Consolidation subsequent to date of acquisition—Equity method with noncontrolling interest, AAP, and upstream intercompany inventory sale

Assume that, on January 1, 2010, a parent company acquired a 75% interest in its subsidiary. The total fair value of the controlling and noncontrolling interests was $550,000 over the book value of the subsidiary’s Stockholders’ Equity on the acquisition date. The parent assigned the excess to the following [A] assets:

75% of the Goodwill is allocated to the parent. Assume that the subsidiary sells inventory to the parent (upstream) which includes that inventory in products that it ultimately sells to customers outside of the controlled group. You have compiled the following data as of 2015 and 2016:

The inventory not remaining at the end of the year has been sold outside of the controlled group. The parent uses the equity method of pre-consolidation investment bookkeeping. The parent and the subsidiary report the following pre-consolidation financial statements at December 31, 2016:

a. Disaggregate and document the activity for the 100% Acquisition Accounting Premium (AAP), the controlling interest AAP and the noncontrolling interest AAP. (Complete for the first four years only.)

b. Calculate and organize the profits and losses on intercompany transactions and balances.

c. Compute the pre-consolidation Equity Investment account beginning and ending balances starting with the stockholders’ equity of the subsidiary.

d.  Reconstruct the activity in the parent’s pre-consolidation Equity Investment T-account for the year of consolidation.

e. Independently compute the owners’ equity attributable to the noncontrolling interest beginning and ending balances starting with the owners’ equity of the subsidiary.

f. Independently calculate consolidated net income, controlling interest net income and noncontrolling interest net income.

g. Complete the consolidating entries according to the C-E-A-D-I sequence.

Jon is a psychiatric mental health nurse in a large metropolitan clinic, which is connected to a research hospital. Jon likes the fact that it’s a walk-in clinic. One day he is just getting ready to eat his sack lunch, when a slender young woman who looks exhausted and timid knocks at his open door. “Excuse me,” she says. “Can I get into a research project?” Jon puts down his bologna sandwich. “What’s that?” he says. He’s confused. “Research?” “Yes,” she says, stepping inside and slipping into the chair beside his desk. Jon wraps up his sandwich for later. “I want to know if I can be part of a study for depression,” the woman says. Her mouth trembles. “This is a research hospital, right?” Jon hesitates, trying to take in what she wants. As he pauses, he does a visual assessment. The woman is in her late 20s or early 30s, attractive, but somewhat bedraggled. She looks as if she’s been on a long, difficult road trip. “Well,” he says. “I don’t know of any studies going on off hand, but does that matter? I’m sure we can get you the help you need without a study. What seems to be the problem? And what’s your name, by the way? Mine’s Jon.” “I’m Erika,” she says when her face crumples and she begins to cry. “I’ve screwed up big time!” she says. “I’ve just ruined my life and my son’s life!” And just like that, she is sobbing. “I’m sure you haven’t ruined anything,” Jon says. He glances at the clock behind Erika, wondering what time the psychiatrist will be back from her luncheon meeting. “Why don’t you tell me what’s happened?” “I ran away,” she says, still sobbing. “I ran away, walked off my job, and hit the road with my little boy Oscar!” She lowers her hands from her face. “We just now got back into town. We’ve been sleeping in the car for 3 days.” “Are you homeless? Do you need a shelter?” “No,” she cries. “That’s just it! We had a perfectly decent life, and now I’ve blown it.” “There’s usually something that can be done,” Jon says, handing her a box of tissues. “Why don’t you start at the beginning, and let’s see what we can do.” “Thank you,” she says, blowing her nose and really looking Jon in the eye for the first time. Jon smiles. “You’re welcome. Now. Just start anywhere.” Erika tells Jon that she is a 28-year-old mother who was a “wild teen,” saying that she had a tumultuous relationship with her parents. At age 20, Erika gave birth to her son Oscar, who is now 8. “Oscar,” she says “is the sweetest, most supportive son ever.” Shortly after Oscar’s birth Erika suffered from severe postpartum depression that plunged her into what she calls “a hellish paranoia. I was some kind of hormonal, psychotic witch for a while. No wonder my fiancé broke it off with me.” She says this with a sad smile and starts to cry again. Erika has come into the clinic because, she says, “sometimes I think I never recovered from my postpartum depression. I mean, I’ve always been hyper and bad-tempered, which I freely admit. But now I just can’t seem to pull out of it. I can’t sleep; I’m angry all the time; I can’t concentrate on anything, and I’m so depressed I can’t function.” But things are even worse than Erika is letting on. “Okay,” she says. “There’s something else. Something even worse.” She has trouble pulling her tears under control, and it takes her a moment to struggle with that. “I flipped out at work last week,” she says. “I slapped my supervisor because she was very unfair. She had it in for me. Then I stormed out of work, grabbed my son out of school, and got in the car and just drove, furious and feeling hopeless. We drove and drove and then it was like I woke up and realized I was in another state. I drove all the way to Wyoming, two states away to Oscar’s dad’s house, and all he said was, ‘You walked out on a good job? Well, you can’t stay here and freeload! Get back to Denver and get your job back!’” “We slept in the car, and I was crying and yelling, and Oscar was crying. It was awful. I’m the worst mother ever. So now I’m back in Denver, with no job and overdue on my rent and no money left in the bank to pay it.” “No money?” She shakes her head. “I blew it all on the trip. I was so mad about work, I told Oscar, ‘We’re going on a road trip.’ I thought maybe we’d go to Yellowstone, or maybe Disneyland. And at first he thought it was fun till he saw I was a mess, and then he was just scared. And now we’re back, and I’m broke and unemployed. I never sleep, and I know I talk too much and too fast, but my head is always full of more thoughts and ideas than I can keep track of, and they rush through me like the Indianapolis 500, and sometimes they just come bursting out of my mouth.” 1. Jon is able to complete an intake assessment of Erika, and when the doctor comes back from her meeting and sees the state Erika is in, she meets with her immediately. She gets Erika help with her most immediate needs, and when Erika refuses hospitalization, concerned about uprooting Oscar any further, the doctor makes a diagnosis and writes her a small, temporary prescription—but only after Erika agrees to come back and start treatment. Erika readily agrees. The doctor subsequently diagnoses Erika with bipolar I disorder. Assuming that the doctor is right, what evidence do you see of this disorder? 2. In addition to her diagnosis of bipolar I disorder, which signs of mania does Erika displays the most.

