain the impact of the merger in the third quarter earnings lease? Under the terms of the Merger Agreement, Hookup’s shares prior to the effective time of the Merger will be cancelled in exchange for the right to receive 7.
177 Yuk Class A shares, and each Outdo ADS will be surrendered in exchange for the right to receive 1. 95 Yuk ADS, which will result in Yuk shareholders and ADS holders owning approximately 71. 5% of the combined entity upon completion of the Merger and Outdo shareholders and ADDS holders owning approximately 28. 5%. Against this backdrop, Ryan will have to address the following three issues first: 1.
The actual net tangible and intangible assets and liabilities of Outdo that exists as of the date of completion of the Merger. 2. Necessary changes to adjust Dugout’s accounting policies in accordance with Hookup’s accounting policies. . The actual purchase price to be paid by Yuk to complete the Merger.
Once the above three issues were thoroughly explains, Ryan can move on to talk about the impacts on the financial statements accordingly. First of all, due to the acquisition method of accounting, Yuk will assume the assets acquired from and liabilities assumed of Outdo based upon their fair values mentioned above. Therefore; we will see a large spike in total assets, total liability, and total shareholder’s equity on the balance sheet.
It’s worth noting that: 1) The significant increase in Goodwill on the balance sheet reflects the excess of the purchase price to be paid by Yuk over the fair value of Dugout’s identifiable assets to be acquired and liabilities to be assumed in the merger. 2) The increase in shareholder’s equity reflects the issuance of approximately 830 million of Yuk shares at the effective time of the Merger.
Ryan an then try to clarify the changes brought to the income statement because of the merger.
Although the revenue has almost doubled after the merger, the cost of revenues also increased which led to a higher net loss per share accordingly. It is, however, pertinent for Ryan to close the session informing the investors that better results are to be expected by further integrating the operation of Yuk and Outdo to take advantage of the synergies existed between the two firms. Take content cost as an example, the merging of Yuk and Outdo accelerates the process of copyright price’s falling back to reason.
