Internet Exercise (Cont’d.)
4c.What is the additional implication of shared expenses between Agilent and HP now that they are independent companies?
4d.Scroll down the "Transactions with Hewlett-Packard" footnote. What other separation agreements have Agilent and HP entered into?
Solution to Internet Exercise
1a.A significant portion of the segments' expenses arise from shared services and infrastructure that HP has historically provided to the segments in order to realize economies of scale and to use resources efficiently. These expenses include costs of centralized research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate and infrastructure costs.
1b.HP has historically provided services to the segments in order to realize economies of scale and to use resources efficiently.
1c.These allocations have been determined on bases that HP considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. If costs were specifically identified to each segment, amounts could vary from the allocated cost.
2.HP may face problems if it bases compensation on the profitability of individual business segments. Since the cost of shared expenses are not bargained for in an arms length transaction, managers may argue about their reasonableness. Managers should be evaluated on the basis of controllable costs and revenues or perhaps the performance of the entire organization.
3a.Agilent's sales to HP for the period November 1, 1999, to June 2, 2000, were $341 million,
3b.Purchases from HP were approximately $122 million.
4a.Agilent and HP entered into interim service level agreements, for various services, including information technology, financial, accounting, building, and legal services. These services are generally being provided for fees equal to the actual direct and indirect costs of providing the services plus 5%.
4b.Agilent received $267 million from HP and HP received $95 million in services from Agilent.
4c.In addition to tax implications, there will be tax implications for the shareholder of each company. Any misallocation of expenses will affect each company's cash flow, earnings, and share price.