Wendy's Mistake in Baja Fresh

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Wendy’s International Inc. sought to gain a market share outside their main operations of Wendy’s Burgers by investing in the fast growing casual Mexican restaurant segment. In 2002, Wendy’s International Inc. purchased Baja Fresh from Fresh Enterprises Inc. The total acquisition by Wendy’s was purchasing 100% Baja Fresh stock for $287.4 million according to Wendy’s cash flow of investing operations in 2002. The acquisition was accounted for using SFAS 141. Wendy’s utilized a third party to value the assets of Baja Fresh. According to the acquisition statements, all of the $287.4 million cost was allocated to the net assets of Baja Fresh.

According to Wendy’s annual meeting notes, Wendy’s Inc. tests its acquisitions for impairment on an annual basis in the 4th quarter. In 2004, Wendy’s Inc. recognized a goodwill impairment loss for the Baja Fresh brand for $190 million. This goodwill amount was based on estimate of fair value compared with historical performance & market data that was determined by an outside third party. According to AA-20 of 2005’s Annual report, Wendy’s test for impairment when an event occurs that is large indication impairment might exist. For Baja Fresh, the decreases in future projected sales was the indicator impairment might exist. The discovery of impairment had a direct relationship with the performance bonuses of top executives. Under Wendy’s Senior Executive Plan, top executives are rewarded based on meeting a certain level of earnings per share & return on assets for the year. Due to Baja Fresh’s goodwill impairment, restraint closings, and other market impairments, Wendy’s fell below the required ratio amounts and top executives received no bonus for 2004. The effect of the impairment loss to the executives will occur as long as Baja Fresh continues to struggle. Until that segment gets turned around and impairment loss does not occur, the essential ratio conditions will not be easily attained. In 2006, Wendy’s...
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