Jon is able to complete an intake assessment of Erika, and when the doctor comes back from her meeting and sees the state Erika is in, she meets with her immediately. She gets Erika help with her most immediate needs, and when Erika refuses hospitalization, concerned about uprooting Oscar any further, the doctor makes a diagnosis and writes her a small, temporary prescription—but only after Erika agrees to come back and start treatment. Erika readily agrees. The doctor subsequently diagnoses Erika with bipolar I disorder. Assuming that the doctor is right, what evidence do you see of this disorder?

In addition to her diagnosis of bipolar I disorder, which signs of mania does Erika displays the most?

Case study:

Married with two young children, John and his wife rented a two-bedroom apartment in a safe neighborhood with good schools. John liked his job as a delivery driver for a large foodservice distributor, where he had worked for more than four years. His goal was to become a supervisor in the next year. John’s wife was a stay-at-home mom.

John had always been healthy. Although he had health insurance through his job, he rarely needed to use it. He smoked half a pack of cigarettes each day and drank socially a couple of times a month.

One afternoon, John’s company notified him that it was laying him off along with more than a hundred other employees. Though he was devastated about losing his job, John was grateful that he and his wife had some savings that they could use for rent and other bills, in addition to the unemployment checks he would receive for a few months.

John searched aggressively for jobs in the newspaper and online, but nothing worked out. He began to have feelings of anger and worry that led to panic. His self-esteem fell, and he became depressed. When John’s wife was hired to work part-time at the grocery store, the couple felt better about finances. But demoralized by the loss of his job, John started to drink more often.

Two beers a night steadily increased to a six-pack. John and his wife started to argue more often. Then, about six months after losing his job, John stopped receiving unemployment checks. That week, he went on a drinking binge that ended in an argument with his wife. In the heat of the fight, he shoved her. The next day, John’s wife took the children and moved in with her parents. No longer able to pay the rent, John was evicted from the apartment.

John tried to reconcile with his wife, but she said she’d had enough. Over the next few months, John “couch-surfed” with various family members and friends. At one point, he developed a cold, and when it worsened over a few weeks, he sought care at the emergency department. The hospital staff told him that he would be billed because he didn’t have insurance. John agreed, and a doctor diagnosed him with a sinus infection and prescribed antibiotics. With no money to spare, John could not get the prescription filled.

