ADT 2003 Annual Report Download - page 79

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2.
Acquisitions and Divestitures
The Company purchased substantially all of the voting equity
interests in each of the businesses acquired for all periods
presented. In addition, each acquisition was accounted for as a
purchase, and the results of operations of the acquired com-
panies have been included in the Company’s consolidated
results from their respective acquisition dates. At the time each
purchase acquisition is made, the Company records each asset
acquired and each liability assumed at its estimated fair value,
which amount is subject to future adjustment when appraisals
or other valuation data are obtained. The excess of (i) the total
consideration paid for the acquired company over (ii) the fair
value of tangible and intangible assets acquired less liabilities
assumed and purchase accounting liabilities established is
recorded as goodwill. Once the appraisals or valuation data are
obtained, the Company records adjustments to the fair value
of net assets acquired and liabilities assumed. Purchase price
allocations for certain acquisitions are preliminary in the year
acquired. As the Company finalizes integration/exit plans, it
expects to recognize additional purchase accounting liabilities.
Several factors impact the finalization of integration/exit plans,
such as identifying acquired facilities that are duplicative of
Tyco’s existing operations. Once this is determined, approval
needs to be obtained from management having the appropriate
level of authority, the estimated cost of the integration/exit
activities needs to be determined and negotiation with employee
bargaining groups needs to be completed in order to finalize
the plan. As a result, final adjustments often extend to the end
of a one-year period after acquisition. These additional purchase
accounting liabilities increase the amount of goodwill recorded,
and any changes to the fair value of net assets could increase or
decrease goodwill. The Company expects to record adjustments
to goodwill related to some companies acquired in fiscal 2003.
However, the Company does not expect the impact of any of
these adjustments to be material to its financial statements.
Acquisitions were an important part of Tyco’s growth during
prior years. When Tyco made acquisitions it sought to comple-
ment existing products and services, enhance the Company’s
product lines and/or expand its customer base. Tyco determined
what it was willing to pay for each acquisition partially based
on its expectation that it could cost effectively integrate the
products and services of acquired companies into Tyco’s existing
infrastructure and improve earnings by removing overhead costs
in areas where there are duplicate sales, administrative or other
facilities and functions. In addition, the Company utilized
existing infrastructure (e.g., established sales force, distribution
channels, customer relations, etc.) of acquired companies to cost
effectively introduce Tyco’s products to new geographic areas.
The Company also targeted companies that were perceived to be
experiencing depressed financial performance. All these factors
contributed to acquisition prices in excess of the fair value of
net assets acquired and the resultant goodwill. However, begin-
ning in fiscal 2003, the Company completed significantly fewer
acquisitions as compared to the past few years due to its focus
on enhancing internal growth within its existing businesses.
FISCAL 2003
During fiscal 2003, the Company purchased seven businesses
within the Healthcare, Engineered Products and Services, Fire
and Security and Electronics segments for an aggregate cost of
$44.0 million in cash, net of $1.1 million of cash acquired. In
addition, the Company paid $596.8 million of cash during fiscal
2003 to acquire approximately 635,500 customer contracts for
electronic security services through the Company’s dealer pro-
gram. During fiscal 2003, the Company paid $171.5 million of
cash for utilization of purchase accounting liabilities related to
prior years’ acquisitions. In addition, the Company-paid cash of
approximately $100.3 million relating to holdback and earn-out
liabilities related to certain prior period acquisitions. Holdback
liabilities represent a portion of the purchase price withheld
from the seller pending finalization of the acquisition balance
sheet. Certain acquisitions have provisions that would require
Tyco to make additional “earn-out” payments to the sellers if
the acquired company achieves certain milestones subsequent
to its acquisition by Tyco. These earn-out payments are tied to
certain performance measures, such as revenue, gross margin or
earnings growth, and are generally treated as additional purchase
price. The cash portions of acquisition costs for the business
and customer contracts were funded utilizing cash from opera-
tions. The results of operations of the acquired companies have
been included in Tyco’s consolidated results from their respective
acquisition dates.
As a result of acquisitions completed in fiscal 2003, and
adjustments to the fair value of assets and liabilities recorded
for acquisitions completed prior to fiscal 2003, the Company
recorded a net decrease of $462.4 million in goodwill and an
additional $40.7 million in other intangible assets in fiscal 2003.
The net decrease in goodwill includes $480.5 million associated
with prior years’ acquisitions, primarily Sensormatic Electronics
Corporation (“Sensormatic”), acquired in November 2001,
Mallinckrodt, Inc. (“Mallinckrodt”), acquired in October 2000,
Lucent Technologies’ Power Systems (“LPS”), acquired in
December 2000, and Deutsche Armaturen AG (“DAAG”),
acquired in September 2001, slightly offset by an increase of
TYCO INTERNATIONAL LTD.