12:06, July 25, 2022
On July 8, 2022, businessman Elon Musk announced that he was ending his plan to buy the social network Twitter at $54.20 per share, valuing the company at around $44 billion (€43 billion). On May 13, the billionaire had already announced that he was suspending the takeover due to concerns about the real number of fake social media accounts, causing the group’s share price to drop by about 20%. “Twitter failed to comply with several terms of the agreement and appears to have provided false and misleading information that Elon Musk relied on in entering into the acquisition agreement,” the entrepreneur’s lawyers at the SEC (Securities and Exchange Commission) explain. , American Stock Market Cop.
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The controversy is mainly based on an estimate of the number of Twitter users, known followers; false reports are estimated, according to stakeholders, more or less than 5%.
Thus, the legal debate concerns the evaluation of Twitter users, that is, what finance calls intangible assets, and the publication of financial information about them. While brands, patents, number of customers or technologies, know-how, and manufacturing processes have no physical content, these intangible assets nonetheless contribute significantly to value creation for the companies that control them. However, unlike tangible assets, companies are generally not required to disclose information about their intangible assets… except in acquisitions.
Useful financial information
Intangible assets can indeed play an important role when one company takes over another. An acquirer may, for example, enter into a transaction for the sole purpose of controlling a brand or technology owned by another company. Thus, during these transactions, the acquirer is required to recognize and report all intangible assets of the acquired company. However, this publishing obligation is currently applied with varying rigor from one company to another, resulting in information that varies widely across operations.
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However, as we show in a recent research article, publishing information on intangible assets is a particularly useful tool for financial analysts. We examined the content of information published on intangible assets after almost 500 business combinations completed between 2002 and 2011 in the United States.
Overall, our results show that the disclosures and amounts relating to recently acquired intangible assets provide financial analysts with relevant information.
The acquisition of Skype by eBay in 2005, for example, is particularly revealing. If eBay’s shareholders knew that Skype did not own many of the patents related to the programs used in its business, that would be reason enough to have a negative impact on the company’s interests. The information is not disclosed because this type of publication is not required in the current context. In addition, this acquisition resulted in a goodwill recognition (revaluation) of US$2,300 million out of the total acquisition price of US$2,600 million.
Source of controversy
Similarly, following the acquisition of WhatsApp, Facebook had to complete the acquisition price allocation, i.e., allocate the acquisition price granted to the acquired assets, in particular intangible assets. At the time of the acquisition, the price paid included 4 billion in cash, 12 billion shares and 3 billion locked shares (restricted shares) for WhatsApp employees. As the value of Facebook’s shares has risen since the deal was announced, the purchase price ended up at nearly $22 billion in 2014. Clearly, most of WhatsApp’s agreed-upon price was intangible assets.
In another study, we also showed that low levels of transparency contribute to both disagreement between analysts, reflecting information uncertainty, and disagreement between analysts and managers, indicating information asymmetry. With the example of Elon Musk and Twitter, we see that these disagreements can affect other parties and lead to lawsuits.
This issue is central to all companies seeking to justify an acquisition to their shareholders or avoid unpleasant surprises. If the value of a company depends largely on these intangible assets, shouldn’t we demand more information about them?
This article is republished from The Conversation under a Creative Commons license. Read the original article.