John continued to live with family and friends, but his heavy drinking and anger only got worse, and his hosts always asked him to leave. He went from place to place. Finally, when John ran out of people to call, he found himself without a place to stay for the night and started sleeping at the park.

One night when John was drunk, he fell and got a cut on his shin. The injury became red and filled with pus. John was embarrassed about his poor hygiene and didn’t want a health care provider to see him. But when he developed a fever and pain, he decided to walk to the nearest emergency department. He saw a provider who diagnosed him with cellulitis, a common but potentially serious bacterial skin infection, and gave him a copy of the patient instructions that read “discharge to home” and a prescription for antibiotics. John could not afford the entire prescription when he went to pick up the antibiotics, but he was able to purchase half the tablets.

Winter arrived, and it was too cold for John to sleep outside, so he began staying at a shelter run by the church. Each morning, he had to leave the shelter by 6 AM. He walked the streets all day and panhandled for money to buy alcohol.

One evening, some teenage boys jumped John in the park, stealing his backpack and kicking him repeatedly. An onlooker called 911, and John was taken to the emergency department. Later that evening, the hospital discharged John. He returned many times to the emergency department for his health care, seeking treatment for frequent colds, skin infections, and injuries. Providers never screen him for homelessness and always discharge him back to “home.”

One day at the park, an outreach team from the local Health Care for the Homeless (HCH), one of about 250 such non-profit organizations in the United States, approached John. The team, including a doctor, nurse, and caseworker, introduced themselves and asked John, “Are you OK?” John didn’t engage. They offered him a sandwich and a warm blanket. John took the food without making eye contact. The team visited John for the next several days. John started making eye contact and telling the team about his shortness of breath and the cut on his arm. The team began seeing John frequently, and he began to trust them.

A couple of weeks later, John agreed to go to the HCH clinic. It was the first time in years that John went to a health clinic. Upon his arrival, the staff at the clinic registered him and signed him up for health insurance through Medicaid and food benefits. John felt comfortable in the clinic, and he saw some of the people who also stayed at the shelter and spent their days in the park. They were happy to see him and told John about how the clinic staff care and would be able to help.

John began going to the HCH clinic on a regular basis. He saw a primary care provider, Maggie, a nurse practitioner. In John’s words, she treated him like a real person. In addition to primary care, the clinic offered behavioral health services. Both scheduled appointments and walk-in care were available. John connected with a therapist and began working on his depression and substance abuse. A year later, John’s health has improved. He rarely needs to go to the emergency room. He is sober and working with a case manager in finding housing.

Discussion Questions:

1. What events in John’s life created a “downward spiral” into homelessness? Which events related to social needs, and which could health care have addressed?
2. What were some of the barriers John faced in accessing health care?
3. Why do you think the emergency department was the first place John thought to go for care? How might the emergency department improve care for patients like John?
4. Why do you think John wouldn’t make eye contact with the HCH team at first? How would you build a trusting relationship with a person like John?
5. What aspects of HCH care do you think represent high-quality care for the homeless? How do you think Maggie made John feel like he was a “real person?”
6. In your own experience, have you encountered a homeless individual? What was that like? Do you recall what you were thinking?

​​Remember some of these questions are Two questions in One. Ensure you answer all completely (detailed) but does not need to be a novel.

Q1. The Cartel That Makes Sure Airplane Tickets Never Get Cheaper

SKY HIGH

It’s been a windfall year for the industry, but you won’t be getting any better accommodations or more affordable fares. What gives?

Updated Apr. 14, 2017 10:33AM ET / Published Jun. 22, 2015 5:21AM ET

Jim Young/Reuters

Screw the passengers.

That appears all too often to be the governing philosophy of the airline business.

Take the case of a United Airlines flight from Chicago to London last weekend. A technical problem forced the plane to abort its trans-Atlantic route and divert to Goose Bay in Canada. The 176 passengers were marooned there for more than 20 hours, sleeping in unheated military barracks at near-freezing temperatures.

“There was nobody from United Airlines to be seen anywhere,” one passenger told NBC News. “No United representative ever reached out to anybody, no phone calls, no human beings, no nothing. Nobody had any idea what was going on.”

It so happened that this came at the end of a week in which the world’s airline chiefs, junketing in Miami, celebrated their most lucrative year ever. They are projecting profits totaling $29.3 billion in 2015—almost double what they made in 2014.

