Applied Materials: Managing Product Costs

In August 1998, Kerry King, President and Chief Executive Officer of Ultratech Corporation looked with great interest at the changes that were occurring in the technology industry. Ultratech Corporation had an opportunity to enter into a strategic merger transaction that would make the combined company the undisputed leader in its market segment. The transaction, a multi-billion dollar deal, made a lot of sense to Kerry, his Board of Directors and Ultratech’s outside financial advisors, with one caveat. As a result of a technical accounting issue, pooling accounting was not available for the merger. Under purchase accounting, Kerry was advised that significant amounts of goodwill would be created and amortized over future fiscal years, effectively “destroying” the combined company’s reported earnings. The challenge confronting Kerry was whether to consummate the merger and risk the earnings “damage” or to let an otherwise perfect opportunity pass. Kerry’s decision could profoundly impact the future of his company and of the fiber optic telecommunications industry as a whole.