Financial Accounting: In an Economic Context

LONG-TERM EQUITY INVESTMENTS

As indicated earlier in this chapter, companies make investments in the equity securities of other companies primarily for two reasons: (1) investment income in the form of dividends and stock price appreciation, and (2) management influence, where the voting power of the purchased shares allows the investor company to exert some control over the board of directors and management of the investee company. The primary motivation behind the long-term equity investments for most major U.S. companies is reason (2), influence over the investee company's operations and management.

Most large, well-known U.S. companies are constantly involved in acquisitions, whereby they purchase all, or a majority of, the outstanding common stock of another company and then change the investee company's operations and/or management. Several years ago, for example, General Electric (GE) purchased for $6.4 billion all outstanding common stock of RCA Corporation, which at the time owned National Broadcasting Company (NBC). As reported in GE's financial report, “subsequent to the acquisition, GE sold … a number of RCA and NBC operations whose activities were not compatible with GE's long-range strategic plans.”

In another example, Cisco Systems stated in its 2006 financial report that its February 24, 2006, acquisition of Scientific Atlanta Inc. cost $7.1 billion. Cisco made significant changes to the operations and management of the acquired company.

In 2004 FedEx Corporation ...