And you must have noticed if you’re flying anywhere in the U.S. this summer that seat prices are not falling. Indeed, if the owners of those seats are suddenly feeling fat and happy, they are in no mood to pass on their swell feelings to you. It’s hard to imagine any other service industry being run like the airline business—but then there is no other business like the airline business.

So now we have a novel opportunity to see how airlines behave when, suddenly and much to their surprise, they find themselves with a business model that is working. If making a profit is a new experience for them, what effect will that have on their behavior?

First, let us consider why the numbers have been transformed.

There has been a steep change in the efficiency of jets. Beginning with the Boeing 787 Dreamliner, the combination of lighter but stronger composite materials in structures and a quantum leap in engine efficiency, using far less fuel, has slashed operating costs per airplane by as much as 30 percent.

In the last year, this windfall has been boosted by the large decline in oil prices.

However, these dual benefits are not being evenly spread either among airlines or continents. Airlines stuck with fleets of older airplanes are not getting these benefits. Fleet age has become far more decisive in deciding an airline’s profitability, particularly true in the U.S.

The three major U.S. legacy carriers—American, United, and Delta—failed to get in early to order the new generation of airplanes—the 787, the Airbus A350, revamped versions of the Boeing 777, the Airbus A320, and the Boeing 737—and allowed European, Middle Eastern, and Asian competitors to become first adopters and, thereby, reap the benefits of lower fuel costs.

The average age of the jets in the American fleet is 12.3 years; for United 13 years; and for Delta 17.2 years. It won’t be until at least 2020 that they can finally dump the oldest of their airplanes. (American has actually been delaying the delivery of some new jets that it ordered.)

Age doesn’t mean that an airplane is unsafe. Properly maintained 20-year-old jets are not in danger of falling apart. The frequency of flights determines retirement age more than years and the smaller single-aisle jets used on domestic routes age the fastest because they are making up to seven flights a day.

Age may not be dangerous but it sure registers with passengers when it contrasts with the comforts they encounter in the new generation of jets with their better cabin climate and quieter engines. So it’s not surprising that when airlines show up with all-new fleets as well as gracious cabin crews people start wondering, Why can’t it always be like this?

It’s also not surprising that the major American carriers are now trying to stop those airlines from coming to an airport near you.

When it comes to price and the domestic U.S. routes, not only are prices not coming down but there is persuasive evidence of price-fixing. The veteran investigative reporter James B. Stewart described this market as a classic oligopoly in a penetrating piece in The New York Times .

However, this is far from being a new phenomenon. These tactics began long before the final round of consolidation mergers when US Airways was swallowed by American Airlines in 2013. They have merely been continually refined to the point now when the airlines, suddenly enjoying profits, have responded not by lowering fares but by tightening control over the number of seats available and cutting back on flight frequency and destinations.

The reality is that the airlines don’t need to expose themselves to charges of collusion on fares and the operation of a hidden cartel that mutually governs capacity. That’s so 20th century.

These days their key tool is “yield management”—being able to precisely calculate how many seats should be available on any given route at any time of the day or night and adjusting the price hour-by-hour according to demand. This algorithm has become so refined and the market so controlled that each of the major airlines ends up looking at the same numbers on their computer screen. No human intervention is needed. In all but name it is a cartel—but one run entirely by unaccountable robots.

So?

We live in the world’s most vigorously capitalist marketplace. What’s wrong with airlines trying to make a decent profit, for once? And what is the point of them flying empty seats around the skies?

But I come back to my earlier point: How do these airline executives behave when, joy of joys, they find their balance sheets deeply in the black? Like a lot of other corporate minders they think a lot more about their shareholders than their customers. Short-termism rules. Wall Street responds to quarterly earnings, not patient long-term strategy.

A good example is Jet Blue. This airline was a rare example of a successful startup based on a maverick idea: super-chummy cabin staff and generously spaced seating. A new CEO (previously schooled by the stingy bean-counters at British Airways) is undermining that spirit by jamming more seats into the cabin and raising baggage charges, all at the behest of shareholders.

The problem is that the people running airlines in the U.S. have one part of their brain missing, the part that provides the service ethic. As well as fare-gouging they’re space gouging in the cabins. Even with the newest jets like the Dreamliner they are packing more seats into coach than the airplane designers (or nature) intended.

