Background Information
The Future Shop is the leading Canadian consumer electronics retailer. In 200l, the Best Buy acquired all of the common stock of Future shop worth $377 including transaction costs. After the acquisition, the company was renamed Best Buy Canada Ltd (CBCNEWS, 2001). The acquisition was meant to expand the plans and increase shareholder value of Best Buy. Since most of the locations are under the original name, Best Buy Canada Limited continues to manage Future shop as a separate unit. The acquisition was a success for both companies because they have expanded their operation since the acquisition. After the acquisition, the Future Shop would no longer trade on the Toronto stock exchange. Therefore, the acquisition helped Best Buy in becoming a global leader in the digital industry and offered Future Shop with the necessary resources to expand its operation in the Canadian market.
Acquisition Analysis
The acquisition was recorded using the purchase method with accordance with SFAS, and recorded the net assets at their estimated fair values. This included the operating results in both financial statements from the date of acquisition (Best Buy, 2001). Best Buy allocated the purchase price on a preliminary basis based on information available. The allocation of the purchase price of asset and liabilities acquired was finalized in 2003. The main changes to the preliminary allocation was attributed to the Future Shop trade name based on the Best Buy decision to operate stores in Canada under both trade names (Downey, 2001). They also adjusted the extended service contract liability assumed as of the date of acquisition. The ultimate purchase price allocation recorded a $5 decrease to goodwill from the Best preliminary allocation (Best Buy, 2001).
The acquisition, improved the financial performance of both companies. Best Buy was willing to offer $17 a share for Future Shop’s share (Best Buy, 2013). This was 47.8 percent premium above future’s closing share price amounting $11.5 at that period (Best Buy, 2001). This was possible to Best Buy because of its financial strength. For instance, the revenues for Best Buy in 2001 amount $15.3 compared to $12.5 billion in fiscal 2000 (Best Buy, 2001). The revenue increases were due to its expansion in the Canadian market. Therefore, its plan to acquire Future Shop was to increase its revenue and expansion further. However, due to decline in gaming, computers, television and digital imaging, Best Buy Canada Limited is currently experiencing comparable sales decline, which is affecting its operations.
Although the financial strength of the Future Shop is not as strong as that of Best Buy, it managed to finance its operations. This is so because its revenue increased by 7 percent to $414.3 million in 2001 compared to $ 386.9 million in 2000 (Future Shop, 2001). The gross profit margins were 23.4 percent of sales in 2001 compared to 23.6 percent in 2000 (Future Shop, 2001). This indicates its financial position before acquisitions was stable. Therefore, after Acquisition it decided to expand its Canadian empire and use the Best Buy’s profits within America, but was no longer listed on the stock exchange.
Therefore, the acquisition increased completion in the Canadian consumer electronics market because they decided to operate the companies as separate entities, although they operate under the same umbrella. For instance, in 2001 Best Buy operated 1800 stores in America while Future Shop operated 88 stores in Canada (Morgan, 2011). After the Acquisition, both tried to maximize the opportunity and increased their operations in both countries.
References
BestBuy (2001). Annual Reports - Investor Relations - Best Buy Co., Inc. Retrieved March 24, 2014, from http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-reportsannual
Best Buy (2001). Financial News Release - Investor Relations - Best Buy Co., Inc. Retrieved March 23, 2014, from http://phx.corporate- ir.net/phoenix.zhtml?c=83192&p=irol-newsArticle&ID=224090&highlight=
CBCNEWS (2001, August 14). Best Buy snaps up Future Shop for $580 million - Business - CBC News. Retrieved March 23, 2014, from http://www.cbc.ca/news/business/best-buy- snaps-up-future-shop-for-580-million-1.285215
Downey, G. (2001, August 14). Best Buy purchases Future Shop in $580 million spree | IT Business. Retrieved March 23, 2014, from http://www.itbusiness.ca/news/best-buy- purchases-future-shop-in-580-million-spree/5771
Future Shop (2001). Associated Documents. Retrieved March 23, 2014, from http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00003755#
Morgan, J. (2011). Construction Today - Construction Today. Retrieved March 23, 2014, from http://www.construction-today.com/index.php/component/content/article/90- print/canadian/266-best-buy-canada-ltd
