Purchase accounting is a nemesis to companies and a friend to prospective and current employees. What is it? It’s a giant estimation exercise to assign “fair market” value to a company’s assets and liabilities once it is acquired. The new owner needs to be thoughtful about its estimates, because any future changes that spark “an impairment” will impact its reported profitability. With that incentive in place, purchase accounting can provide a peek into what the new owner really cared about in the acquisition.
The Basics: Activision Blizzard purchased Major League Gaming for $46 million in 2015 as an “anchor” to its eSports division. Major League Gaming has been a private corporation since its inception in 2006. That said, they have offered glimpses into their business through securities filings. Each year between 2009 and 2015 (except for 2014), MLG disclosed that their revenues were in the range of $5 million to $25 million.
The purchase price for Major League Gaming was allocated as follows for accounting purposes:
A tangible asset has to be physically identifiable, such as cash, inventory, equipment, or real estate. At most, Major League Gaming had $1 million in cash.
An intangible asset is non-physical, but something the company will benefit from for more than a year (brand names, patents, customer lists, and non-compete agreements, software, etc.) Activision Blizzard noted the primary intangible asset in the MLG transaction related to developed technology
Goodwill is simply the difference between the purchase price and the estimated value of the assets acquired.
Add Context: Activision Blizzard isn’t the only company to acquire its way into eSports. In 2014, Amazon purchased Twitch, the leader in live gaming streaming for $842 million. Now, consider the purchase price of Twitch, as compared to Major League Gaming’s $46 million. Do you work better at a challenger or a leader? Why did Activision not just purchase Twitch?
On the Twitch details, the scale of Amazon allows it to aggregate the accounting for its acquisitions, which totaled $862 million in cash (after adjustments) in 2014. Since Twitch accounts for 97 percent of the total, we will assume the priorities in terms of value were not impacted by the other acquisitions. For “Twitch’s” intangible assets, Amazon valued:
While Activision bought MLG primarily for its “broadcast, live streaming technology,” customer- and marketing-related assets were larger forces at Twitch. At Twitch, the brand appears to be sacrosanct, maybe not for MLG.
The takeaway: Understanding where companies place value helps you think about the opportunity and how you might successfully answer interview questions designed to probe your strategy and tactics.
This is the second part of a multi-part series on acquisition accounting and how it benefits prospective and current employees. The first post was on where to find the information.