Q1. Read the above article and answer the questions that follow.

a. Why did the investigative reporter James B. Stewart describe US airlines as a classic Oligopoly?

b. What is the meaning of yield management as described in the above article?

c. Why did the writer accuse people running airlines of missing service ethics

Q1. The Cartel That Makes Sure Airplane Tickets Never Get Cheaper

SKY HIGH

It’s been a windfall year for the industry, but you won’t be getting any better accommodations or more affordable fares. What gives?

Updated Apr. 14, 2017 10:33AM ET / Published Jun. 22, 2015 5:21AM ET

Jim Young/Reuters

Screw the passengers.

That appears all too often to be the governing philosophy of the airline business.

Take the case of a United Airlines flight from Chicago to London last weekend. A technical problem forced the plane to abort its trans-Atlantic route and divert to Goose Bay in Canada. The 176 passengers were marooned there for more than 20 hours, sleeping in unheated military barracks at near-freezing temperatures.

“There was nobody from United Airlines to be seen anywhere,” one passenger told NBC News. “No United representative ever reached out to anybody, no phone calls, no human beings, no nothing. Nobody had any idea what was going on.”

It so happened that this came at the end of a week in which the world’s airline chiefs, junketing in Miami, celebrated their most lucrative year ever. They are projecting profits totaling $29.3 billion in 2015—almost double what they made in 2014.

And you must have noticed if you’re flying anywhere in the U.S. this summer that seat prices are not falling. Indeed, if the owners of those seats are suddenly feeling fat and happy, they are in no mood to pass on their swell feelings to you. It’s hard to imagine any other service industry being run like the airline business—but then there is no other business like the airline business.

So now we have a novel opportunity to see how airlines behave when, suddenly and much to their surprise, they find themselves with a business model that is working. If making a profit is a new experience for them, what effect will that have on their behavior?

First, let us consider why the numbers have been transformed.

There has been a steep change in the efficiency of jets. Beginning with the Boeing 787 Dreamliner, the combination of lighter but stronger composite materials in structures and a quantum leap in engine efficiency, using far less fuel, has slashed operating costs per airplane by as much as 30 percent.

In the last year, this windfall has been boosted by the large decline in oil prices.

However, these dual benefits are not being evenly spread either among airlines or continents. Airlines stuck with fleets of older airplanes are not getting these benefits. Fleet age has become far more decisive in deciding an airline’s profitability, particularly true in the U.S.

The three major U.S. legacy carriers—American, United, and Delta—failed to get in early to order the new generation of airplanes—the 787, the Airbus A350, revamped versions of the Boeing 777, the Airbus A320, and the Boeing 737—and allowed European, Middle Eastern, and Asian competitors to become first adopters and, thereby, reap the benefits of lower fuel costs.

The average age of the jets in the American fleet is 12.3 years; for United 13 years; and for Delta 17.2 years. It won’t be until at least 2020 that they can finally dump the oldest of their airplanes. (American has actually been delaying the delivery of some new jets that it ordered.)

Age doesn’t mean that an airplane is unsafe. Properly maintained 20-year-old jets are not in danger of falling apart. The frequency of flights determines retirement age more than years and the smaller single-aisle jets used on domestic routes age the fastest because they are making up to seven flights a day.

Age may not be dangerous but it sure registers with passengers when it contrasts with the comforts they encounter in the new generation of jets with their better cabin climate and quieter engines. So it’s not surprising that when airlines show up with all-new fleets as well as gracious cabin crews people start wondering, Why can’t it always be like this?

It’s also not surprising that the major American carriers are now trying to stop those airlines from coming to an airport near you.

When it comes to price and the domestic U.S. routes, not only are prices not coming down but there is persuasive evidence of price-fixing. The veteran investigative reporter James B. Stewart described this market as a classic oligopoly in a penetrating piece in The New York Times .

However, this is far from being a new phenomenon. These tactics began long before the final round of consolidation mergers when US Airways was swallowed by American Airlines in 2013. They have merely been continually refined to the point now when the airlines, suddenly enjoying profits, have responded not by lowering fares but by tightening control over the number of seats available and cutting back on flight frequency and destinations.

The reality is that the airlines don’t need to expose themselves to charges of collusion on fares and the operation of a hidden cartel that mutually governs capacity. That’s so 20th century.

