KBR Inc. (KBR), the Houston-based construction and engineering firm, expanded its Government Services segment in 2016 with two sizable acquisitions. KBR acquired Wyle Inc. (Wyle) for approximately $600 million in July, and then acquired Honeywell Technology Solutions Inc. (HTS), which is based in Columbia, Maryland for approximately $300 million in September. From a business combination accounting perspective, one might expect these two deals to look very similar. However, a look at KBR’s financial statement disclosures for each transaction reveals significant differences.
A few things jump out when you compare the purchase price allocations side-by-side. For one, in the Wyle acquisition goodwill represents a much higher percentage of purchase consideration than in the HTS acquisition. In terms of purchase price allocation mechanics, goodwill is a residual value and represents going-concern elements that don’t meet the criteria for separately recognized assets. But what specific things can we point to in these two acquisitions? We know that the value associated with operational synergies (each deal cites “growth opportunities based on a broader service offering of the combined operations” as primary goodwill components), and assembled workforces are subsumed within goodwill, so perhaps one or both of these were of greater value in the Wyle transaction. Deferred taxes, which are not measured at fair value, also have an impact on the reported goodwill amounts.
In the Wyle acquisition, $48 million of the purchase consideration was allocated to trademarks and trade names, whereas in the HTS acquisition no value was allocated to trademarks and trade names. This is likely explained by the nature of the HTS transaction, which was a divestiture by Honeywell International Inc. The “Honeywell” name was retained by the parent company.
Another observation relates to working capital, which comprised almost one-fourth of the purchase consideration in the HTS acquisition, but less than one-tenth of the purchase consideration in the Wyle acquisition. Perhaps the nature of the HTS business is such that it requires higher working capital levels to operate compared to the Wyle business.
If you find the questions raised above interesting, you may want to check out an upcoming Aronson webinar. Later this month we’re conducting a one-hour session for clients and friends where we will explore business combination accounting and purchase price allocations. Click here for more information.
Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses and impairment testing. To learn more click here or contact Bill Foote at 301.231.6299.