These days their key tool is “yield management”—being able to precisely calculate how many seats should be available on any given route at any time of the day or night and adjusting the price hour-by-hour according to demand. This algorithm has become so refined and the market so controlled that each of the major airlines ends up looking at the same numbers on their computer screen. No human intervention is needed. In all but name it is a cartel—but one run entirely by unaccountable robots.

So?

We live in the world’s most vigorously capitalist marketplace. What’s wrong with airlines trying to make a decent profit, for once? And what is the point of them flying empty seats around the skies?

But I come back to my earlier point: How do these airline executives behave when, joy of joys, they find their balance sheets deeply in the black? Like a lot of other corporate minders they think a lot more about their shareholders than their customers. Short-termism rules. Wall Street responds to quarterly earnings, not patient long-term strategy.

A good example is Jet Blue. This airline was a rare example of a successful startup based on a maverick idea: super-chummy cabin staff and generously spaced seating. A new CEO (previously schooled by the stingy bean-counters at British Airways) is undermining that spirit by jamming more seats into the cabin and raising baggage charges, all at the behest of shareholders.

The problem is that the people running airlines in the U.S. have one part of their brain missing, the part that provides the service ethic. As well as fare-gouging they’re space gouging in the cabins. Even with the newest jets like the Dreamliner they are packing more seats into coach than the airplane designers (or nature) intended.

Q1. Read the above article and answer the questions that follow.

a. Why did the investigative reporter James B. Stewart describe US airlines as a classic Oligopoly?

b. What is the meaning of yield management as described in the above article?

c. Why did the writer accuse people running airlines of missing service ethics?

Read these articles and answer the following questions is a well written essay not to exceed 2 pages. (Same standards apply as in the 1st assignment) QUESTIONS: 1. Do you use Uber? Have you used Lyft? Do you think there is there a real difference between the services? 2. How has the Chinese market altered the market for ride-hailing services in the US? How does the acquisition of Uber China by Didi alter the face of global strategy in this burgeoning industry? 3. According to the article, how well is Lyft doing right now? Does this latest deal in China help Lyft or hurt Lyft, all things considered? 4. If you are the CEO of Lyft, what strategic moves would you make now? How does Lyft need to readjust its strategy in the US, based on the events in the Chinese market?

Uber-Didi Tie-Up Threatens Lyft in U.S.

Lyft sees ally Didi team with its biggest rival, which is now no longer burdened by China

Lyft, whose cars are recognized by fuzzy pink mustaches, is sustaining big losses at a time when venture capital is harder to secure. PHOTO: GETTY IMAGES

By GREG BENSINGER and ROLFE WINKLER

Updated Aug. 2, 2016 12:07 a.m. ET

Uber Technologies Inc.’s retreat from China creates ripples in what will now become its biggest market, the U.S., where it can refocus on its simmering rivalry with hometown competitor Lyft Inc.

The merger of Uber’s China operation with Didi Chuxing Technology Co. adds a twist to the rapidly shifting landscape of ride-hailing alliances and brings more uncertainty for San Francisco-based Lyft, which has been shopping for a financier to keep it flush with capital.

Didi had been Lyft’s biggest ally after the two companies in recent months touted an anti-Uber alliance that would effectively link their apps and share access to passengers traveling abroad. The two companies also teamed up with India’s Ola and southeast Asia’s Grab to make their apps globally accessible.

By tying together their apps, the companies aimed to better compete with Uber. Didi also is an investor in Lyft.

But Didi now has agreed to align with Lyft’s fiercest rival by combining its operations with Uber’s China business. Uber will receive a 18% stake in Didi, meaning Uber becomes an indirect stakeholder in Lyft. Didi also will invest $1 billion in Uber’s global operations, making Didi both a friend and foe to Lyft.

“Over the next few weeks, we will evaluate our partnership with Didi,” a Lyft spokesman said in an emailed statement. “We always believed Didi had a big advantage in China because of the regulatory environment.”

The deal also means Uber can stanch the hemorrhaging in China, where it had pumped in billions of dollars. Uber has raised over six times more capital than Lyft, and its latest valuation of $68 billion far outpaces Lyft’s $5.5 billion value.

Lyft has been in a bruising four-year battle with Uber for passenger and driver loyalty. The Wall Street Journal reported in June that Lyft hired boutique investment bank Qatalyst Partners LP, which is known to help tech companies find a buyer.

Lyft has tried to keep up with its larger competitor as both San Francisco companies pour millions of dollars into subsidizing low-price rides and giving cash bonuses to new drivers.

Uber and Lyft have sought to edge one another out by poaching employees and have accused each other in the past of ordering up fake rides that hinder service. The two firms believe they can be a central means of transportation, rather than just replacing existing taxi services.

FURTHER READING

Uber’s Retreat Shows Limits U.S. Companies Face in China

China Circuit: Financial Pressures Shaped Didi-Uber Deal

Heard on the Street: Why Foreigners Never Win in Tech

Uber Sells China Operations to Didi

5 Things to Know on Uber-Didi Deal

Didi: Chinese Rival Buying UberChina

Lyft is sustaining big losses at a time when venture capital is harder to come by, likely encouraging the company to find a suitor.

Last year, Lyft posted an operating loss of around $360 million on revenue of roughly $200 million, according to a person familiar with the company’s financial statements. Riders paid a total of about $1 billion for Lyft rides in 2015, and the company kept 20% of that amount as its revenue.

The company has ample cash on hand to sustain itself for now. As of June, Lyft had about $1.4 billion in cash, this person said. It has recently been burning about $50 million in cash a month, according to another person familiar with the matter, suggesting it has more than two years of cash left at that rate. But its spending could go up if the promotional arms race with Uber kicks up a notch, and Lyft is forced to subsidize price cuts.

Lyft does have a major ally in auto maker General Motors Co., which invested $500 million for a 10% stake and indicated the ride-hailing service could be crucial to the future of automobiles. The two companies have since agreed to develop self-driving cars and to offer deals on rental cars to Lyft drivers.

That partnership is critical in helping bolster GM’s electric vehicle strategy. The auto maker’s battery-electric car, Chevrolet Bolt, was designed with a bigger back seat to better appeal to taxi services, for instance. GM also plans next year to begin testing autonomous electric taxis in the Lyft network.

With Uber likely returning its attention on the U.S., it is unclear whether GM is interested in buying all of Lyft or increasing its stake. But GM has been involved in several discussions about the company’s funding needs and strategic alternatives, according to people familiar with the matter.

A GM spokesman said the Uber-Didi announcement doesn’t change its strategic alliance with Lyft, and that the companies will continue work on joint projects.

The Uber-Didi tie-up changes the calculus for Lyft’s other China backers. Along with Didi, China’s largest internet companies, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., invested in a May 2015 round that valued Lyft at $2.5 billion. Those investments were meant to counter Uber’s growth in China.

But Alibaba and Tencent also are investors in Didi and have strategic partnerships including payments services and app integration. So the two internet giants have more at stake in the future success of Didi in China than in Lyft in the U.S. That could put pressure on Lyft and Asian ride-hailing startups to either find new allies or cut a deal with Uber or Didi in the future.

—Rick Carew, Gautham Nagesh and John Stoll contributed to this article.

Write to Greg Bensinger at [email protected] and Rolfe Winkler at [email protected]

Corrections & Amplifications

A person familiar with Lyft Inc.’s financial statements said the company earlier this year was on pace to more than double revenue to around $450 million in 2016, and post an operating loss of more than $200 million. An earlier version of this article incorrectly attributed this projection to Lyft.

TOPICS: Global Strategy

TECH

Uber’s Efforts to Build Chinese Business Ultimately Fail Against Homegrown Rival Didi

So far, no U.S. internet-based company has succeeded in conquering the Chinese market

By EVA DOU and KATHY CHU

Updated Aug. 1, 2016 10:05 p.m. ET

BEIJING—Uber Technologies Co. entered China with billions of dollars to spend and ambitions to dominate the world’s biggest market for ride hailing. It wasn’t enough.

After almost three years, Uber agreed to sell its China business to rival Didi Chuxing Technology Co., the Chinese company announced Monday. Despite launching private ride-sharing services in China a full year before Didi, Uber has been outmaneuvered by the homegrown player, which added localized features, landed powerful investors and wooed Chinese regulators and press. Uber and outside investors in Uber China will get 20% in the merged company, which has a combined valuation of $36 billion.

U.S. internet companies have long struggled in vain to capitalize on the allure of China’s enormous population and growing wealth. Some have been stymied by strict government licensing and censorship, which contributed to Google Inc.’s decision in 2010 to shutter its China-base search engine and has effectively barred access to Facebook Inc. and Twitter Inc.

Others have been bested by deep-pocketed local rivals that adapt quickly to Chinese consumer preferences. Amazon.com Inc. and eBay Inc. both faced off unsuccessfully against Alibaba Group Holding Ltd.

“So far we haven’t seen a foreign internet company that has made it big in China,” said Andrew Teoh, managing partner of Ameba Capital, an early investor in Didi.

Other companies in the technology industry and beyond have struggled with a range of hurdles in China, including government policies that favor domestic players. Apple Inc. and Microsoft Corp., for instance, have felt a sales chill in China amid Beijing’s growing focus on using “secure” domestic equipment.

“The environment has become more challenging,” said Jeremie Waterman, executive director for greater China at the U.S. Chamber of Commerce. “There’s no question that there are Chinese companies that are more competitive than they were five or 10 years ago, but there’s also no question that the government has and is increasingly putting its thumb on the scales to benefit Chinese companies.”

China is extremely important to many companies. General Motors Co., which used decades-old alliances in the region to become one of the largest players in the world’s biggest light-vehicle market, counts on Chinese operations for about $2 billion in operating profit annually and has committed to spend 100 billion yuan ($15.1 billion) between now and 2020 on new car development. Although less profitable than U.S. operations, China accounts for about a third of vehicle sales and its position has grown in 2016 as the wider auto market shakes off volatility.

Still, a survey released in January by the American Chamber of Commerce in China found that only 64% of the U.S. companies surveyed were profitable in 2015—the lowest level in five years. Nearly a third weren’t planning to expand their investment in China, a higher percentage than during the global financial crisis of 2008-09.

Uber Chief Executive Travis Kalanick’s decision to capitulate in China came on the heels of new ride-hailing regulations there, which were announced last week but had been in the works for two years and were known to companies in the industry in advance.

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The guidelines officially legalized the industry, but gave an edge to the player with the largest user base. That was Didi, which is backed by Apple as well as Chinese internet giants Alibaba and Tencent Holdings Ltd.

The rules forbid companies to operate ride-hailing services below cost, putting an end to ruinous subsidy wars but making it difficult for Uber China, with its smaller scale, to match Didi on price.

The guidelines also require companies to implement stricter driver oversight and incur other overhead expenses, measures likely to be less costly per ride the larger the user base.

Didi and Uber disagree on their China market shares, but most third-party researchers put Didi significantly ahead. According to one research firm, Analysys International, Didi had 42.1 million active users in May while Uber China had 10.1 million.

Didi said it would maintain the Uber service and brand separately in China. A similar promise was made after the merger of Didi Dache and Kuaidi Dache in 2015 to form Didi Chuxing, with the smaller Kuaidi product subsequently marginalized.

Mr. Kalanick, in a statement Monday, acknowledged the challenge Uber faced in entering China. “We were a young American business entering a country where most U.S. internet companies had failed to crack the code,” he said. Uber had worked hard to localize in China, setting up Uber China as a Chinese company and giving high autonomy to the local executives at its helm.

Didi began in 2012 as an app to help Chinese taxi drivers find passengers. Although the service didn’t make money for Didi, it helped the company amass loyal users. By the time Didi launched an Uber-like ride-sharing service in 2014, it had more than 100 million registered users.

In July 2014, Mr. Kalanick offered to acquire Didi, saying that he would conquer China one way or the other, recalled Didi Chief Executive Cheng Wei in a 2015 interview. Mr. Cheng said he had refused, saying, “There will be a day when we will surpass you.”

An Uber spokeswoman confirmed the meeting at the time but said Uber executives remembered it differently.

Didi’s status as the local champion helped it best Uber both in relations with local governments and in the media.

Uber China found its accounts on China’s leading messaging app, WeChat, repeatedly shut down, hobbling its attempts to promote its services to regular consumers. WeChat is owned by Tencent, a Didi investor. Tencent has declined to comment.

Uber’s decision to effectively join a rival echoes similar moves by other big Western companies in China.

Wal-Mart Stores Inc., which has struggled to expand in China as shopping rapidly shifts online there, switched gears in June. Rather than continuing to build its own online business in China, the world’s biggest retailer agreed to sell its Chinese website to JD.com Inc., one of the country’s largest e-commerce players. In exchange, Wal-Mart took a 5% stake in JD.com.

—Juro Osawa, Drew FitzGerald and John D. Stoll contributed to this article.

Write to Eva Dou at [email protected] and Kathy Chu at [email protected]